investment income to make up for the absence of a salary. But Iâm still heavily invested in stocks. Most people err on the side of income, and shortchange growth. This is truer today than it was in 1980, when 69 percent of the money invested in mutual funds went into stock funds. By 1990, only 43 percent of mutual-fund assets were invested in stocks. Today, approximately 75 percent of all mutual-fund dollars is parked in bond and money-market funds.
The growing popularity of bonds has been fortunate for the government, which has to sell an endless supply of them to finance the national debt. It is less fortunate for the future wealth of the bondholders, who ought to be in stocks. As I hope I convinced you in the introduction, stocks are more generous companions than bonds, having returned to their owners 10.3 percent annually over 70 years, compared to 4.8 percent for long-term government debt.
The reason that stocks do better than bonds is not hard to fathom. As companies grow larger and more profitable, their stockholders share in the increased profits. The dividends are raised. The dividend is such an important factor in the success of many stocks that you could hardly go wrong by making an entire portfolio of companies that have raised their dividends for 10 or 20 years in a row.
Moodyâs Handbook of Dividend Achievers , 1991 editionâone of my favorite bedside thrillersâlists such companies, which is how I know that 134 of them have an unbroken 20-year record of dividend increases, and 362 have a 10-year record. Hereâs a simple way to succeed on Wall Street: buy stocks from the Moodyâs list, and stick with them as long as they stay on the list. A mutual fund run by Putnam, Putnam Dividend Growth, adheres to this follow-the-dividend strategy.
Whereas companies routinely reward their shareholders with higher dividends, no company in the history of finance, going back as far as the Medicis, has rewarded its bondholders by raising the interest rate on a bond. Bondholders arenât invited to annual meetings to see the slide shows, eat hors dâoeuvres, and get their questions answered, and they donât get bonuses when the issuers of the bonds have a good year. The most a bondholder can expect is to get his or her principal back, after its value has been shrunk by inflation.
One reason bonds are so popular is that elderly people have most of the money in this country, and elderly people tend to live off interest. Young people, who have earning power, are supposed to buy all the stocks, to build up their assets until they, too, are old and need to live off interest. But this popular prescriptionâstocks for the young, bonds for the oldâis becoming obsolete. People arenât dying as readily as they used to.
Today, a healthy 62-year-old is looking at a life expectancy of 82: 20 more years of spending, 20 more years of inflation to erode the buying power of his or her money. Senior citizens who assumed they could retire happily on bonds and CDs are finding out otherwise. With 20 years of bill paying ahead of them, they need to put some growth back into the portfolio to maintain their standard of living. With interest rates low, even people with huge portfolios are having trouble living off interest.
This has created a situation in which senior citizens around the nation are all asking, âHow can I survive on a three and a half percent return from my CDs?â
Consider what happens to the retired couple whose entire net worth, $500,000, is invested in short-term bonds or CDs. If interest rates go down, they have to roll over their CDs at much lower interest rates, and their income is drastically reduced. If interest rates go up, their income goes up, but so does the inflation rate. If they putthe entire $500,000 into long-term bonds paying 7 percent, their income is a steady $35,000. But with an inflation rate of 5 percent, the buying power of this $35,000 will be cut in
The growing popularity of bonds has been fortunate for the government, which has to sell an endless supply of them to finance the national debt. It is less fortunate for the future wealth of the bondholders, who ought to be in stocks. As I hope I convinced you in the introduction, stocks are more generous companions than bonds, having returned to their owners 10.3 percent annually over 70 years, compared to 4.8 percent for long-term government debt.
The reason that stocks do better than bonds is not hard to fathom. As companies grow larger and more profitable, their stockholders share in the increased profits. The dividends are raised. The dividend is such an important factor in the success of many stocks that you could hardly go wrong by making an entire portfolio of companies that have raised their dividends for 10 or 20 years in a row.
Moodyâs Handbook of Dividend Achievers , 1991 editionâone of my favorite bedside thrillersâlists such companies, which is how I know that 134 of them have an unbroken 20-year record of dividend increases, and 362 have a 10-year record. Hereâs a simple way to succeed on Wall Street: buy stocks from the Moodyâs list, and stick with them as long as they stay on the list. A mutual fund run by Putnam, Putnam Dividend Growth, adheres to this follow-the-dividend strategy.
Whereas companies routinely reward their shareholders with higher dividends, no company in the history of finance, going back as far as the Medicis, has rewarded its bondholders by raising the interest rate on a bond. Bondholders arenât invited to annual meetings to see the slide shows, eat hors dâoeuvres, and get their questions answered, and they donât get bonuses when the issuers of the bonds have a good year. The most a bondholder can expect is to get his or her principal back, after its value has been shrunk by inflation.
One reason bonds are so popular is that elderly people have most of the money in this country, and elderly people tend to live off interest. Young people, who have earning power, are supposed to buy all the stocks, to build up their assets until they, too, are old and need to live off interest. But this popular prescriptionâstocks for the young, bonds for the oldâis becoming obsolete. People arenât dying as readily as they used to.
Today, a healthy 62-year-old is looking at a life expectancy of 82: 20 more years of spending, 20 more years of inflation to erode the buying power of his or her money. Senior citizens who assumed they could retire happily on bonds and CDs are finding out otherwise. With 20 years of bill paying ahead of them, they need to put some growth back into the portfolio to maintain their standard of living. With interest rates low, even people with huge portfolios are having trouble living off interest.
This has created a situation in which senior citizens around the nation are all asking, âHow can I survive on a three and a half percent return from my CDs?â
Consider what happens to the retired couple whose entire net worth, $500,000, is invested in short-term bonds or CDs. If interest rates go down, they have to roll over their CDs at much lower interest rates, and their income is drastically reduced. If interest rates go up, their income goes up, but so does the inflation rate. If they putthe entire $500,000 into long-term bonds paying 7 percent, their income is a steady $35,000. But with an inflation rate of 5 percent, the buying power of this $35,000 will be cut in
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