Savvy Money: As with fine bourbon, letting your stock portfolios ‘age’ is worth the wait

By Christina Harrison
First Kentucky Securities
 

This past weekend, my husband and I went to the Great Kentucky Bourbon and Tasting Gala in Bardstown. My husband works for a local distillery and he worked their booth on Saturday night.
 

While he was working, I strolled around, going from booth to booth. I heard a lot about the aging process involved, and when I got home, I did a little research on aged bourbon. When I Googled that, I found a story about Pappy Van Winkle, which has a 15- and 23-year aged bourbon. Both are produced in small quantities and are difficult to find, which means they are somewhat expensive.
 

I thought about how people are willing to wait for a bourbon to age and then pay quite a bit of money for it. But I don’t think we are quite as willing to let our stock portfolios “age.” So, what are the benefits of letting our portfolios age?
 

1. Aging a stock portfolio allows you to ride out market swings and volatility. It smooths out huge upswings (1998-2000) and large downturns (2008). Let’s look at the five-year return of the S&P 500 – if you reinvested dividends, your return from Sept. 1, 2007 to Aug. 31, 2012 was 1.28 percent. If you had “aged” your portfolio a little more – say 10 years, again reinvesting dividends – your return was 6.5 percent. If you used the Pappy Van Winkle approach and aged your equity portfolio for 20 years and reinvested dividends, your return was 8.4 percent.
 

2. Aging a stock portfolio gives you have the ability to collect dividends as cash or have them reinvested. Dividends add appreciably to your total return. In fact, USA Today reported that dividends have accounted for 29 percent of the S&P 500 total return since 1988. So, if you use them for income or have them reinvested, dividends are a good thing!
 

3. Aging your stock portfolio allows you to make decisions based on your overall strategy, as opposed to the “news of the moment.” A focus on your long-term strategy will keep you grounded during period of market unrest.
 

4. Lastly, aging your stock portfolio gives you favorable tax treatment in a non-retirement account. Currently, long-term capital gains are taxed at 15 percent – short-term gains are taxed as ordinary income. ( Although long-term is defined by the IRS as longer than a year, long-term for us usually means five to 10 years.) Lower taxes mean more spending money in your pocket.
 

Christina Harrison and Judy Howell, H2 Investments, are affiliated with First Kentucky Securities Corporation (member FINRA, SIPC). They have over 25 years of experience assisting individuals in meeting their investment and retirement goals.