The Dow Approach
The Dow Approach
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FOOL GLOBAL WIRE LEXINGTON, KY. (Feb. 21, 1997) -- In many of my columns I talk about investors just getting started. They have decades before retirement and the biggest obstacle is simply getting going. Their fears are that they don't have enough to invest and it'll take them forever to get anywhere. But today, let's go to the other end of the experience spectrum. What about an investor who's retiring and needs to prepare for the rest of his or her life. How appropriate is a stock strategy then? Let's assume this is an investor who's saved throughout his earning years and invested reasonably well and now has a portfolio worth approximately $1,000,000. (That's not an unreasonable expectation if you've read my other columns on how easy it is to get to $1 million if you start early.) Should our new retiree forgo stocks in favor of bonds or a certificate of deposit in order to generate the needed income in his golden years? (You're way ahead of me.) Today's retiree could be looking at an additional 20 years or more where they'll need to draw on their investments. Our millionaire could stick his money in 30-year bonds and draw about $65,000 to $70,000 in annual income. And this might even satisfy his needs for now. But what will that $70,000 buy in 20 years or so? A heck of a lot less, and in the meantime, his portfolio has actually shrunk in real value because of inflation, even though it's still worth $1 million. Too many investors feel they must get their spending requirements through dividend or interest income. But investing in a relatively conservative Dow approach can provide the needed income and afford you continued growth indefinitely. Even if the approach does significantly poorer than it's done for the last several decades, only earning 18%, you can meet the same $70,000 spending need by taking the dividends in cash and then selling some shares each year to make up the difference. For example, if you receive $30,000 in dividends (3% on the $1,000,000 investment), you could sell shares equal to an additional $40,000 to generate the needed $70,000. If the portfolio has grown 18% through dividends and appreciation, you've still seen a net growth of $110,000 ($1,000,000 * 18% = $180,000 - $70,000 = $110,000). After a number of years, in fact, the continued portfolio growth will put you in a position where the dividends alone will meet your requirements and the growth can compound even faster. You can even give yourself a raise regularly to keep pace with inflation and still see long-term growth. So don't feel your only resort as a retiree is to turn to bonds or fixed income securities. Conservative growth is a good idea, even for the investor who's no longer "working." And by only having to follow your portfolio once a year, there's no reason why you can't shave a few strokes off that handicap now, is there? Fool on. (c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. |
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