As a recent retiree after 40 odd years – some of them very odd – in finance, I spend a lot of time managing my investments. Like many people hooked on following the stock market, over the last few months I had gotten into feeling that positive rush you get when you check you investments and they’re up on the day. It makes you want to keep checking them more and more often, although after awhile – if the market’s been trending up – it’s less of a rush and almost an expectation. So it’s like a punch in the stomach when you check and see big drops of the sort we’ve had the last several days, reminding us what it was like during the roller coaster drop days of late 2008 and early 2009.
But then I realized that I wasn’t going to touch most of my pension money for years, and that these market drops – by allowing me to reinvest the income I was generating at higher yields than I would otherwise be able to if prices had stayed higher – were actually making me richer rather than poorer.
This is the age of the “do-it-yourself pension,” with most companies having shifted from “defined benefit” pensions where they were on the hook for paying retirees a specific amount every month until they died, to “defined contribution” pensions (like 401Ks) where they give you some money upfront (along with your own contributions) and it’s up to you to invest it wisely or not; and maybe, just maybe, if you’re both wise and lucky, you’ll have enough to retire on when the time comes.
That time has now come for millions of older baby boomers like me (I was born in 1947.) We’ve taken our 401Ks, rolled them into tax-free IRA brokerage and/or mutual fund accounts, and are now managing our own retirement funds. I’ve got my excel spread sheet that projects the years out until I hit 100 and my wife Betsy (who’s younger) hits 90. (Actually it projects out as far as I want, but she laughs at me when I run it past 100. Hey, you have to be an optimist, right?) I can plug in any investment returns I want, as well as whatever withdrawal rates I want, and the spreadsheet calculates at what age I’ll run out of money.
Corrections equal higher reinvestment rates
As an investor, I want to have my cake and eat it too, in that I want high current income and some “equity” return as well (which I define as potential growth in the income stream and/or protection against inflation rising and taking interest rates up with it.) So my investments tend to be a mix of (1) high-quality high-yielding common stocks where I believe the dividends will grow modestly but steadily over time; and (2) low-duration and/or floating-rate mutual funds that provide high-yields and the ability to continually reinvest at higher rates as and when interest rates eventually start to rise. (I have discussed this in some of my other articles: http://seekingalpha.com/author/steven-bavaria/articles.) I like closed-end funds as vehicles for doing the latter, since besides the good yields and low duration or floating rates, many are slightly leveraged so you get the benefit of their borrowing at today’s ultra-low rates to leverage the investment (only slightly, since funds are limited by law to leveraging no more than 33%; which can still add another 2% to the fund’s yield, bringing to 7-8% or so a fund that might – unleveraged – yield 5-6%.)
The average current yield on my IRA investment portfolio about a week ago – before the downdraft of the past two days– was 5.6%. That had been dropping steadily in recent weeks and I found myself re-investing current dividends at higher prices and correspondingly lower yields. Now, post downdraft, my average yield on the whole portfolio is up to 5.8%. Running an additional 20 bp of yield through my pension spreadsheet shows I will earn an additional $350,000 over the next 40 years, and add another year or two before I outlive my money.
Of course, by doing this analysis and learning not to stress out over down-market days, I may add years to my life as well, so I’ll need that extra money.
(As examples of the sort of income-oriented investments I focus on, here is a list of investments in my pension (i.e. IRA) portfolio: AINV, CNSL, CTL, DUK, EFT, ETR, EVV, EXC, FFRHX, FHIFX, FNFG, FOF, FRIFX, FTR, HCN, HPS, JPS, KMB, KMR, NGG, NLY, RQI, SCG, SDRL, SE, SO, SPHIX, T, TFCIX, VZ, WIN, WPC, XEL)
Disclosure: Long: AINV, CNSL, CTL, DUK, EFT, ETR, EVV, EXC, FFRHX, FHIFX, FNFG, FOF, FRIFX, FTR, HCN, HPS, JPS, KMB, KMR, NGG, NLY, PKO, RDS/B, RQI, SCG, SDRL, SE, SO, SPHIX, T, TFCIX, VZ, WIN, WPC, XEL