#191 – What Retirees Need To Know About A New Bull Market And The Hidden Strength Dividends

Wes Moss [00:01:28]:
And by the way, Jeff Lloyd, joining me here on the retire Sooner podcast, a longtime producer, longtime friend, market strategist. Thank you for being here. Often crunching a lot of the numbers that we’re doing here. But you’ve got scary event after scary event after scary event, and it shakes investors out. And that’s why we know that through the dowbar study that even though stocks might do eight or 9% over a 20 or 30 year period, individual investors may only do three or 4%. So there’s always this question, why? And this is measured through the way they find these or do these studies on the individual investor. They’ll look at the performance of a particular mutual fund, and then they’ll look at the individual performance received from an investor. And let’s say a fund did 12% in a year doesn’t mean that an investor did 12% because they could have bought it in March and sold it in October and actually lost money because of the way the market pattern worked.

Wes Moss [00:02:29]:
So that’s how you see this big discrepancy. It’s really about behavior and timing. Now, traditionally, we get scared out of stocks when bad stuff happens. Of course, new election, I’m scared of that party won and I don’t like it. This party won and I like it. So I’m in. I’m out. Us debt downgrade pandemic.

Wes Moss [00:02:50]:
I’m looking at my chart here. Back in 2010, remember there’s the BP oil spill, the Macondo oil leak. CNBC had this gushing pipe on television for weeks, and it was very disconcerting. It was polluting. The ocean is terrible for the world. A couple of months later, we had a flash crash where the market was down over 10% in a few minutes. So the world’s always scary. There’s always reasons to sell.

Wes Moss [00:03:18]:
There’s always things that are shaking us out. But we have a new one, and it happens to be that things have actually gone really well. Wait a minute. Isn’t it time to get out because markets have done well? So Jeff Lloyd and our team went back and tried to answer that very question around what happens when markets do really well? What happens next? Is it time to run for the hills? Is it time to change my 401k from a stock allocation to money markets or cash? And of course, we don’t know what’s going to happen to markets over the next six months, twelve months, or two years for that matter. But we can go back and look to see what has happened historically. So, Jeff Lloyd, you went back to just set up the parameters here of what we’re looking at? Yeah.

Jeff Lloyd [00:04:04]:
So we were looking at occurrences where the S and P 500 set a.

Wes Moss [00:04:08]:
New high, forged new ground, new high.

Jeff Lloyd [00:04:13]:
Reached a new high watermark after going more than a year without doing so.

Wes Moss [00:04:19]:
Makes sense because, for example, in January, let’s say we reach an all time high on a Wednesday, and then you have a new all time high on a Thursday. The market just happens to go up a couple of days in a row. It wouldn’t make any sense to do an all time high that makes sense. So we’re going to look at an all time high and then it doesn’t make a new one for at least a year. And you went all the way back to the 1950s and looked at this? Yeah.

Jeff Lloyd [00:04:46]:
And the first time that that had happened during that time frame was 1958. So this is data going back all the way there through 2024, which we just reached the new high water mark. So not including 2024, there have been 13 previous occurrences where that has happened.

Wes Moss [00:05:05]:
All right, so it’s happened 13 different times where again, we’ve gone. Market reached a brand new high after going more than a year without doing so. What happened over the following year or in the following two years? Well, first of all, I love this way to look at it, is that what was the positivity rate? Meaning that how often a year later were we positive? Not the amount, but just how often was it up or down and a year out. This is interesting. 92% of the time. So essentially, twelve out of 13 periods, this has happened a year out. After this all time high markets are positive. I was surprised by that number.

Wes Moss [00:05:45]:
And it’s similar for two years out, as you could probably imagine. Actually, there was one more period that was just slightly negative. So it’s actually eleven out of 13. So that would be 85% of periods of time over a two year period. But here’s the average rate of return. You go out a year 92% of the time positive. The average rate of return, 15.3% after we. A year after we hit an all time high.

Wes Moss [00:06:13]:
So the market carried through that momentum. Historically, two years out, on average, up 23% over two years after you hit an all time high. So I don’t know if I would have been put on the spot prior to us doing this research, I wouldn’t have guessed that the positivity rate would have been so high. But it really tells us that, and we don’t know the exact reason why we see this phenomenon. Here’s what I would suspect is that perhaps once a market has gone through a rough period, so in all these cases, it’s over a year. So it took over a year, and sometimes it took a lot more than that. Perhaps you’re getting this consolidation effect and you’re getting the market going through some trauma, and they’re coming out maybe a little stronger. So think of it.

Wes Moss [00:06:59]:
This markets get hit, they get stuck in a quagmire for a long period of time, and when they finally break out, it’s for a relatively strong, or not. Let’s call it a nontrivial reason. Maybe it’s earnings again, earnings are almost always an important variable. Maybe it’s the fact that in this particular case. So think of what happened recently. Let’s go back to the very beginning of 2022. Doesn’t sound like that long ago, but ironically, the market peaked at the very beginning of the year and then essentially went down for the entire year. So all 2022 was a rough year for the SP 500.

Wes Moss [00:07:35]:
Then in 2023, even though we had a really good year, we still hadn’t gotten back to where we were. We had this big run up, the SP 500 up 25%. We still had not gotten back to where we had left off, essentially. It wasn’t until midway through January in 2024 that we finally eclipsed that ath, that all time high. The thing about that life cycle, a lot has to happen, right? So you have bad news, then you get stuck in the bad news, then it has to bottom means the news has to stop getting worse to some extent, or the outlook gets better, and then you have to make up for your moss. So a negative 25% return doesn’t get eclipsed by a 25% positive return because of the arithmetic of loss. Now you have to go up 35% or so in order to get back to where you were. So it takes a lot to get out of these slumps, if you will.

Wes Moss [00:08:31]:
And maybe, and this is my theory on this, if you’re looking over the course of market history, that because the market was able to do that, it had to have a kind of a lot of momentum to be able to get to the all time high. Hence it has that carry through momentum. That’s the way I would explain that phenomenon. I don’t know if I’m right about that, but that would be my theory behind why the momentum continues, because it took a lot of flywheel power just to kind of make up for all the destruction that was caused. Now, speaking of flywheel power, maybe I’ve gotten back to using the peloton. That’s where that analogy is coming. Know, I’ve been going, Jeff Lloyd, a long time without any good superhero movies. There was a period of time in my podcasting career where every analogy had something to do with the superhero movie, and that’s gone away because there haven’t been any new good superhero movies.

Jeff Lloyd [00:09:30]:
Well, let’s start bringing them back.

Wes Moss [00:09:32]:
Well, coming from the guy who hasn’t.

Jeff Lloyd [00:09:34]:
Watched man of Steel, I’ve not seen man of Steel. As of the recording of this podcast, I have not seen man of Steel.

Wes Moss [00:09:40]:
Don’t come back into this studio until you watch man of Steel. It’s part of being an american Superman. How old is Hunter?

Jeff Lloyd [00:09:50]:
He is ten. Grace Anne is 13. So we need to have a family.

Wes Moss [00:09:55]:
And it’s a family. Even grieving Night man of Steel is going to love it. But you’re such a good father in so many ways. I’m so shocked at this revelation.

Jeff Lloyd [00:10:05]:
Maybe it’s because we’re a Batman family right now. We’re in a Batman phase. Dark knight.

Wes Moss [00:10:12]:
Thinking about retirement in 2024. Well, you’re not alone, and I’ve got just the thing to help guide you on your journey. What the happiest retirees know my most recent book that shares the ten habits of the happiest retirees, meant to help you land at a place where work becomes optional for a limited time. Get 25% off@westmossbooks.com. Simply use the promo code. Our treat, all one word at checkout. That’s wesmossbooks.com. Speaking of the Dark Knight, coming out of nowhere with great power, what are we about to talk about?

Jeff Lloyd [00:10:53]:
Dividends.

Wes Moss [00:10:54]:
Yeah, we’re talking dividends and the power of the growth in dividends over time. So we talked about how markets, they hit an all time high, gives them some momentum. Imagine. And we just updated our, I call this our speaking of America, our red, white and blue chart because it looks a little bit like an American Flag. Here we’ve got the blue bar charts that are annual interest payments if we choose bonds, and the red bar chart, stock dividends. And imagine if you’re an investor and you had to choose. You go back to 1980 and you’ve got ten grand. Jeff Lloyd gives you $10,000 and says you get to pick one.

Wes Moss [00:11:31]:
You get to pick the stock market or the bond market, and you got to generate some income. What’s going to be a better long term bet over the course of the next? What, what do we do this 45 years or 44 years? What would win now? We’re not talking about total return. I’m not even talking about total return. What would give you core cash? You can’t touch the principal, but you can take whatever the interest is that comes from the investment or whatever the dividend is that comes from the investment. Of course, you get dividends from the SP 500. You get interest from the aggregate bond index. And you had to make a bet of how are you going to make the most income? Again, can’t touch the principal. I don’t care how much it goes up.

Wes Moss [00:12:10]:
I can only take what it comes out in the form of cash flow. What would you have picked? Jeff Lloyd gives you $10,000 SP 500 aggregate bond index. Well, back in 1980, I wouldn’t have faulted you for saying, wait, I’m going to take the bond index. Bond index paying 11%. Ten grand is going to pay me one. $119 this year. All right, pretty good bet. And the S and P 500.

Wes Moss [00:12:36]:
Now, the dividend back then was actually pretty high. Today it’s sub 2% for the SP 500. Back then it was a little over. It was five and a quarter. So you get $529 from stock dividends. Still pretty darn good. But if you were wagering on your income future, you may have stuck with fixed income. Again, as a reminder, if anyone’s new to the podcast, bonds are essentially ious, issued by governments or issued by companies.

Wes Moss [00:13:02]:
They want to build some big power plant or a road or something significant. They need all the money today. So they sell you an iou and they say, look, we’re going to pay you back in three years, five years, ten years in full. But along the way we’re going to give you interest. We’re going to give you 3%, 5%. Back then, 11% was the norm. But how does bond interest stack up against the income producing power of stock dividends? Well, now, here we are in 2023, and the bond investment has grown from ten grand. Remember, we’re not touching our principal here, we’re just talking about the income.

Wes Moss [00:13:38]:
But the 10,000 in the aggregate bond index had grown over the course of that period of time to a little over $14,000. So it went up a little bit. And for 2023, it would have paid you about $657, your $10,000 from back in 1980, and the S and P 500 would have grown a bunch. But it’s not just that the value grew, it’s the dividends grew almost methodically over that 40 some year period. And instead of paying you $529 like it did in year one, it would now be paying you over $6,400 a year, or a 64% annual yield on your original investment called yielded cost. Now, of course, the original investment grew as well. 10,000 now is worth 441,000. That doesn’t even incorporate the dividend income you got every year.

Wes Moss [00:14:39]:
So essentially the investment in bonds went up 1.4 x and the income went down by about 50%. Started out at one $100 a year. 44 years later, now you’re down to under $700. On the other hand, annual stock dividend income increased over twelve x. When it comes to the annual payment, the price only return grew 44 times 44 x. But when it comes to generating income, and we think about stocks as appreciation and we think about bonds as income, but ironically, the dividends just from the S and P 500, we’re not even talking about dividend oriented companies here or specifically looking at dividend companies. We’re just looking at the whole SP 500 absolutely trounces fixed income investing, even if you’re looking at just the income. Another way to look at it, inflation over that period of time went back to 1980.

Wes Moss [00:15:39]:
The inflation index, according to the St. Louis Federal Reserve Wes right around 78. In January of 1980, the end of last year, December 2023, got up to a little over 308. That means inflation rose just shy of four times four x. Your stock dividends went from $529 to over $6,400. That’s a twelve x rise. So inflation grew by four x, dividends grew by twelve x. Dividend growth beats the growth of inflation by three times.

Wes Moss [00:16:15]:
Jeff Lloyd, who would have ever thought so? Whether you have 2 million or 20 million or $200 million, it’s really hard to find a more consistent source of sprouting income to outpace inflation than dividend paying stocks. Now, I’m still a big believer in a balance, still like a certain amount of dry powder, call it three years worth of spending. Now the interest rates are much higher. Investors can expect a fair amount of interest coming from fixed income. It’s not sitting there doing, quote, nothing. And it’s a nice counter cyclicality to help you sleep well at night when it comes to your overall portfolio. When wes go through those rough periods of time for markets or stocks. Now, Jeff, we went through the exercise, which was essentially having to choose stocks or bonds.

Wes Moss [00:17:09]:
The good news is we don’t have to choose. We get to do both. We get to do more than those two. And if we can think about having our retirement set up in multiple streams of income, stock dividends, bond interest distributions from real estate investment trusts, energy pipeline companies, rental homes. And you put all that together, now you have some really steady income coming in. And as long as we own quality, diversified stocks and we give it enough time, we have a really good shot. We’re going to see some appreciation, because the total return equation is growth plus income. Total return equals growth plus income.

Wes Moss [00:17:49]:
But we don’t have to choose. We can have it all together in one collective plan that then allows us to have the financial peace of mind that we’re going to be able to fund all of our core pursuits and fund all of the things that we have new purpose for as we get into retirement. So I was on Joe Salcy High show stacking Benjamin, and we were talking about this article from Fritz Gilbert, who does the retirement manifesto. And that first of all, it’s interesting that Fritz says that we spend 90% of our time planning the money side of retirement and only 10% of the life. He thinks it should be the inverse. We should spend 90% of our time planning for all of the lifestyle changes and only 10% of the time on the finances. Because in his interview and research process, and these are folks that are well into retirement in their 80s. From his research, he’s found that they’re not worried about what their income is going to be at all.

Wes Moss [00:18:45]:
They’re not worried about their portfolios. They’re not worried about really anything to some extent, I guess, because they have gotten accustomed to what their income is and they’re satisfied with it. And they know as long as they follow some really important rules, many of them we talk about here on this podcast, that they shouldn’t have to be worried. Do you think that’s what this is?

Jeff Lloyd [00:19:06]:
So basically, their income is their income, and that’s just what they know that they can spend every year or every month, whether it goes up or down. It kind of is what it is when it comes to their income and spending.

Wes Moss [00:19:21]:
I guess by that point, when you’re in your eighty s and you’ve invested for 40 or 50 years, you know what your income is going to be, as the french siri would say, cis cassette. It is what it is. And they’re comfortable by that point in the retirement journey to maintain those levels. So what did we learn today? That we learned that as scary as an all time high might sound, history proves that to otherwise not be a bad time to invest or to put money into work. Somewhat counterintuitive, but history and investing is also a really informative and important guide. We also discuss the unheralded power of dividend increases. From 1980 through the end of last year, stock dividends went up twelve times or twelve x over 44 years. Pretty significant, and three times faster than the rate of inflation.

Wes Moss [00:20:23]:
And that’s just the S and P 500. Put it all together and there’s a lot for investors to think about. According to Fritz Gilbert, we think 90% of the time on according to Fritz Gilbert, we spend 90% of the time planning on the money side and not nearly enough on the life side. Here on the retire Sooner podcast, I think it’s a 50 50 split. I think about half of our time should be spent on making sure we have the right financial foundation that can last us for decades and the other 50% of the time understanding what our purpose is and what our purpose process is for a happy retirement. And of course the money side will fund it. So I think they’re equally important. What do you think can always let us know? Is it a 50 50 mix? Is it 90? Ten? 1090? You could find us and email me directly@retiresunerteam.com.

Mallory Boggs [00:21:26]:
Hey y’all, this is Mallory with the retire sooner team. Please be sure to rate and subscribe to this podcast and share it with a friend. If you have any questions, you can find us@wesmoss.com that’s wesmoss.com. You can also follow us on instagram and YouTube. You’ll find us under the handle Retire Sooner podcast. And now for our show’s disclosure. This information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal.

Mallory Boggs [00:21:56]:
There is no guaranteed offer that investment return, yield, or performance will be achieved. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions for stocks paying dividends. Dividends are not guaranteed and can increase, decrease, or be eliminated without notice. Fixed income securities involve interest rate, credit inflation and reinvestment risks and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Past performance is not indicative of future results. When considering any investment vehicle, this information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investment decisions should not be based solely on information contained here.

Mallory Boggs [00:22:41]:
This information is not intended to and should not form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment tax, estate or financial planning considerations or decisions. The information contained here is strictly an opinion and it is not known whether the strategies will be successful. The views and opinions expressed are for educational purposes only as of the date of production and may change without notice at any time based on numerous factors such as market and other conditions.