Will the speculation game stop?
Recent events suggest there are two types of people in finance today: the trading app hares and the income-investing tortoises.
You either care about the stupendous rise and fall in the GameStop (NYSE: GME) share price or you don’t. Those who don’t may fall into the camp of income investors—a camp that probably sleeps more soundly, blissfully unaware of the schizophrenic chatter in social media forums, which these days can help inflate share prices, which in turn can spark frenetic activity on trading apps.
This week’s example was an American video game retailer, with a deliciously ironic name. There will be others. Firstlinks’ Graham Hand captured the psychology of it rather nicely. “Fuelled by stimulus cheques and social media stories of instant wealth, thousands of new participants in the US are speculating in a way the market rarely sees. Think Dutch tulips in 1637, South Sea Bubble in 1711, the Japanese stock market in the 1980s, Alan Greenspan's 'irrational exuberance' of 1996, the dot coms of 2000 and US housing before the GFC.”
And if you wanted a current example of irrational exuberance, consider the fortunes of ASX-listed GME Resources (GME), which rose then promptly fell presumably because a herd of "investors" collectively said, "hang on this ain't the stock I wanted".
Meanwhile, in another social forum far far away, the weekly Morningstar webinar, a presumably older viewer quietly raised his hand to ask, “for retirees is it better to focus on dividend ETFs?”
The short answer is income investing, be it through dividend-paying ETFs, is worth investigating—if only to help you stay sane amid the volatility. “If you are able to generate enough income from your portfolio to cover your living expenses that’s a pretty good place to be,” replied webinar host and head of Morningstar Individual Investor Mark Lamonica.
“A lot of people focus on income investing,” Lamonica added, “because then they can say, ‘I don’t really care as much about my net worth or my balance. If I have $500,000 or $1 million in my account, who cares? What I care about is the cash flow generated. If it generates cash flow and can pay for my life, then I’m in really good shape.’
Lamonica went on to explain that much of this has to do with taking a bucket approach whereby you hold a certain amount of cash to cover your living expenses for a certain number of years. “One way to replenish that bucket is with income generated by your portfolio, for example dividends.”
And since you’re probably asking, the top dividend-paying ETFs, many of which contain tech and biotech companies, are listed in the table below. They are not recommendations, and as always, any advice here and elsewhere is general. And as Lamonica said, remember, companies can always cut dividends, and last year was a fair example of that.
Top five dividend-paying ETFs in 2020
Source: Morningstar Direct; data as at 29 January 2021
In Firstlinks this week, Graham Hand examines fund manager presentations and concludes that unfortunately they’re all good. Why unfortunately? Well, manager performance necessarily considers what has happened, not what will happen. Every presentation tends to be as slick as the next, and risks paralysing the investor with unlimited choices.
Hand also hears from Fidelity’s Kate Howitt who draws a fascinating parallel between investors and the dilemma facing the (anti)hero in the hit show Breaking Bad.
Another question that popped up this week was how much equity exposure is too much in retirement? Retirees require stocks' growth potential, says Morningstar director of personal finance Christine Benz, but they need a cash and bond buffer, too.
Morningstar analyst Brian Colello wonders if there’s any value left in tech; while Emelia Fredlick surveys five companies that shifted their thinking in 2020 to reflect pandemic-driven consumer trends.
In a similar vein, Morningstar India’s Larissa Fernand speaks to behavioural finance director Steve Wendel on how to stay cool in a hot market.
What is the outlook for commodities as the world gears up for economic recovery? Can oil continue its recent rally or will bumps in the road mean that gold has another strong year? Nicki Bourlioufas reports.
Rebecca Jiang, manager of the JPMorgan China Growth & Income Trust, tells Holly Black why Chinese stocks soared in 2020 and whether the trend can continue.
Redpoint's chief executive and portfolio manager Max Cappetta tells us why he's got his eye on JB Hi-Fi, Goodman Group and Reliance Worldwide this year.
The ESG transformation we expected to come to Asia is now very much under way, writes guest contributor Aberdeen Standard Investments' Paul Lukaszewski.
We examine the GameStop fallout in greater detail and explain what a short squeeze is and how it works.
And finally, in Your Money Weekly, Peter Warnes argues that education is crucial if we're to keep the politicians’ hands off the superannuation pool.
Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.
