Should You Protect Assets or Cash Flow?
The Dow Jones Industrial Average (“DJIA”) is a little more than double what it was in March 2009 at the depth of the market meltdown. Interest rates are less than half of what they were at that time. Here are some of my observations about asset values as compared to cash flow.
When the financial markets had their melt down in October of 2008 through March of 2009, stock values dropped over 50% from their previous highs, but bank certificate of deposit values stayed stable. Many high-quality bond values rose but as I discussed on Feb 24, 2012, these increases are illusory for most individual investors.
Now, an interesting thing happened with cash flow since then. The DJIA stocks (whose value plummeted) continued paying dividends at their previous dollar amounts and at its worst point, only had a 17% drop in dividends. Today, those dividends are higher than they were for any quarter since the beginning of 2008. However, bank CDs and bond interest yields on reinvested matured funds are much lower today… as much as 50% or more depending upon the maturity term.
While stock values got killed, the dividends remained stable; and while CD and bond values remained stable, the yields on replacement CDs and bonds got killed.
This raises a question about the safety of stocks versus fixed income investments and the purpose of investing. So, which is safer? Stocks or bonds and CDs? Maybe a better question is; which is more important to you? Asset values or cash flow?
Psychologically, safety of principal seems more critical, but in reality, cash flow is what you spend.
This information is for your consideration and thought, and should not be construed as a recommendation.