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Retirement Planning: An Economic Standstill February 27, 2009

Posted by retirementwithaplan in retirement.
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You can almost feel it. There is palpable thickness to the economy that provides a new mystery with each new tidbit of knowledge. The more we know in other words, the less it seems to mean.

022609_mystConsider this: The S&P 500 has lost a little over half of its value since the euphoric high of October 2007. This has become a buyers markets, a classic Benjamin Graham type undervalued opportunity that only comes along once in a lifetime. You may have even begun to ramp up your 401(k) contribution or possibly are attempting to offset a tax bill by making a lump sum offering to your IRA.
(What you do in your individual portfolios held outside your retirement portfolio is not what we are considering here, although the same approach applies.)

But that sort of thinking, offered by numerous financial planners to the younger of their clients, would be wrong. Broad based investing such as the kind an index offers is good for those who bring only a few skills to the investment table but choosing such an index would expose the investor to a far worse fate. Numerous companies in this index, almost 290 have eliminated, suspended, or reduced their dividend.

True wealth over the long-term is in those dividends, a measure of how well a company is doing, the stability of its goods or services, and the willingness of their shareholders to commit to the relationship. But what happens when these kinds of steps are taken? Shareholders realize that the stock they hold is no longer as valuable.

Why does this matter to you? A dollar invested is more likely to show an exponentially higher return on the dividend the company pays compared to the long-term price of the stock. In a mutual fund that indexes the S&P 500, the growth of your portfolio is directly tied to this payment. When it stops, you can only rely on the share price to increase in value. And with dividend seeking stock holders no longer interested in owning what now has become an expense stock, the share price is likely to remain low.

This is not a backward looking forecast of what the market will do. There are no historical precedents that we can use to help us look forward. What we do have is a guess on how some people will react.

So that said, what should you do? If you are looking for growth, a good many of those S&P 500 companies are now straddling the world of mid-caps (many mid-caps are now small-caps). While we could talk about the broader economy at this time, we won’t. In order for these non-dividend companies to regain footing, they will rely on investors who are looking for everything but a dividend. These kinds of companies, many of whom have pared down nicely over the last several quarters, controlled their inventories and still have some access to credit, might just be a mid-cap manager’s dream come true.

If your are seeing an opportunity, I would agree. My best guess is that you will find mid-cap growth funds and to some degree small-cap growth funds existing in a sort of middle earth and when this is over, this might be the best place for those evenly placed investments in your future.

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