Redrick Terry:
It is now time for 4 your money. We’re joined by Brad Fritz of NelsonCorp Wealth Management. Brad, welcome back.
Brad Fritz:
Good morning. Thank you, Redrick.
Redrick Terry:
Absolutely. So at several times on this segment last year, we talked about stocks appearing that they could be overvalued and that future returns will likely be lower than in the past. So while we did have a significant decline this year, we really aren’t that far from where the year started. So are evaluations still something that people should be worried about?
Brad Fritz:
On the big scheme, valuations are really a crude perspective of a way to measure returns, we think. We look more at components of earnings per share, dividends, than valuations. Because valuations can run high for many, many reasons may not be applicable. On the first chart we see on the screen, we’re looking at 16 year returns for the Dow Jones, looking at moving numbers. And even though the last 16 year market cycle, which means peak to drop to peak, even as all that market cycle was 16 years, we did have one full bull market and one full bear market in there, and they will over time moot each other. But we came out of this last market cycle with averaging, as you’ll see on the chart, about a 6% mean rate of return. And what does that mean? That’s just the return of the investment, that doesn’t include any dividends or anything else, which would add another approximately 2%. So we’re running about historical average.
Redrick Terry:
So, what are some of the factors that drive some of those cycles you just showed us?
Brad Fritz:
Factors that are driving these cycles I think yet are still … we’re in an unusual time right now, even though we’re looking at a longer term cycle, we still count heavily on earnings per share. We still think that that earnings per share, if you look at the next chart decade by decade, that we try and break it down and see which is the most valuable components of those earnings per share is by far leads returns, drives returns, more than valuation does. And dividends are still a main component as well. So while everything is cyclical and they affect things differently at different times, we still feel like earnings per share is the most efficient driver of markets through different cycles. That’s up markets and down markets and durations of cycles as well.
Redrick Terry:
We’re running low on time here, but wanted to ask, is there anything people can do with their investments to help protect themselves if we’re entering into a period of those lower returns?
Brad Fritz:
Expectations of lower returns are always a challenge for investors. Those people that have gone to the bond market previous to this, or during this pandemic scare have suffered obviously with lower returns, the fed rate lowering interest rates to near zero over this longterm period. Nobody wants to think about having to adjust your lifestyle down, your spending down, due to lower income levels from your investments. I think probably pension funds are a great example of this. During difficult times, they never lower their expectations of what the income production will be. They continue to pay out the same amount of money, which puts drag on the overall pension portfolio. So it’s going to lead to a lot of people.
Brad Fritz:
We have it here in our office where a lot of investors are either going to have to work longer, spend less, or figure out a way to save more. And those are difficult things to tell someone when they’re entering a stage of their life where they want to be doing other things. And it certainly isn’t spending less. So asset allocation, we think, for our models, asset allocation is probably the most important part of that. To keep people in the play, to be able to maintain their lifestyle, enjoy retirement the way they want to enjoy retirement and not have to think about maybe adjusting their spending when they at least want to.
Redrick Terry:
Important decisions to be made for sure. Brad Fritz with NelsonCorp Wealth Management. Brad, thanks for joining us.
Brad Fritz:
Thank you, Redrick.
Redrick Terry:
Of course. And if you missed any part of our discussion, we’ll make it available to you at OurQuadCities.com.