Berko: Long-term conservative investing
Thursday, June 12, 2014 6:00 AM
Dear Mr. Berko:
I’m a 36-year-old professional who makes a fine living. I’ve paid off all personal debts, and I’m now ready to invest for the next 30 years. I’ve interviewed three supposedly brilliant brokers/money managers, but I’m not comfortable with their various sophisticated “buy low, sell high” strategies. I invested $127,000 (inherited money) with one of them four years ago, and it’s now worth $166,000 – and that’s after 76 trades since 2009. I’ve had some big winners and some big losers, and all those trades make me uneasy. Would mutual funds or an annuity be a better way to plan for my retirement?
R.E., Wilmington, N.C.
There are thousands of brilliant investment analysts providing research and advice for the U.S. brokerage industry. And there are as many brilliant investment professionals who collectively manage zillions of dollars in retirement plans, private and public trusts, endowment funds, mutual funds and eleemosynary institutions. And probably 96 percent of these good fellows don’t have 10-, 20- or 30-year records that match the Standard & Poor’s 500 index’s 10.1 percent average return since 1983. That means that only 4 percent of those thousands of gurus did as well as or better than the S&P 500. And probably 90 percent of that 4 percent earned those returns buying stocks that appreciated significantly in price. Though the S&P 500’s average annual total return is attractive, many investors are bored stiff and sniff at 10.1 percent. They’re conditioned by media (especially the hype advertising on Sirius XM Radio) that it’s easy to buy stocks at $20, $25 or $30 and sell them later at $40, $50 or $60. However, in the long run, according to Dalbar, the average investor has earned 3.7 percent in the past 30 years, underperforming the S&P 500 annually by 6.4 percent.
Earning a 10 percent average annual return over 30 years is really rather simple if you recognize that since 1970, reinvested dividends have represented 77.6 percent of the S&P 500’s total return. And there are numerous highly regarded blue and pale-blue chips yielding 3 percent whose dividends more than double every 10 years – Johnson & Johnson, McDonald’s, Kinder Morgan Energy Partners, Chevron, Owens & Minor, UPS, Clorox, Procter & Gamble, Kimberly-Clark, Unilever and General Mills, to name a few.
Let’s pick a totally boring company, Kimberly-Clark Corp. (KMB-$111.10). It pays a $3.36 dividend, which yields 3 percent and will probably double every decade for the next 30 years. So by 2024, KMB’s dividend could go to $6.72. By 2034, it could double again, to $13.44. And by 2044, when you’re 66 and ready for Social Security (cruel joke), KMB’s dividend could double once again, to $26.88, or $2,688 on your 100 shares. And that’s a 25 percent return on the 100 shares you purchased today for $11,110. Today’s blue chip stocks – in this low-interest-rate environment – yield about 2.5 percent, but let’s assume that in 2044, the average blue chip yields 4 percent. Now, how much money must you invest to earn a $2,688 return, which is what your $11,110 investment in 2014 should pay you in 2044? The answer is $67,400! So in 30 years, your $11,110 KMB investment could be worth $67,400, and your 100 shares of KMB would trade at $674 a share if it were not to split several times.
But it gets better than that. Because you’ve reinvested those dividends during the past 30 years (120 quarters), you’d probably have 325 shares of KMB at $674 (without splits), worth $219,000 and paying $26.88 a share, or $8,736 in dividend income. That would be a 10.1 percent compounded annual total return. So if you invested $11,110 in Johnson & Johnson, McDonald’s, P&G, Kinder Morgan and others with superior dividend growth, the 30-year price appreciation plus dividends would be enormously impressive. That’s the magic of compounding, and that’s why I advise investors that it’s surer to earn a slow $20 than make a fast $10.
However, this philosophy (admittedly the best way to make money in the stock market) is anathema to Merrill Lynch, Oppenheimer, the big banks, UBS, Wells Fargo and Morgan Stanley. Those firms and their brokers would starve to death if Americans became serious long-term conservative investors.