In the past 10 years we have been living in a low interest environment and when interest rates were near zero, the alternative was to be invested in dividend paying stocks with dividends at 3% and above. Along with a rising stock market, the total returns were healthy. Economies move in cycles and the rise in inflation means there is a reasonable alternative to investing in the stock market or bank savings and bonds and interest rates on savings will rise.
In an article from Reuters, Ray Dalio, founder of one of the world’s largest hedge funds called Bridgewater Associates is predicting if the US Federal Reserve raises interest rates aggressively to tame inflation the stock market will fall as people move money into bond type investments. Mr. Dalio has some YouTube videos on how the market moves into cycles and where in the cycle we are at (the videos are worth viewing). Mr. Dalio said if the fed rate goes to 4.5%, this will lead to a decline in the stock market by 20% as money seeks alternatives in bonds.
Linking to dividend paying stocks, each investor at some point will examine if you can make X% with no risk, why invest in the stock market to make the same risk? In every cycle of the economy there are alternatives, some are better than others. The risk return is different for everyone because what risk are you comfortable with on your money? The answer tends leads to a focus on growth stocks or value stocks and combinations in between. We know that over the long-term investing in the stock market index (where the losers are changed to winners every 6 months) means the stock market will outperform other alternatives. We also know, if a company is profitable its shares will go up and down, but the dividend tends to go up over the years, which makes the total return a good number. In the stock market the only perfect information is looking backwards, as investors you need to look forward and from your homework made a decision.
There are more questions than answers, till the next time – to raising questions.