2010 Q3
The Money Planner – Summer 2010
Greetings Clients and Friends!
I hope this finds you well and you are having an awesome summer! The Money Planner's goal is to provide items of use and interest as you plan your financial future. This issue discusses using dividend-income to meet your needs and the national debt we hear so much about.
Please share with your friends and colleagues as you feel appropriate.
Are you on a path to Financial Independence?
There are many ways to reach financial independence. One way is managing your portfolio for income.
Here's a simple example: Assume you need $50,000 in income to lead an independent lifestyle. With today's investment options, it is possible to have an average income portfolio yield rate of around 9%. You would need to invest $560,000 to meet your needs ($50,400 of income annually at 9%).
Portfolio income also offers safety from market volatility.
Let's assume the stock market crashes 20% and your income portfolio also falls 20% in value ( A full 20% is unlikely as dividends usually support the securities price to some degree). Your $560,000 portfolio is worth only $448,000. (Please don't shoot your planner-messenger!) However, you are still receiving $50,400 in annual income, because the securities in your portfolio are still paying the same dividend payments as when purchased. As long you do not sell the securities and the underlying businesses maintain their dividends, your income is not affected. In fact you could invest additional money at an 11.3% rate.
There is a place in every portfolio for dividend-paying investments. Seek some for your portfolio or ask your planner. Don't have the size portfolio you need? Keep saving and investing - you will get there!
Does the National Debt Affect Investments?
Government actions greatly affect interest rates and inflation, which affect portfolio performance. The current debt level is high, but the US has seen higher.
For proper perspective, debt must be compared to the size of the economy (GDP or Gross Domestic Product). After World War II, US debt was 120% of GDP. Now it is 95%.
Of course, after WWII, the government reduced spending, whereas today spending is on the rise. The future promises (unfunded liabilities) the government has made regarding Social Security, Health Care, and Welfare programs are a looming problem. For more information on the US budgets and debt see: Federal Deficits - Heritage Foundation
Historically, this level of government spending leads to inflation, or a weakening of the currency, as the government creates money to pay the interest payments.
What to do?
If an inflationary environment occurs, mining, natural resource, and energy stocks usually provide superior returns. Avoid bonds as they will fall in this environment.
Please visit my website to learn more about how I may be able to help you: ScotWolfPlanner.com
Scot Wolf
Financial Independence Planner
Email: Scot@scotwolfplanner.com
Phone: 952-888-4991
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