I recently reviewed two graphs which highlighted the following information:
A 60/40 stock/bond portfolio positioned in 1980 would present much different opportunities then than in 2015.
10 year bond yield 11.1% 10 year bond yield 2.3%
Stock earnings yield 13.5% stock earnings yield 4.5%
Now, I am not of the opinion that this suggests disaster for the stock market but I do believe it points to the need to reduce expectations. Where is the upside going to come from? <2% dividend yields from the S&P? Multiple expansion? Earnings growth? Europe?
My guess is we are in for returns similar to the mid 60s to the early 80s period in which the Dow crossed the 1000 mark, retreated and did not cross it and stay there for 15 years.
At this point I am moving market into preferred stock funds (HPI HPS & JPC). Their blended distribution rate is 7.75%. The income is very dependable and I believe over the next several years this return will exceed that of general equities. As stated, I do not foresee a disaster for the market, but I think we are in for a very long, boring, low performing stock market and believe preferred stocks will outperform with greater safety and consistent income.
If we do have a meltdown then the sale of the preferred positions will provide the opportunity to pick up relative bargains.