Now that the Fed has decided to begin raising rates, the focus has turned to how these decisions might affect stock returns. The chart below reports the return impact for the dozen times during which the 10-year US Treasury Bond rate increased by more than one percent over the last 45 years. The annual S&P 500 return averaged 13.4% over these 12 periods, higher than the long-term average of 10%, and was positive in nine of these periods.
The presidential election has generated especially strong emotions this go-around. Both sides fear the other candidate will win and many believe that as a result the economy will go into a death spiral. This fear is driving many investors out of the market, waiting on the sidelines for the outcome.
One of the most common and costly mistakes made by investors and professionals alike is making panic-related sell decisions. Getting out of the market based on market noise and perceived risks often leads to significant underperformance because it requires impeccable timing with respect to both exiting and reinvesting into the market.
In today’s low-rate environment, dividend stocks represent an attractive alternative to bonds for generating both income and long-term growth. Separating the total return of the S&P 500 Index into the dividend and capital appreciation components shows the stability of dividend income going back to the 1920’s with an average yield of 4.0%.
The perfect portfolio may not look like what you think. A common fallacy is that good active equity funds should deliver consistently good short-term performance with smooth upward trending returns. Investors who believe this have unrealistic expectations and often dump good investments too quickly thereby losing out on great long-term returns.
Even though we all know market fluctuations are a normal part of equity investing, large market declines are scary to most investors because they often happen rapidly and feel random.