It’s About Income, Not Asset Value
It’s about income, not asset value. The Three Key Lessons You Must Learn About Creating Wealth.
Do successful investors look for capital growth, income generation or both?
Ask many investors and chances are, they’ll tell you that what’s most important is the value of the asset. So keep the TV turned to the finance news and watch the portfolio / property value like a hawk so you know when to buy and sell.
But have these investors considered the multi-dimensional aspect of an asset? It can’t all be about the value when what you need in retirement is to replace your income when you aren’t working. Investors should consider the capital, the ability to generate an income and the tax retreatment of the income. See investments as a single-dimensional item and you will clearly miss some of the most important considerations of successful investing.
Let’s take a look at what you need to consider when investing.
Round Numbers Aren’t the Be-All and End-All
If you focus solely on the numbers when deciding which stocks to buy, that’s fine in a way. After all, almost all share investment strategies will require you to look at the numbers. But in many cases, you don’t “solely” do that.
The question now is, which numbers should you look at?
Australian investing expert Peter Thornhill wrote about this in the highly acclaimed book Motivated Money (2003). More recently, he wrote an insightful piece about the share market’s “religious” fascinations. To be specific, he wrote about the investors’ fascination with round numbers.
He came across an article (and there are many) that extolled the symbolic move of the S&P/ASX 200 index hitting 7000.
What does it mean? Does it indicate that it’s time for you to act?
Thornhill recalled writing an article on the same topic when he was just 15 years old. At that time, the symbolic threshold for the index was 4000. It was the inexplicable, almost religious fascination about that round number that bothered him back then.
He analysed the value of the stocks and their dividends at the time. Of course, the value of the shares had to have gone up for the index to go up. Some of them went up by as much as 60% in the past 12 months. However, the dividends weren’t that different from a year ago.
“What changed was merely perception,” Thornhill wrote.
And that’s where most share investors fall flat.
If surging share prices mean that the companies are doing better, how come the dividends rarely follow suit?
If people need income in retirement, then perhaps investors should primarily consider the dividends or return an investment pays, and the capital performance secondary.
“Despite the ups and downs [of asset value], the stability of the dividend stream shines through. And it is this that forms the basis of our investment success.”
Higher share prices rarely result in higher dividends nowadays. It’s because the companies aren’t necessarily doing better. Similarly, lower share prices don’t always affect the amount of dividends.
For example. In recent times, the effects of COVID-19 has seen share prices plummet. Within a few days, the value of large Australian companies fell significantly. Do we believe that in that short amount of time the underlying value of that company fell? Or was it investor confidence in the share market that caused shares to be sold off, increasing supply with reduced demand may have impacted share prices? The underlying asset remained the same, it’s price changed for a period of time in this instance. In most cases, dividends continued to be paid. Some at an increased rate, and some at a reduced rate. Depending on the impact of the event on the revenue generated by that business.
What’s the point then?
It’s that you shouldn’t focus on the big round numbers that stock market reports get hung up on.
Instead, you should assess the market based on what’s best for you, which brings us to…
The Three Key Lessons
To invest or to speculate. That is the question! Are you looking to build wealth instead of participating in the thrill of stock trading? Then it’s about time for you to invest like that’s your main goal.
Here are three lessons that can help you invest for the purpose of income generation and wealth-building.
- Focus on Income (Rather Than Asset Value)Again, focusing strictly on asset values is the pitfall of many investors.
Those who don’t pay attention to income are making a mistake. Whether you choose to reinvest the income to create more income or choose to spend it. Ignoring this dimension of an asset will only show you one very small piece of a much larger puzzle.
- Don’t Subscribe to the Herd MentalityIf you want to be a successful investor, you must strategically assess the situation.
Here’s an example:
At the beginning of 2010, many considered shares as risky investments since the GFC taken its toll for some time. Only the brave were willing to put their money in shares at the time.
And then, the Australian economy recovered and share prices have since increased tenfold off the trough. During that time, more and more investors came into the market when they felt good enough about the new uptrend.
However, it was the investors that stayed invested, purchased more if they could or started investing at that time who profited the most.
How come only a small minority recognised the opportunity?
It’s because most investors want someone else to test the waters first and help them confirm whatever predictions are made about the stock market.
It’s much easier to just do whatever everybody else does.
Except, this rarely bears fruit. You’re essentially buying when the prices are high and some then sell when the price is low as a result of fear.
The best thing that you can do is to ignore the media and financial news networks. If you don’t have the expertise or time to do your own analysis, it’d be better to rely on experts with the proven track records from doing this day in and day out.
Just don’t follow the herd.
- History Repeats Itself“This time will be different.”
How often have you said that when you’re trying to make an investment decision? Lots of investors and traders have the same approach. Everybody wants to be the wise guy that breaks trends.
Unfortunately, it usually doesn’t hold true.
That’s because history tends to repeat itself in wealth markets. Even more so when it comes to the share market, which relies on supply and demand and investor psychology.
These parameters tend to work the same way.
When the economy takes a turn for the worse, fear takes centre stage. Supply is higher than demand and prices go down.
Conversely, demand outstrips supply and greed takes over in a roaring economy. Investors rush into buying with both hands, paving the way for inflation and another downturn.
The recovery after the 2008 financial crisis wasn’t too different than what happened after the Great Depression of the 1930s, or most other recessions for the matter.
Any blips in the market don’t necessarily mean that you have to get rid of your investment assets. Even in a downturn, there are a host of profitable strategies that you can use.
History often repeats itself and markets have historically recovered to reach new heights.
Invest at Your Own Terms
Round numbers and public perception aren’t always indicative of sound investment choices. That said, it doesn’t mean that you should always make it a point to go against the grain.
You’ve got to be sure when you try to develop a strategy that works. And it doesn’t have to be a strategy used by the majority of investors.
And if you need any help in developing an investment strategy that works for your unique situation, you’re in the right place.
Contact us at Modoras Financial Performance Solutions for insights into successful investing. Together, we can create an investment strategy that’s independent of popular opinions and not restricted to one asset class. Book an appointment on our website today to get started.
Want to Know More?
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- How Much is Enough to Retire
IMPORTANT INFORMATION: This blog has been prepared by Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licences (Number 233209). The information and opinions contained in this presentation is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals’ personal circumstances have been taken into consideration for the preparation of this material. Any individual making any investment or borrowing decisions should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to borrow funds or purchase, sell or hold any particular investment. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of, credit contract entered into or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog may change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.