We need to talk about a mistake that almost every investor makes — a trap that’s especially easy to fall into today.
That would be to let the headlines drive our investment decisions out of fear. Below, we’ll dive into a situation where doing so could result in a 30% loss and lost profits over the past 12 months. That’s before we even consider the bonus of staying on the table.
How worrying about inflation can cost you dearly
Let’s consider today’s inflation scare, which feels fresh but actually only started to be in the news a year ago. Back then, many sold (or at least reduced) their equity exposure, fearing that higher prices would prompt the Fed to take aggressive interest rate action, pulling away from the stock market in the process.
Imagine our hypothetical investor succumbing to these fears and cashing out as early as early 2021. Even if the market gets off to a rough start in 2022, they will miss out.
It’s just from the index itself. If our investors were overrepresented in some of the largest companies in the S&P 500, they could miss further: Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOGL) and Tesla (TSLA) For example, an average growth of 22% from the beginning of 2021.
Then there is actual inflation to consider. In February, prices rose 7.9% year-on-year. So, if our panic sellers cashed out in January 2021, their holdings would be worth 7% less today due to higher prices. So in addition to missing out on gains of 15% or 22%, they’re missing out because their cash is now worth more than 7% less than it was a year ago.
This means a loss of up to 30% on sales due to inflation, not including any missed dividends! (Our dividends are a big reason why our CEF Insider members stay invested in a market catastrophe – at the time of this writing, our portfolio’s equity funds are yielding a whopping 9.6% on average. This allows us to hold on to Our spending until the storm passes. )
The so-called “inflation hedge” plummeted
Inflation often prompts investors to opt for the popular inflation hedge, TIPS bonds, rather than cash (“TIPS” stands for “Treasury Inflation Protected Securities”, a type of government bond directly tied to inflation). Essentially, the interest rate the federal government promises to pay you goes up with inflation, so if prices go up, your income goes up too.
Investors who exited the stock and opted for TIPS ended up missing out on $1,071 for every $10,000 invested. So turning to TIPS to protect your money from inflation is better than all cash, but worse than sticking with stocks.
Your Best Moves: Stocks vs. Stocks, Get 7%+ Dividends, vs. CEF
As we mentioned above, most of the S&P 500’s gains have been concentrated in a handful of large companies that posted strong gains last year. And now, thanks to the recent pullback, those same stocks have pulled back a bit, giving us a good entry point.
Of course, we’re fans of CEF and we know we can get these shares at a nice “double discount” when we buy through our favorite funds!
Take, for example, the Adams Diversified Equity Fund (ADX), a long-term holder of CEF Insider. Its four largest investments are in four of the five largest companies in the S&P 500 (Tesla is an odd one, but it is indeed the fund’s 18th largest investment). ADX’s other top 10 holdings are U.S. blue-chip companies with strong track records, including UnitedHealth Group (UNH), Nvidia (NVDA), Bank of America (BAC) and Berkshire Hathaway (BRK.B).
These stocks have propelled the ADX to a solid run over the past decade, easily outperforming the S&P 500 and outperforming TIPS by a wide margin.
ADX is trading at 14% below NAV, which means we can buy all these great companies for 86 cents. And when investors realized that ADX had paid out a 7%-plus dividend yield in each of the past five years and crushed the market, that discount was bound to disappear, building on the fund’s already strong portfolio performance for us. bring more profit.
Michael Foster is the lead research analyst for the reverse outlook. For more great income advice, click here for our latest report, “Unbreakable Income: 5 Cheap Funds With a Safe 7.5% Dividend.”