Dear Mr. Berko: I retired at 55 in 1997 and moved my $460,000 401(k) to an individual retirement account to be managed by our broker.
By late 1999, my portfolio had increased in value to $605,000, so we took out $4,000 a month — about $3,000 from appreciation and about $1,000 from dividends.
Then, in 2001, my IRA got trashed in the dot-com bubble and crashed by more than 50 percent, to $290,000. This was devastating because we needed stock growth to give us most of the income we needed. So I returned to work in 2003, which was good because in 2006, my employer was merged into a larger company, and my few shares of stock were exchanged for $410,000.
This time, I purchased quality bank stocks and mortgage bonds. I retired again in 2008 at 66, with Social Security, and the market crashed again because of the housing bubble and subprime mortgage scandal. My IRA took another big blow, but my Social Security income (my wife’s, too) helped pay our bills.
In early 2010, a money manager you recommended improved our account’s value back to where it was before and then some. Today I get about $3,300 a month in dividend and interest income. Recently, the market has been so volatile that I’m scared of losing 50 percent of our principal again. I need this monthly income.
Please advise me as to whether I should liquidate everything and wait until events calm down. Please look at my portfolio and tell me what to do. Will the market crash again, or will it continue to rise? The money manager says to hold, but I trust your advice.
LS, Joliet, Ill.
Dear LS: I understand how you feel, and at your age (74), it’s not so easy to go with the flow as it was when you were 55.
There are tens of dozens of gurus who claim absolute knowledge about what the stock market will do over the next few years. They spend huge bucks competing for your attention on satellite radio, on the Internet and in the print media. All are either unreservedly bullish or frighteningly bearish; there’s no in-between. These guys profess a brilliance that makes it impossible for them to be wrong. Because I’m not thus hindered, I’m incapable of knowing what the market will do in the coming few years.
Yes, the market could head south and even remain there for a while, though if you have your money invested properly, a 20 percent or even a 30 percent drop in the Dow Jones industrial average shouldn’t affect your lifestyle or income. I’ve frequently told readers that the enormous $85 billion monthly Federal Reserve stimulus (probably worth 3,000 points on the Dow) was a major market stimulus. Now it’s being “tapered,” and so is the Dow.
Fortunately, your broker is a darn smart fellow. His management style uses stocks with growing dividends to provide you with income rather than create income from buying low and selling high. According to the brokerage statement, your portfolio, valued at $836,000, gave you $39,565 in dividend and interest income last year. If the stock market takes a 20 percent dive (as some predict) and your portfolio crashes to $600,000, I am quite certain your dividend income will continue to increase.
Issues such as your business development companies, your superb master limited partnerships, AT&T, Verizon, NextEra Energy Resources, Southern Co., Avista, Rayonier, Camden Property Trust, Microsoft, Digital Realty, Altria, Mead Johnson, Royal Dutch Shell, W.P. Carey, Deere & Co. and others in your portfolio will decline in price when the market falls. But I’m as certain as Caesar that those issues will increase their dividends this year and the following years. It’s with a low degree of certainty that I predict whether a specific stock will increase in price, but I can predict with a very high degree of certainty whether that specific equity will increase, maintain or decrease its dividend.
Yes, many of your issues decline with the market. But what difference does it make? Each of your issues is a strong dividend payer. And some wise investors are beginning to figure out it’s easier and safer to live off dividends than it is to live off capital gains. Trust your superb money manager.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.