Is this the end of the crash?

A market crash + recession or worse, depression isn’t great, and will affect earnings that will affect cash reserves/reinvestment and in time dividends.

I think that the GFC was a bad template for Oz investors as we had locally a massive market crash but relatively benign effects in the real economy. That is not normal. Wonderful for the accumulator however.

Look at the recession of the early 90s for a guide as to what can happen, 11% unemployment, banks and building societies falling over....a debacle.

We already know that APRA will garnish bank earnings if capital equity ratios fall fairly modestly, so those dividends can’t be relied upon in a recession.

Best we can hope for is sentiment driven crises...20% drawdowns would be good

 

Great comment.

Of course it would be silly to suggest that in a genuine recession or worse that dividends would not be cut. But history has shown time and time again any reduction in dividends is significantly less than capital.

I admit to being a mug amateur who is not as well read as others and happy to stay that way given I’m committed to the simple dividend investing approach. And I don’t have the skills to perform the deep analysis like some others. But when it comes to major market events I’m a bit old school in thinking that experience is sometimes the best teacher.

The early 90’s recession was mentioned above. Well my birth year is 1960. It’s not as if I didn’t know it existed. I lived through it. Relative to our low level of wealth at the time we had significant investment in share funds and unlisted property trusts prior to the 87 Crash. Made some stupid decisions given lack of knowledge / experience and sold a couple of the Share funds at a loss due to concerns about the crash. Fortunately the unlisted property funds froze redemptions. By the time redemptions we’re allowed again I’d settled down and the market was improving so the funds were back into profitable territory.

Of course the biggest concern during recessions or worse is whether one has a job or in the case of a retiree enough retirement income to live on. Too much debt also makes for a very uncomfortable situation.

But getting back to dividends during the early nineties recession. Here’s a few charts so I can’t be accused of cherry picking data:





As much as I find reading sharemarket related books boring I have found a couple relating to market history of some interest. We all need to have some plan in dealing with scary market events. So I’ll draw on some research into market history and personal experience from prior to the 87 Crash and all events since then including the recession and GFC etc.

Relying on Share capital is out because it’s the most volatile component during market corrections / crashes. Given where bond yields are at I certainly wouldn’t be relying on them to seriously dampen capital volatility in a major event.

Dividends have proven time and time again to be significantly less volatile than capital so yep they’re part of my plan. And being one for simplicity and wanting to be confident that liquidity, safety and dry powder is there when I need it the most then the only other thing needed is government guaranteed Cash.

So when the **** really hits the fan we’ll do the sensible thing in reducing unnecessary spending, continue to enjoy the dividend income with cash topping up any cut in dividends and providing dry powder to take advantage of the huge opportunities on offer. No having to worry about capital volatility and whether bonds will do as expected because they don’t always work. Which is potentially more likely especially given the current extreme low rate environment.

 

Good post but this doesn't make sense. Yield is not a factor in whether bonds will be correlated to stocks or not. I personally would rely on them to significantly dampen capital volatility in comparison to an all stock portfolio.

No warranty

 

Agree, but it certainly reduces the level of downside protection should a major event occur given where yields are at.

I feel much more comfortable with Cash rather than a bond fund at the moment but that’s just me.

 

Yes Earnings may be more volatile than Dividends, however the more relevant comparison should probably be price volatility vs dividend volatility.

From the data I have collected back to 1974 and presented on a log scale.

87 crash was largely an unwinding of sentiment driven price multiples and the economy barely blinked. Dividend focused investor would have wondered what all the fuss was about.

Early 90's recession dividend income was far less stable than price. Nasty for the income investor as Falcon indicated.

 

Not sure about that at all. They will be what they are when the rest of the portfolio goes through the floor. Although yields wont increase price should go to premium to face value for AAA bonds. But yeah, we are talking about a hills of beans between this and cash really.

Note "should". The past is no guide for the future.....as humans we have a habit of looking at the recent past, say 50 years...and that is "recent" really and thinking that the range of possible outcomes resembles what we have seen in the past 50, or past 100 years. When the range of possible outcomes is very far outside of that. Only when things happen do we then create a palatable backstory "ah that makes sense! thats what X happened"

Be broadly diversified ; anything can happen.

 

Chart from the Shiller dataset for the USA http://www.econ.yale.edu/~shiller/data.htm which goes back to 1871 and using real dividend and price [as purchasing power is what really matters in the big scheme of funding your lifestyle]


The belief that dividends are less volatile than price isn’t really supported by this longer look back at history. But who know what the future holds? I dunno, for sure!

 

Oh dear. I don’t know why at my age I get into these debates regardless of whose right or wrong.

I focus on Australia given that is where I source most of our dividend income and get the benefit of the imputation system. As I’ve said a few times in the past “beware the well meaning American” when it comes to investing in Australia.

Early 90’s. Volatility appears to look worse given the introduction of the Dividend Imputation system in 87 and the resultant flow on effect. Let’s see what happened:

And



And @dunno’s chart:



So if we remove the anomaly of the introduction of the imputation system well dividends certainly look far less volatile during that period than others are suggesting. A wise person would have realised the windfall they were getting and put some away for a rainy day such as during the recession.

And rather than relying on us amateurs here fiddling with charts etc here’s a tidbit from the result of Research done by the Acturies Institute of Australia:


I’m not suggesting that the 90’s recession wasn’t unpleasant for some. But I disagree with how some are making out that dividend investors were in a world of pain during that time. Real life does not always match what is shown on a chart.

I admit it’s difficult for me to debate with others who read a lot about this stuff. I can only give my experience of having Iived through these events, what I experienced in the real world and how they impacted me.

I’ve run out of debating energy reserves. Perhaps @SatayKing or others who have also experienced these events can add further.

Anyhow more important things to do. Decided I’d celebrate Valentine’s Day early. Bought some beautiful flowers for the boss earlier and have some excellent champagne in the fridge. So time to celebrate. As if I need an excuse.

 

If your portfolio is large enough to be generating much higher dividend income than your spending needs would you still prefer to diversify into bonds?

Reason I ask is Buffet and Charles Ellis have publicly acknowledged they are happy to be 90% or above in stocks (index funds) and don't feel the need to diversity into bonds.

Broad diversification by including bonds can reduce the volatility but at the cost of lower returns. I don't think returns from bonds over last 30 years can be repeated over the next 30 years.

Cheers,
oracle.

 

That chart shows that dividends tend to a long term average of 4.4%. The best time was 2008 with >8% yield while the worst times were from 97 to 2001 where it was as low as 3%. It also shows reversion lower back to the mean when dividends are high and reversion higher to the mean when dividends are low.

Therefore, buy when dividends are > 4.4%.

Not advice.

 

Its a good question. When I have $50MM + I will let you know

Ellis is an extreme outlier and Buffett has more money than god and no expenses. Saint Jack has about $100MM and runs 60/40.........I am inclined to believe i will hold relatively more in FI and cash in coming decades.

 

Feeling so much better now.

The reality is there’s no right or wrong answer here.

Brain function not at optimal level at moment but a few key thoughts.

1. Personality Traits (capital vs cash flow)

Do you focus on portfolio value vs dividend income? If capital volatility causes you sleepless nights then best to favour a total return approach with low correlation assets including bonds. @The Falcon has done some wonderful research in this area. Some may even feel comfortable with an allocation to absolute return funds. But good luck finding a top line Mgr especially as a retail investor. Anything to reduce capital volatilty (think capital drawdowns) will improve SANF.

If all you are interested in is cash flow with no decisions on your part and can ignore capital volatility then perhaps dividend investing is for you. But don’t kid yourself this is harder than you think. Watching your portfolio sink by a multiple seven figure sum during a market crash is not easy. Of course it’s all relative to ones level of wealth.

2. Deep vs Shallow Risk (Bernstein)

Deep risk essentially applies to younger folk. The risk of unforeseen events is more probable the longer your future time frame. Shallow risk is the opposite. So as @The Falcon mentioned earlier best to cover your arse as much as possible especially if one is a younger investor.

3. Amount of Wealth

Some unfortunately will be unable to survive on dividends alone. Hence capital drawdown will be mandatory. So in this case a total return approach may be the only option. As stated earlier anything that can reduce capital volatility will be welcomed in this situation.

Finally one doesn’t need $50 Mil to feel comfortable with a high stock allocation like Ellis / Buffet. It all depends on one’s lifestyle and mindset. Buffet might be incredibly rich but he lives relatively frugally. Ellis is similar to a degree but is investing for his grandchildren.

Once one has more than enough cash flow to meet lifestyle expenses then provided you can cope with capital volatility (a big if) then there would appear to be no / little need for bonds. For example if $50 - 60K pa (indexed) is enough to meet ones living expenses with a modest cash buffer then bonds are unlikely to be needed. The big proviso of course is one’s ability to withstand capital drawdowns.

The underlying theme is each investors behavioural attributes. In other words, know thyself. Regardless of how great any approach might be if it fails SANF then it’s unlikely to succeed.

Not advice.

PS: Be wary of inibriatred geriatrics offering investing suggestions. I really am capable of talking a lot of crap at times.

 

Test of nerve for markets as 10 years of cheap money come to an end


Headline CPI 0.6%qtr/1.9%yr, Trimmed mean 0.40%qtr/1.8%yr, Weighted median 0.45qtr/2.0%yr.

 

Not much new in that. Debt can be addictive. Add in a large degree of greed and you have one hell of a volatile cocktail.

Never really get it why the bozo's never factor in The what if it goes, or will potentially go, against ya from the get go? Probably reason their very smart so they'll get out before it happens. Sadly, a lot of Mum and Dad money (odious term) is rolled up in their activities.

 

Perhaps the contrarian in me or just a nervous type.

When interest rates are low it seems like a good opportunity to get rid of / reduce outstanding debt rather than take on more.

 

Never a bad time to get rid of debt. Only a bad time to take it on.

 

An accumulator might benefit from some “conservative” use of debt for opportunistic buying when the market is experiencing major gloom. Especially if the debt is secured against property. Outside of that I agree, never a bad time to get rid of it.