December has been all about the yield curve. The yield curve is a curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity. A yield curve is almost always upward sloping, a sign that the economy is functioning properly. In short, you would expect interest rates to be higher the greater the length of time of a security. A 10 year bond should have higher interest rates than a 1 year bond in order to tempt buyers to buy longer dated bonds.
The yield curve inverts when long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality i.e.short-term interest rates are higher than long-term interest rates. This could be due to doubts about the short-term economic growth.
Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle.
So will the invested yield curve bring about a recession this time around? I have no idea. I am not smart enough to answer this question. Have look at this post to see whether the inversion of the yield curve is a signal of things to come or it is just noise. Also do other research on the topic to get a better understanding of the yield curve and its predictive effects.
The inverted yield curve has brought about fear in the market. Sentiment has quickly changed and it has caused a lot of investors to panic and sell. This has driven down stock prices. And there is rampant fear of a prolonged global bear market.
As at the second week of December, when my monthly stock purchase programme kicked in for the month, many markets already down for the year. Here are some notable figures:
- MSCI Greece -26.8% ( -31.3 % in USD)
- MSCI Belgium -17.5% ( -23.2 % in USD)
- MSCI germany -14.5% ( -20.1 % in USD)
- MSCI China -14.1% ( -15.7 % in USD)
- MSCI Italy -9.2% ( -15.2 % in USD)
- MSCI Japan -8.2% ( -10.1 % in USD)
- MSCI UK -6.7% ( -13.8 % in USD)
And if you think these numbers read bad, it has gotten a whole lot worse since the second week of December. Even the US markets are approaching bear market territory (classed as a fall inn stock prices of 20% or more).
There is real panic right now. And it requires steady head.
If you are panicking try the following out. Put the Kettle on, sit down, and and write about how you feel about what is happening in the market. Be free, true and honest. to yourself. If you feel a pit in your stomach, write it down. If you feel jittery, write down. If you think a recession is imminent, write it down. If you want to liquidate your portfolio and go to cash, write it down. Basically write down whatever you feel about the markets in this moment.
Once done putting your thoughts to paper, date it and put it away.
Chances are very good that when you read it again 12-18 months from now, you’ll be shocked you felt this way. Your brain will try to convince you that you ‘really’ didn’t feel everything you wrote, because things will have calmed down. Corrections and bear markets are a feature, not a bug of the stock market.
As I have mentioned before, expect markets to fall 10% once a year, 20% once in couple of years and 30% fall at least once a decade. This is unavoidable.
For many people, this is the first year in a long time (or perhaps ever if you are a new investor) of a 20%+ correction.
Look at the FTSE 100 where most people in the UK are invested.
- 9% of FTSE100 down more than 35% YTD
- 15% of FTSE100 down more than 30% YTD
- 30% of FTSE100 down more than 25% YTD
- 40% of FTSE100 down more than 20% YTD
- 60% of FTSE100 down more than 10% YTD
- 70% of FTSE100 down more than 5% YTD
Nobody loves to see the portfolio value going down. But this is the price which has to be paid for long term growth. In most aspects of life, nothing worthwhile can be achieved without some amount of pain and sacrifice.
In equity investing, seeing your wealth going down, though it is temporary is the pain you’ve to go through for building long term wealth.
Just continue to stay the course remembering the long term results are always good for those willing to undergo short term pain.
And even better is to keep buying as long as you have money. Buying when markets are down is a way to buy stock on the cheap. It is a way to get more dividends for your money. It is a was to get more bang for your buck.
This is exactly what I did in December. I bought the following shares using my monthly stock purchase programme:
- BAT: Bought 12 shares at £26.6 a piece. Dividend Income = £23.40
- IMB: Bought 17 shares at £23.3 a piece. Dividend Income = £31.80
For the above two purchase I spent £715 and in return I am expecting to receive £55.20 in annual dividend income. A dividend Yield of 7.72%
If I had spent the equivalent amount of £715 at the beginning of the year, I would have only bought 7 shares in BAT and 12 Shares. This would only have given me an annual dividend income of £36.09. A full £19 less! The dividend yield would have been 5%
This is why I love when markets drop in valuation. When this happens, dividends go on sale. I am essentially buying more annual dividend income for less money. Anybody in the asset accumulation phase of their wealth life cycle should follow this line of thinking. Don’t be upset that your portfolio is dropping in price. Instead, be glad that you can turbo charge your dividends and passive income.
Looking at my portfolio as whole, it is now expected to generate £3,084 in passive income over the next year. That is £771 a quarter. £257 a month. £60 a week. And £8.44 a day.
I feel truly blessed to be in this position. I have gone from earning £0 in dividend income three years ago to now having a decent four figure dividend income stream.
It is a wonderful feeling knowing my money is working hard for me. The money is pouring in from all parts of the world. If someone drinks a coke in Japan, money comes in. If someone eats a Cadburys chocolate in Australia, money comes in. If someone transacts using a visa card in Singapore, money comes in. If a company in South Africa uses Pastel, money comes in. If someone uses Sensodyne to brush their teeth in Europe, money comes in. If someone buys clothes from Primark , money comes in. You get the picture.
The greatest part of all this is that the money is purely passive. The money gushes into my account regardless of what I do. If I wanted to sleep all day, the money would pour into my account. If I spent my days playing video games, the money stream in. If I was to go on holiday, I would find money in my account upon my return. This is the power of passive income.
As we close the chapter on 2018 and move ahead into 2019, my goal will be the same, to keep growing my passive income and to hopefully one day be able to cover all my expenses from pure passive sources.
Have a good new year and stay safe!