Ignore the Noise. Equities Offer Income Potential.

Oh boy, are we a mercurial bunch!

Back in the summer I went on record that, amid the malaise, I was bullish on the market. As it turns out, equity market indices, by and large, printed positive returns for 2012. The S&P 500 Index was up 16% or so for the year. As of January 31, we have continued the positive upward momentum.

I don’t write these lines to gloat or to tap out a victory dance. As someone once told me, they don’t hand out trophies at half-time. Or perhaps more to the point, it’s harmful to exit a moving vehicle before coming to a complete stop. I share this because, while investors are warming to the opportunities in equities, the crowd noise from observers and the media pundits suggests that they believe the game is nearly over, and the journey will come to an abrupt end. Wow – the ‘haters’ are out in force!

Misdirected Paranoia

Common prospectus disclosure reads, “past performance is no guarantee of future results.” Yet, this crowd of naysayers seems to be projecting the paranoia associated with the “lost decade(s)” onto the current environment and beyond. They are preparing for the future by fighting the last few wars all over again. Their sentiments and actions (or inactions) are emblematic of an American looking the wrong way for traffic on a London street. Given wrongfully configured context, these people are looking in the wrong direction for the wrong things.

I continue to be positive on the equity markets. Trillions in cash – of both institutional buyers and individual investors – still sits on the sidelines. We are coming off an extended bull market in Bonds, where U.S. Treasuries are yielding between nearly 0% and 3%. Most fixed income investors understand the dangers of owning fixed rates at a time when yields may be poised to rise. The risk/reward tradeoff is not very favorable in such an environment.

I believe people confuse their need to generate income and grow it over time with the perceived security of something labeled ‘fixed income’. All of this cash on the sidelines won’t benefit from an investment that offers fixed income; but it may benefit from investments with the potential to generate income now, tomorrow and for some time in the future.

The Markets Will Move On

While we continue to deal with potential bumps (next up: the debt ceiling), we also get more clarity as these events get closer. Look at the recent U.S. presidential election – our fears of the unknown are now gone and we can all deal in reality. That said, we all still need to plan, save and invest in order to fund educations, weddings, retirements and other goals. This will eventually continue to drive money off of the sidelines, away from fixed income, toward investments that offer sources of income today and growth for tomorrow.

We should take these steps with the guidance of sources we trust. We need to take them with a combination of investment strategies, from multiple asset classes, blended together to manage risk/volatility – all in concert with personalized objectives and time frames.

An Example of Income Potential at Work

Consider SPY as a proxy for the S&P 500 Index (since it’s not possible to invest in the index itself).* If you invested $100,000 in SPY ten years ago, on December 31, 2002, you would own approximately 1,133 shares at $88.23. In the first year, you would have been paid $1,848 in dividends. In 2013 thus far, your 1,133 shares would be worth about $170,000 or $149.70 a share.** Your dividends last year would have been $3,517. So your initial income yield on your investments was about 1.8%. The current income yield is 3.52%; however, there are other factors to consider:

  • Your original investment increased by 70%.
  • Your income from your investment increased by 90%.
  • You collected another $21,800 in income over the life of your investment.
  • In the midst of a ‘lost decade’ you had present income, you had income for tomorrow and it grew!

Don’t listen to this fickle bunch.


*SPY is the trading symbol for the SPDR ETF investment designed to track the S&P 500. The S&P 500 Index is an unmanaged measure of the performance of the U.S. stock market. It is not possible to invest directly in an index.

**As of 1/31/13. Source: Morningstar. The performance data quoted here represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Hypothetical examples are for illustrative purposes only and are not intended to represent the future performance of any Pioneer product. The growth rates used are for illustrative purposes only and do not reflect any fees or charges associated with investment products. If they were taken into account, the ending value would be lower. This material is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent. Before making any financial commitment regarding the issues discussed here, consult with the appropriate professional adviser.

Investments in mutual funds/securities involve significant risks; for complete information the specific risks associated with each fund, please see the appropriate fund’s prospectus.

The outside fund data is provided for informational purposes only. Although the data is gathered from sources believed to be reliable, Pioneer cannot guarantee the accuracy and/or completeness of the information.

Pioneer Funds Distributor Inc. is the distributor of the Pioneer family of mutual funds only. This illustration should not be considered an offer to sell or a solicitation of an offer to buy any of the funds mentioned other than the Pioneer family of mutual funds.

SPY is distributed by State Street Global Advisors (SSGA). Pioneer is not affiliated with SSGA.

SPY Average Annual Total Returns as of 12/31/12

1-year: 15.84%; 3-year: 10.76%; 5-year: 1.60%; 10-year: 7.00%

Source: Morningstar. SPY’s gross expense ratio is: .10%. Returns reflect NAV. There is no sales charge applied to this security.

Securities offered through Pioneer Funds Distributor , Inc.

60 State Street, Boston, MA 02109

Underwriter of Pioneer mutual funds, Member SIPC

© 2013 Pioneer Investments


Read more commentaries by Pioneer Investments