You don’t have to be a genius to realize it will be hard to find growth for a while. Stagnant global economic growth may be a theme for some time. Major central banks have used unorthodox methods like monetary policy stimulus to urge consumers to buy goods with cash or credit (mostly the latter) to produce economic activity. The latest remedy to this chronic sickness of global stagnation? Negative interest rates. As an aside, I was just told by the firm that custodies our client assets that they will be passing on the charge to any account holding foreign currency positions. This just means that with negative interest rates, you now pay the bank to hold your funds. With all of this, it could be quite compelling to just sit in cash or worse, stick your head in the sand and wait for all the madness to end. However, I have a better plan…
With the Dow Jones approaching all-time highs once again, investor anxiety is likely correlated with the upward motion. Let’s look at the last 5 Dow milestones:
-Dow 14000 happened on June 19, 2007
-Dow 15000 happened on May 7, 2013
-Dow 16,000 happened on November 21, 2013
-Dow 17,000 happened on July 3, 2014
-Dow 18,000 happened on December 23, 2014
It seems strange that the Dow has made such highs so rapidly. Especially considering additionally that, Dow 10,000 happened in 1999, while 14,000 happened 8 years later.Yet, it has increased at a much more increased rate since then (remember the Dow hit a low of 7,000 in February 2009). I think this is why many feel a crash (or at least a decent pullback) is imminent. However, successful investors like Buffett, Templeton, and Swensen have one thing in common in their success (besides financial genius!) They all have used the discipline of patience to exploit the concept of total return. I truly believe that total return is a concept that is lost on many investors today. Capital appreciation is desired, but having a myopic focus on just this metric under-utilizes the concept of total return and stifles portfolio growth. Last December, I covered this but I feel it is worth a refresher in light of what we face in the markets. When I was taking undergraduate finance courses at Prairie View A&M (go Panthers!), my professor called it the “magic of compounding interest”. It was the concept that your original investment earned a return and that return earned a return, so on and so on. But if you think about how powerful that principle is for a minute, it will really revolutionize your investment strategy. Using the rule of 72, if you found an investment paying 10% interest (and there are some out there) you could use the interest payment to buy more shares paying 10% interest and repeat until you ran out of money, you would double your money in just over 7 years. For someone starting this discipline at age 25 with consistency, they would receive 6 doubles before full retirement age. Now, they would probably have difficulty in finding such a high paying investment during the whole time, but I think you get where I’m coming from. Successful investors have not waited as much for the Dow to go up in value as they have simply waited on the passage of time! Come to find out, the most valuable thing isn’t money…it’s just time.
Check out this graph illustrating the power of compounding interest (courtesy of JP Morgan Asset Management):
This most important element in executing a portfolio strategy that exploits this power is consistent investment. Making monthly or quarterly deposits into high income generating assets and re-investing the subsequent income payments has benefited many investors throughout time. Do you think you can let time work for you (instead of against you) for a change? If so, you are well on your way to outstanding portfolio returns.