Disappearing Dividends During the Year of COVID-19

Many investors view dividend payouts as a reliable source of income, and construct portfolios emphasizing stocks that pay above-average dividends. This strategy has become common among many conservative investors over the past decade as bank interest rates and returns on government bonds have progressively approached zero.

Greatly reduced bond and bank returns has made a formerly common bond-only approach impractical among risk-adverse investors for achieving their essential retirement income goals. Since high-dividend stocks were often companies issuing bonds familiar to risk-adverse investors, a high dividend stock approach quickly captured much interest among retirees highly dependent on their portfolios for income. Over time, investors bid up the prices of those stocks as the broader market rose, effectively reducing the level of return relative to share prices, causing disappointment among retirees coming in later and wanting to increase their positions.

But it gets worse. Bonds have promised payouts; dividends for stocks are not guaranteed. So retirees expecting a regular flow of income from dividends from their stocks were surprised to see reduced or suspended dividend payouts following the coronavirus pandemic onset. Both market declines and volatility were extraordinary and selling stocks with declining dividends was not an option. Research and historical data show that changes in dividend policy by firms are common, especially during times of higher business uncertainty when cash on hand must be retained for survival.

Aggregate dividend payouts fell meaningfully in the first three quarters of 2020 compared to the same period in 2019. Exhibit 1 shows the dividends earned from a hypothetical $1 million investment in US, developed ex-US, and emerging markets in both periods. Developed ex-US markets showed the most drastic change with a 41% decrease. Dividend payments in emerging markets decreased by 29% and in US markets by 22%.

Exhibit 1: Drop Zone
Dividends from a Hypothetical $1 Million Investment

Graphic, Exhibit 1 - Drop Zone - Disappearing Dividends During the Year of COVID-19 - View From the Hill, Dec. 2020

Source: Calculated by Dimensional Fund Advisors LP from Bloomberg data. In USD. Each hypothetical investment includes all securities in the investable equity universe in the applicable region at free-float market cap weight as determined at the beginning of each year. To be included in the investable equity universe, securities must meet certain minimum capitalization and liquidity requirements. Investment companies are excluded. Past performance, including hypothetical performance, is no guarantee of future results.

Worldwide, large established firms have historically had the highest propensity to offer substantial dividend payouts.1 But even successful, well-established firms were not immune to the economic consequences of governmental response to a global pandemic. A few examples will illustrate. Harley Davidson (HOG) has been paying dividends to shareholders since the 1990s. In April 2020, the motorcycle manufacturer slashed its dividend from $0.38 per share to just $0.02, a 95% decrease.2 Gap Inc. (GPS) suspended its dividend payments until at least April 20213 after the economic downturn left the clothing brand with particularly poor revenues.

Exhibit 2: Changing Tune
Dividend Policy Changes in Global Markets (% of Dividend-Paying Firms), 2020

Graphic, Exhibit 2 - Changing Tune - Drop Zone - Disappearing Dividends During the Year of COVID-19 - View From the Hill, Dec. 2020

Source: Calculated by Dimensional Fund Advisors LP from Bloomberg data. Dividend-paying firms include all firms that have paid a dividend in the preceding 12 months and were expected to pay a dividend in the current quarter. In USD.

Harley Davidson and Gap were not the only firms to change their dividend policies. As shown in Exhibit 2, 38% of firms in global markets (2,584 companies) that were expected to pay dividends consistent with their payout history, instead decreased, omitted, or eliminated their dividend payments in the second quarter, more than doubling the 1,248 firms that made similar changes to their dividend policy in the first quarter of the year. The trend continued into the third quarter: 2,699 firms made such changes.

While these dividend cuts may come as a surprise to some retirees, history buffs may recall that, in 2009, Harley Davidson announced it was cutting dividend payouts from $0.33 per share to $0.10, a 70% decrease.4 In fact, during the Great Recession years, significant changes to firms’ dividend policies spiked throughout the global markets.

Exhibit 3 displays Fama/French global market returns for 1991–2019 with a one-year lag and the proportion of dividend-paying firms that eliminated or decreased their dividend payouts. In 2008, for example, the global market was down more than 40%, and, the following year, many firms made changes to their dividend policies. The historical correlation between global market returns and dividends that are decreased or eliminated suggest that firms are likely to alter their dividend payouts during times of market instability. Intuitively this makes sense.

Exhibit 3: In Step
Global Market Returns and Dividend Changes

Graphic, Exhibit 3 - In Step - Disappearing Dividends During the Year of COVID-19 - View From the Hill, Dec. 2020

Note: Global Market return is free-float market cap weighted average of Fama/French Developed Markets and Emerging Markets Indexes. See Index Descriptions in the disclosures for descriptions of Fama/French index data.
Source: Calculated by Dimensional Fund Advisors LP from Bloomberg data. Past performance is no guarantee of future results. Dividend paying firms include all firms that paid a dividend in the prior calendar year.

The first three quarters of 2020 remind us once again that past performance is never guaranteed. Dividend payouts can be inconsistent, particularly during times of uncertainty. Hence, investment strategies that focus on income derived from dividends may not well serve those who need a steady income stream during retirement. Moreover, that approach is unlikely be an effective way to confidently pursue long-term wealth growth.

We believe a more reliable planning approach for greater confidence of success during retirement, in addition to other planning strategies, is to structure a portfolio asset allocation strategy around stock’s fundamental characteristics that decades of economic research has demonstrated drive higher expected returns: size, relative price, and profitability, while maintaining broad diversification across names, sectors, and countries plus carefully controlling costs and taxes. A sensible, systematic process solidly grounded in an informed economic philosophy is much more likely to provide retirees a successful financial experience and greater peace of mind.

Disclosures: Index Descriptions: Fama/French Developed Markets Index: July 1990–present: Courtesy of Fama/French from Bloomberg securities data. Companies weighted by market cap; rebalanced annually in June.

Fama/French Emerging Markets Index: July 1989–present: Courtesy of Fama/French from Bloomberg and IFC securities data. Companies weighted by float-adjusted market cap; rebalanced annually in June.

Presidential Elections: What Do They Mean for Markets?

Investors and media habitually look for a connection between who wins the U.S. White House and whether stocks will go up or down. But predictions based on election outcomes are unlikely to result in consistently winning bets that provide excess returns reliably.

Election Day in the U.S. has come and gone. Some voters are happy, others are not. While outcomes of many national and state elections held surprises and disappointments, plenty of opinions and predictions were floated in the preceding days. Discussions frequently included the potential election impact on markets. But should major elections seriously influence decisions regarding portfolio planning?

We believe that speculation that leads to substantial changes to a well-informed investment strategy based on changing political winds hoping for extra profits or avoiding losses is likely to prove futile. For context, think of financial markets as a powerful information-processing machine. The combined impact of millions of investors placing billions of dollars’ worth of trades each day results in market prices that already incorporate all of investors’ collective expectations including matters and situations far removed from who happens to be president of America or which political party is in power. This makes outguessing market prices, individually or collectively, expecting to out-perform most other investors (or their computer algorithms)–for the market or any market segment – very difficult to do over and over.1

For the stock market going back to 1926, research shows in those months when presidential elections took place, returns have not been that different than any other month. As we look at the data, the aggregate of all those outcomes approximate a normal “bell curve” distribution. Most election months did not produce extreme returns in one way or the other. And which president or party happening to win was not a reliable driver for the direction or magnitude of market movements in those months.

Exhibit 1: U.S. Presidential Elections and November Returns for U.S. Stocks
January 1926–June 2020

Past performance is no guarantee or assurance of future results. This material is in relation to the US market and contains analysis specific to the US. In U.S. dollars.
Source: Distribution of Monthly Returns for Fama/French Total US Market Research Index provided by Kenneth French and available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. This value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before. Exclusions: American depositary receipts. Sources: CRSP for value-weighted US market return. Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced.

Exhibit 1 shows the frequency of monthly returns (expressed in 1% increments) for a broad-market index of U.S. stocks from January 1926–June 2020. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months in which returns were between 0% and 1%). The blue and red horizontal lines represent months during which a presidential election was held, with red meaning a Republican won the White House and blue representing the same for Democrats. This graphic illustrates that election month returns are well dispersed throughout the columns, with no clear pattern based on which party won the presidency.

It’s natural to seek a connection between who wins the White House and to guess which way stocks will go. But shareholders are investing in companies, not a political party. And companies focus on serving their customers and getting their businesses to grow profitably, either regardless of or despite who inhabits the White House.

During an election cycle, profitability expectations of public companies are continuously reflected in their daily stock prices. Surprises are, by definition, unpredictable — and completely random occurrences rarely lead to clear-cut investment outcomes within a month’s time. For that reason, we believe that a smartly diversified, globally allocated approach for investing is best for confidently realizing important goals such as a flow of income that you can expect during what may be a very long retirement with health care related needs.

Modern history shows that stocks have rewarded investors with a long term focus, through both Democratic and Republican presidencies. Needless speculation about election outcomes, or how results from a recent election might unfold, is unlikely to result in excess returns that you can spend. Perversely, underperformance or costly mistakes you may regret are equally possible. Accordingly, we recommend that most wealth planning clients maintain a strategic approach scientifically grounded in a sensible economic philosophy within a structured investment management process they can stick with.

1The performance of active investment managers casts doubt on the ability of investors to consistently outguess market prices. For more on this topic, see Fama and French (2009), “Luck versus Skill in Mutual Fund Performance.”

What History Tells Us About Elections and the Markets

While surprises can and do happen, voter surprises in America frequently lead to outcomes that investors and pundits don’t expect.

Election Day here in the U.S. is coming the first Tuesday in November. For those needing a civics refresher, the President is elected every four years. Every two years the full U.S. House of Representatives and one-third of the Senate are up for reelection. While election outcomes may be uncertain, one thing we can count on is that plenty of opinions and prognostications will be floated in the coming days. In financial circles, this almost assuredly will include the November election’s potential for impacting global markets. But should long-term investors be overly anxious about even controversial elections?

Markets Work

We caution those who invest against making short-term changes to sound long-term planning to try to profit or avoid losses from political changes they think may happen. For context, it is helpful to think of financial markets as a powerful information-processing machine. The combined impact of millions of investors placing billions of dollars’ worth of trades each day results in market prices (we usually notice only at the end of a trading day) that incorporate the aggregate expectations of all those investors. The implication in practice is that consistently outguessing market prices is very difficult.1 While surprises can and do happen in elections, trying to predict the consequences of those outcomes even when an investor is correct about who wins most often leads to no significant financial advantage.

The presidential election back in 2016 serves as the most recent example. There were a variety of opinions about how that election would impact markets, but many articles at the time posited that stocks would fall severely if Trump were elected.2 The day following President Trump’s win, however, the S&P 500 Index closed 1.1% higher. So even if an investor would have correctly predicted the election outcome (which was not apparent in pre-election polling), there is no guarantee that they also would have predicted the correct directional move of the market, especially given prevailing disaster narratives.

But what about congressional elections? Again, market strategists, pundits and news outlets will offer many opinions on who will win various districts, what party will take control, and what impact a change of control (if any) will have on financial markets. However, data for the stock market going back to 1926 shows that returns in months when elections took place did not tend to be that different from returns in any other month.

Exhibit 1 shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926 – December 2019. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which a midterm election was held, with red meaning Republicans won or maintained majorities in both chambers of Congress, and blue representing the same for Democrats. Striped boxes indicate mixed control, where one party controls the House of Representatives, and the other controls the Senate, while gray boxes represent non-election months.

This graphic illustrates that election month returns were well within the typical range of returns, regardless of which party won the election. Results similarly appeared random when looking at all Congressional elections (midterm and presidential) and for annual returns (both the year of the election and the year after).

Exhibit 1: Presidential Elections and S&P 500 Index Returns
Histogram of Monthly Returns: January 1926–December 2019

histogram of Presidential Elections and S&P 500 Index Returns

Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Planning for the Long Term

While month-to-month or even calendar returns can be distracting, what really matters for long-term success is how your wealth grows and eventually provides income over your lifetime planning horizon. Exhibit 2 shows the hypothetical growth of wealth for an investor who put $1 in the S&P 500 Index beginning back in January 1926, shortly before the Great Depression years. Again, Presidential election impact on the largest U.S. stocks during their time in office is laid out. And again, Presidents of both parties have periods of significant growth and significant declines — sometimes both ways during their term of office. However, no persistent pattern of stronger returns occurs when a President of either party is in office, or when there is mixed control in Congress during their terms. Markets have historically provided returns over the long run irrespective of (and perhaps for those who are tired of political ads, even in spite of) which party is in power during a term of office.

Exhibit 2: Markets Have Rewarded Long-Term Investors under Variety of Presidents
Growth of $1 Invested in the S&P 500 Index: January 1926–December 2019

graph of Growth of $1 Invested in the S&P 500 Index: January 1926–December 2019

Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Equity markets can help you substantially increase your wealth relative to fixed income alternatives like bank deposits. We also believe investing strategy should have a long-term perspective. Making tactical investment decisions betting on the outcome of U.S. elections is unlikely to result reliably in excess returns. At best, any positive outcome based on such a technique will likely be due to random luck but creates for an investor the illusion of skill. At worst, it can lead to future costly mistakes that miss major market upswings.

Fundamentally, there is a strong case for relying a disciplined portfolio allocation strategy based on the science of capital markets, rather than to regularly trying to outguess what the market may do in a certain event — and then worry afterward about whether your decision was smart enough to beat the financial market when there are literally thousands of investors with enormous resources much smarter than you.

Highlights: What History Tells Us About Elections and the Market

Investors often wonder whether the market will rise or fall based on who is elected president. In a recent webcast, Dimensional’s Mark Gochnour and Jake DeKinder offered lessons from history.

photo of Dimensional Fund Advisors Mark Gochnour and Jake DeKinder

1This is known as the efficient market theory, which postulates that market prices reflect the knowledge and expectations of all investors and that any new development is instantaneously priced into a security.

2Examples include: “A Trump win would sink stocks. What about Clinton?” CNN Money, 10/4/16, “What do financial markets think of the 2016 election?” Brookings Institution, 10/21/16, “What Happens to the Markets if Donald Trump Wins?” New York Times, 10/31/16.

Taking Stock of Lump-Sum Investing vs. Dollar-Cost Averaging

Some investors favor a dollar-cost averaging (DCA) approach to deploying their investment capital. Unlike lump-sum investing, in which the full amount of available funds are invested up front, DCA spreads out investment contributions using installments over time.

The appeal of DCA is the perception that it helps investors “diversify” the cost of entry into the market, buying shares at prices that fall somewhere between the highs and lows of a fluctuating market. So what are the implications of DCA for investors aiming to generate long-term wealth?

Entry Level

Let’s take the hypothetical example of an investor with $120,000 in cash earmarked for investment in stocks. Instead of buying $120,000 of equity funds today, an investor going the DCA route buys $10,000 worth of stock funds each month for the next 12 months. If the market increases in value each month during this period, the DCA investor will pay a higher price on average than if investing all up front. If the market decreases steadily over the next 12 months, the opposite will be true.

While investors may focus on prices paid for these installments, it’s important to remember that, unlike with the lump-sum approach, a meaningful portion of the investor’s capital remains in cash rather than gaining exposure to the stock market. During the process of capital deployment in this hypothetical example, half of the investable assets on average are forfeiting the higher expected returns of the stock market if they are simply in fixed income or cash. For investors with wealth accumulation goals, this could be potentially a big opportunity cost.

Despite the drawbacks of dollar-cost averaging, some may be hesitant to plunk down all their investable cash at once. If markets have recently hit all-time highs, investors may wonder whether they have already missed the best returns and so ought to wait for a pullback before getting into the market. Conversely, if stocks have just fallen and news reports suggest more declines could be on the way, some investors might take that as a signal waiting to buy is the wiser course. Driving similar reactions to these very different scenarios is one fear: what if I make an investment today and the price goes down tomorrow?

Exhibit 1 puts those fears in a broader context. It shows the average annualized compound returns of the S&P 500 from 1926–2019. After the index has hit all-time highs, the subsequent one-, three-, and five-year returns are positive, on average. Alternatively, after the S&P 500 has fallen more than 10%, the subsequent one-, three-, and five-year returns are also positive, on average. Both data sets show returns that outperform those of one-month Treasury bills. Overall, the data do not support that recent market performance should influence the timing of investing in stocks. Time in the market and not timing should be your biggest concern and your primary investment strategy.

Exhibit 1. Highs and Lows

Average annualized compound returns after market highs and declines, 1926–2019

chart of Average annualized compound returns after market highs and declines, 1926–2019

Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful. This is an advertising document.

Different Strokes

Both theory and data suggest that lump-sum investing is the more efficient approach to building wealth over time. But dollar-cost averaging may be a reasonable strategy for those investors who might otherwise decide to stay out of the market altogether due to fears of regret if the equity market have a large downturn after investing a substantial lump sum.

The stock market historically has offered a high average return, and it can be an important ally in helping you reach your goals. Getting capital deployed into equities, whether gradually or all at once, puts you in a position to reap the potential benefits. A trusted wealth planning professional can help you decide which approach—lump-sum investing or dollar-cost averaging — is better for your situation.

What’s clear is that capital markets have rewarded investors over time. Whichever method you pursue, the goal is the same: developing a sensible plan, following that plan, and sticking with it over time.

Long-Term Investors, Don’t Let Recessions Faze You

With activity in many industries sharply curtailed in an effort to reduce the chances of spreading the coronavirus, some economists say a recession is inevitable, if one hasn’t already begun.1 From a markets perspective, we have already experienced a drop in stocks: prices have likely incorporated the increased chance of recession. Investors may be tempted to abandon equities and hold cash because of fear of recession and its impact. But across the two years that follow a recession’s onset, equities generally have a history of
positive performance.

Data covering the past century’s 15 US recessions show that investors tended to be rewarded for sticking with stocks. Exhibit 1 shows that in 11 of the 15 instances, or 73% of the time, returns on stocks were positive two years after a recession began. The annualized market return for the two years following a recession’s start averaged 7.8%.

Recessions understandably trigger worries over how markets might perform. But history can give those investors who wonder whether a coming recession may be time to move out of stocks the needed confidence to stick with an informed strategy and stay with their plan.

Exhibit 1. Downturns, Then Upturns
Growth of wealth for the Fama/French Total US Market Research Index

illustration, Exhibit 1. Downturns, Then Upturns Growth of wealth for the Fama/French Total US Market Research Index

Past performance, including hypothetical performance, is not a guarantee of future results. In USD. Performance includes reinvestment of dividends and capital gains. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Growth of wealth shows the growth of a hypothetical investment of $10,000 in the securities in the Fama/French US Total Market Research Index over the 24 months starting the month after the relevant Recession Start Date.

Sample includes 15 recessions as identified by the National Bureau of Economic Research (NBER) from October 1926 to December 2007. NBER defines recessions as starting at the peak of a business cycle.


  • Fama/French Total US Market Research Index: The value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before.
  • Exclusions: American Depositary Receipts.
  • Sources: CRSP for value-weighted US market return.
  • Rebalancing: Monthly.
  • Dividends: Reinvested in the paying company until the portfolio is rebalanced .

1Nelson D. Schwartz, “Coronavirus Recession Looms, Its Course ‘Unrecognizable,’” New York Times, March 21, 2020; Peter Coy, “The U.S. May Already Be in a Recession,” Bloomberg Businessweek, March 6, 2020.

Why Stocks Act Good When News is Bad

Are you puzzled when the media broadcasts bleak economic or health reports from yesterday, only to be accompanied by upwardly surging stock market prices? You’re not alone. The last few months produced many examples of astonishing stock market performance and economic indicators putting the U.S. in recession. So what explains the disconnect?

Markets are forward-looking when pricing stocks or any other security. That means, today’s asset prices are highly efficient in aggregating future expectations of market participants collectively. Today’s news is already old for making investment decisions. Expectations of profit-seeking participants such as hedge fund traders have already anticipated likely future economic developments such as the timeliness of a recovery and how that may impact the future profitability for those companies that survive the crisis.

Profits from anticipated revenues for years in the future are key to estimating a stock’s price today. For example, if the market expects an economic environment to weaken company cash flows to make firms less profitable (say from new government policy due to virus resurgence), markets will react well in advance of a formal news announcement. Expectations from any new information is rapidly embedded in stock prices—often in seconds—as profit-seeking participants “vote” their profit expectations in real time.

Of course, an upward or downward direction of stock market prices depends on how well realized information compares to collective expectations of investors. If news of results are better than expected, even what could appear as “bad” news can be greeted positively by financial markets. For instance, if profitability has improved relative to what markets had priced into their expectations, stock prices may jump when what appears as “bad” news (such as a dividend reduction) is released if that reduction is not as much as expected.


The anticipatory behavior of markets can be illustrated using U.S. gross domestic product (GDP) growth as a proxy for current profitability and its relationship to equity premiums (stock market returns in excess of risk-free U.S. Treasury bills). Plots in Exhibit 1 show no discernable relation between U.S. equity premiums and GDP growth for the same year. Changes in GDP are obviously not strongly related to stock market returns in the same year.

This result does not imply financial markets are ignoring macroeconomic data. After all, GDP encompasses multiple economic measures that seriously impact corporate profits. However, while growing GDP imprecisely represents activities driving stock prices upward, more analysis shows how the popular media narrative of a direct relationship is incorrect.

When we plot GDP growth against the previous year’s equity premium (shown in the bottom panel of Exhibit 1) a noticeable relationship suddenly appears. The positive trend in the data upward to the right suggests market prices are responding to GDP changes. However, prices did so in advance of realized economic developments. This result — at odds with popular belief — is consistent with the best financial theory and research. Markets prices in publicly traded markets “efficiently” incorporate economic growth expectations long before those outcomes are realized and reported by the media.

Exhibit 1: Plot Development

US equity premium vs. GDP growth, 1930-2019

Graph of equity premium in same year as GDP growth
Graph of equity premium in year before GDP growth

Annual GDP growth rates obtained from the US Bureau of Economic Analysis. GDP growth numbers are adjusted to 2012 USD terms to remove the effects of inflation. Annual US equity premium is return difference between the Fama/French Total US Market Research Index and One-Month US Treasury Bill. Equity premium data provided by Ken French, available at mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. “One-Month Treasury Bills” is the IA SBBI US 30 Day T-Bill Total Return, provided by Ibbotson Associates via Morningstar Direct.

This brings us to new headlines that affect your planning: the financial fallout from multi-trillion-dollar government expenditures intended to ease the burden of government mandated shutdowns. Will those trillions being spent create a financial burden for the U.S. government and for its citizens as higher taxes in ways that adversely affect stock returns?

The results in Exhibit 2 may allay concerns regarding how those huge expenditures may impact equity market performance. When we sort countries each year on their debt-to-GDP for the prior year (top panel), average annual equity premiums have been slightly higher for high-debt countries than low-debt countries in markets globally. However, the return differences’ small t-statistics — a measure of the precision of a value’s estimate and thus its validity — suggest these averages may not be reliably different.1

But it could be that markets more focused on where professional investors expect the amount of that debt to end up, rather than on where it’s been. The top panel uses prior year debt-to-GDP data to sort countries into the high/low groups. In the bottom panel of Exhibit 2, we rank countries on debt-to-GDP at current year-end, assuming perfect foresight of end-of-year debt levels. Again, we see average equity premiums similar for high- and low-debt countries. Like the results for GDP growth, these results imply that markets have already priced in expectations for future government debt and business profitability risk.

Exhibit 2: Debt Defying

Average equity premiums for countries sorted on debt

Chart of Average equity premiums for countries sorted on debt

All returns in USD. Countries are sorted at the beginning of each year. High-Debt and Low-Debt refer to countries above and below the median debt, respectively. Debt is general government debt and central government debt. Source: The International Monetary Fund. Equity market returns represented by MSCI country indices. Dimensional Fund Advisor LP calculations from Bloomberg and MSCI data. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.


Macroeconomic variables and investment decisions are like frozen turkeys and deep fryers — extreme caution should be exercised when used in combination. These studies are consistent with the notion of markets as information processing machines. Vast sets of macroeconomic indicators and their expectations are processed into what we see as market prices. The ironic result is that stock markets in the form of indexes like the S&P 500 are themselves perhaps among the best leading macroeconomic indicators we have.

Since markets are such good predictors of economic conditions, their short-term movements are fiendishly unpredictable. For planning, we assume their movements are essentially random. It should not surprise us that survivorship of mutual funds and hedge funds focused solely on what is called “market timing” has been abysmally low. Fortunately, with modern financial science at the core of a wealth management strategy, you don’t need to out-guess the markets or economy for reliable life goal outcomes.

Over time, capital markets have consistently rewarded those with a long-term perspective who remained disciplined in the face of market surprises. No matter what you may read in the media, there are no miracle products to save you if you saved too little or spent too much. In my years as a CFP® professional, I’ve never seen one that paid off both very well and for very long. The new “structured products,” like so many varieties of hedge fund schemes that came before them, were devised to be sold, not owned.

But through an informed wealth management process that collaborates with a knowledgeable firm of CFP® professionals and other specialists, you can position yourself to make the most of what markets and integrated planning have to offer. And through the right strategy for achieving your life goals, you can have peace of mind even during a crisis.

1Researchers often cite a t-statistic value of 2.0 as the threshold for statistical reliability.


  • Macroeconomic data: Data used to measure the output of an economy, such as employment or production.
  • Gross domestic product: The total value of goods and services produced by, for example, a country over a set period of time.
  • Debt-to-GDP: The ratio of a country’s debt to its gross domestic product.
  • Fama/French Total US Market Research Index: The value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before. Exclusions: American depositary receipts. Sources: CRSP for value-weighted US market return. Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced.

Do Downturns Lead to Down Years?

Stock market slides over days or months may lead someone with investments to anticipate a down year for their portfolio results. Fear from a coronavirus-induced business downturn has resulted in the greatest and fastest fall of stock prices in American history.

Seeing disappointing prices and projecting poor results coming, many people decide to sell at least part of their stock positions and hold cash on the side. For example, in the worst month of the recent decline in March, money markets added nearly 17 percent to their asset base, when average monthly changes up and down are less than 5 percent.

There will always be times of good and bad financial markets, and good and bad investments within those markets. Assuming that you have a diversified, long-term strategy within your comfort level that allows for informed adjustments as appropriate, and that you collaborate with a knowledgeable professional, that does not mean you will worse off if you stay put. In fact, you very likely can be a lot better off if you’ve created a plan that’s right for you, based on your personal goals, priorities and attitudes toward risk. A realistic snapshot is needed.

Before making changes, you should consider your current situation and whether your needs or goals have changed. The biggest risks are market volatility, recessions and the unknown. Most people prefer risks that are constrained to acceptable levels. They want to protect their assets, generate growth and build consistent returns for financial security and a comfortable retirement to maintain their lifestyle for as long as they live. If you wisely diversified in stocks and bonds, the recent great fall was greatly mitigated for you.


Don’t be too quick to assume, with the deluge of media pessimism, that outcomes for 2020 and beyond — at least for investors — may not still be favorable. Our exhibit of a broad U.S. market index shows positive returns in 15 of the past 20 calendar years, despite notable dips within the days during a calendar year. Standard frameworks ignore daily market volatility.

U.S. Market Intra-Year Declines vs. Calendar Year Returns
January 1, 2000-December 31, 2019

Illustration of chart:  U.S. Market Intra-Year Declines vs.Calendar Year Returns January 1, 2000-December 31, 2019

Source: U.S. market is the Russell 3000 Index. Largest Intra-Year Decline refers to the largest market decrease from peak to trough during the year. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

Here are a few observations we can make from this brief record of recent history:

  • Intra-year declines for the index ranged from 3% to 49%.
  • Calendar year returns improved during each of those intra-year slides. The steepest declines show the most notable recoveries in either the same or following year.
  • In 15 of the 20 years, stocks ended up with gains for the year.
  • Even amid the financial crisis in 2009 where a disaster seemed possible almost day-by-day, a 27% plunge gave way to a 28% gain by the end of the year.

A globally diversified portfolio is positioned in many different markets and impacted by different local events. We know from modern financial science there are multiple dimensions of return such as size, value and profitability operating within the financial markets of each country, of which the U.S. is simply the largest economy. Certainly, financial markets will have different sectors such as technology or energy that perform differently over a normal business cycle.

Markets are especially volatile when significant new information is discovered. Markets are like vast information processing machines that produce prices. Recent news regarding a previously unknown virus evoked memories of the dreaded Spanish flu. That implied a potentially huge negative impact on business profits and economic outcomes. That fear caused market prices to become highly volatile and a modest panic ensued as big firms sold off automatically to cover highly debt-leveraged positions in a progressively cascading effect. As the impact of the perceived risk was better understood and uncertainty reduced, volatility subsided. Prices in markets worldwide have reset themselves at another, lower level. While we are cautiously optimistic, the pricing process will take time to fully work out.


You most likely would rather plan forward than look backward. You don’t care to know what went wrong in the past; you want to make the right decisions going forward. That means a balanced diversified investment strategy that aims to anticipate volatility without the need for futile predictions. After all, how many gurus predicted weeks ago a virus from China that would precipitate a chain of events that would virtually shut down the American economy?

Volatility is normal for investing. A long-term focus helps informed investors holding diversified strategies constructed from modern financial science and who collaborate with knowledgeable fiduciary professionals, keep a clear perspective for planning their future.

If you are still reading this, you’ve already endured a lot of risk in recent months. If you’ve wisely planned and smartly added to your stock positions, then stick around for the return.

Controlling What Matters Most in a Crisis

Markets globally are recovering more rapidly than you might expect after reading about today’s new Coronavirus deaths or how unemployment figures in the U.S are hitting record highs.

Over the past two months, we’ve all experienced a roller-coaster of emotions—especially fear. First, the media reminds us daily of a contagious virus that could infect and kill you or your family with a new death tally. Then state government mandates keep millions at home and keeps millions of citizens from working at their jobs.

Many Americans worry how to pay rent and bills. A little CARES money from the IRS won’t help most of them. And for those near or at retirement, planning a comfortable lifestyle from portfolios that gradually grew over the past decade, now worry about what will happen. Moreover there are grieving families of those who got sick and died.


Financial marketplaces like the New York Stock Exchange can be leading indicators of U.S. economic health. Share prices on exchanges around the world are rising again this week. That is not an indicator of imminent doom. Continued recovery of markets from their lows implies that the savviest investors — including institutional traders whose algorithms dominate trading — believe that early virus risks were overstated, and that an apocalyptic outcome will not occur. That does not mean that there are no other important investing risks around.

Market prices of publicly traded stocks and other securities aggregate all available information — not just the news sensationalized by the media. Markets prices incorporate a collective “best estimate” of how soon states will reopen for business and Americans resume their normal lives. Opinions about how much “stimulus” of government spending will, in fact, stimulate American business are incorporated in prices. That is another big risk markets have uncertainty pricing.

For us at Professional Financial, it is a fundamental principle of investing that modern capital markets continually process new information in the form of prices. Information processing through prices occurs almost instantly as markets decline and when they rise. Sharp price declines distress investors, but even large unexpected changes are evidence that markets are functioning properly during a perceived crisis.

Market declines occur when investors, collectively, are forced to reassess their future expectations for earnings that companies, represented by those shares, may generate. What made the Coronavirus so terrifying to investors was the media’s sensationalized death forecasts that ignored the reasonableness of the assumptions underlying those models. Immediately after the gargantuan CARES Act was passed, updated models gave radically new forecasts with outcomes only 5% of earlier worst-case scenarios.


Our investing strategy is based on the principle that markets price securities to deliver positive expected returns. Markets, as vast information procession “machines,” evaluate a constant flow of information as each participant judges individually the impact of new information on future outcomes of various businesses. Prices may adjust wildly during times of heightened uncertainty — such as how fast and far a deadly contagious virus will spread or be allowed to spread. When perceived risks increase due to newly discovered information, that news is quickly incorporated into prices as investors then pay less for shares.

As market participants collectively gain certainty about the impact on future company profits in general — say, observing how governments are attempting to ameliorate the human and business costs of shutting the economy down — perceptions about risk begin to ebb. Prices of stocks one by one stop declining and then begin to reverse, in fits and starts, collectively precipitating a rally like we are seeing. Even though the media today displays infected people dying, market participants have a different picture of tomorrow.


Disentangling emotions from investment management is essential. Bombardment daily and hourly from negative media news plays havoc with our emotion. It clouds rational thinking. There is no reliable way known to identify a market bottom, much less a peak. Emotion commotion should not infect your investing decisions. If you over-react and get out, how do you ever decide when it’s “safe enough” to get back in?

We can’t be sure if market rises of the last few weeks won’t be followed by a short decline. Eventually, in the years ahead, there will be another big market decline triggered by events we cannot predict. But our expectation is that clients positioned in dimensionally-targeted strategies will be well-compensated with higher positive expected returns that help them better realize key retirement and legacy goals. Those who fearfully sell shares in panic when negative news overwhelms their emotions will be rewarded only with regret.


What so many see as a crisis, we see as a tremendous opportunity for our clients as well as ourselves.

Our planning philosophy expects bad things to happen unexpectedly. Markets are volatile. Since, by definition, a panic is “unexpected,” we cannot predict when it will happen or how much volatility there will be. But in recent years large growth stocks around the world, but especially in the U.S., have reached historically ridiculous valuations. In fact, at year-end expected returns of U.S. growth stocks had been trading down to those of investment grade bonds.

Value and small stocks around the world have been hit badly — but that’s good news for the informed investor. Expected returns are not just higher — they are much higher due to panic liquidity selling on the long, painful and ugly decline. In phases we bought into discounted positions through Dimensional Fund Advisors all the way down. Our investment management process systematically buys into falling prices to rebalance, not knowing when the bottom would occur.

Repeat the investor’s mantra: The company’s cost of capital is my return. Repeat again. Breathe and relax.

When prices go down, that means the cost of capital is going up. That means, your expected return for planning purposes is higher. When highly leveraged hedge funds are desperate for cash to pay their loans, your purchase helps them — for a price. Crisis is a rewarding opportunity for liquidity providers (you!) with time to wait it out.

Based on decades of leading theory and research, we prepared with a crisis in mind when we designed your strategies and had a process arranged for such an event. I dream of and dread these times. But our planning appears to have worked well.

What now matters most for long-term success in investment planning, if you feel the need to take action, is to stay focused on those things you can control. The most important thing you can do today, is to control your actions.

Don’t have a crisis of confidence. You’ve endured a lot of risk these last two months; I urge you to stick around and wait for your return.


Better yet, forget about your portfolio — you pay us to worry. Once a quarter is enough for most of you.

Enjoy being with those you love. Even before stay-in-place restrictions lift, turn off your news media access. Think about what most matters to you and what most gives you purpose. Prioritize your life and start living.

At the very least, certainly after a long winter, get out of the house and enjoy spring. You only live once.

We are here for you, 24/7 for a conversation. Call or email us with your questions and concerns.

Warm regards, and God bless – Paul

Epidemics, Market Declines and Planning Strategy

Around the world a spreading coronavirus is raising distressing concerns. Will it be contained or become a pandemic? Uncertainty has been experienced globally, and it is unsettling both on a human level and for investors concerned how a spreading epidemic may impact their portfolios after recently seeing the biggest market declines since the panic of 2008.

It is a fundamental principle from modern financial science that competitive capital markets are designed to handle financial uncertainty, as they process information in the form of prices through trading almost instantaneously. Information is processed when markets decline and as they rise. Excessive attention paid to media headlines during plunging market declines is distressing, of course, but such price volatility simply demonstrates the efficiency of financial markets functioning as unbiased aggregators of information repricing expected returns.

Exhibit 1: What Affects a Stock’s Current Price?

graphic, What Affects a Stock's Current Price?

Using all available information, a stock’s current price — or a group of American or Chinese stocks comprising their home markets — reflects the aggregate financial expectations of participants about risk and return pertaining to that security from the past, present and even anticipated future information. Market declines occur when informed participants must reassess their future expectation due to negative “news” as it is almost instantly incorporated into that stock’s price or the price of a group of securities.

The spreading of an epidemic outbreak worries governments, companies, and individuals about the potential impact on their domestic and the global economy. Apple announced earlier this month that it expected revenue to take a hit from problems making and selling products in China.1 Australia’s prime minister has said the virus will likely become a global pandemic,2 and other officials there warned of a serious blow to the country’s economy.3 Airlines are preparing for the toll it will take on travel.4 These are only a few examples of how the impact of the coronavirus is being assessed.

The market quickly responds not only to new information becoming known, but in pricing potential unknowns, too. As risk increases uncertainty, so investors demand greater returns for bearing risk. Those demands push prices lower and expected returns higher. Our entire management strategy of multifactor investing depends on the fundamental economic principle that prices adjust to deliver positive expected returns for investors who hold risky assets.

We can’t tell you when the decline will reverse. Our expectation is, however, that disciplined clients who bear risk will be compensated with positive expected returns. That’s been the lesson of health-related crises in the past, such as the Ebola and swine-flu outbreaks, that cause temporary market disruptions, and those epidemics did not impede recovery from the Tech Bust of the early 2000s or the global financial crisis of 2008-2009.

Additionally, studies of market history have shown no reliable way to identify a peak or bottom. This argues against investors taking actions outside of investment policy guidelines based on fear of loss or greed for gain, even as traumatic events transpire. Looking at the U.S. market’s resiliency through multiple past epidemics gives perspective on the advantage of a disciplined investment approach for planning.

Exhibit 2: Epidemics and U. S. Stock Market Performance Since 1980

chart, S&P 500 Index Price Performance
chart, Epidemcis and S&P Price Performance

Source: Bloomberg, as of2/24/20. Month end numbers were used for the 6- and 12-month % change. *12-month data is not available for the June 2019 measles. Past performance is not a guarantee or an assurance of future results. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges. Returns are based on price only and do not include dividends. This chart is for illustrative purposes only and not indicative of any actual investment. These returns were the result of certain market factors and events which may not be repeated in the future.


The portfolios of Dimensional Fund Advisors play an important role in helping clients stick with an informed strategy through changing economic and political conditions. We educate clients to be aware of possible extreme outcomes, positive and negative, when deciding on an investment policy. We review your policy regularly to make sure it still fits your situation. Our planning assumes inevitable market downturns. Amid the anxiety of such times, decades of financial science and academic-level research guide our process and our judgement.

Focus on the long-term: Working with Professional Financial, your strategy is exceptionally well-diversified. Your investment portfolio is coordinated with your wage income and your current or future Social Security, pensions, annuities and reverse mortgages. Make changes only as lifestyle needs and family objectives change. Don’t let media noise and fear run your life. Stay in good health and spend time with family and friends doing things that truly matter. That’s why we are here — to worry for you.


1Apple, February 17 press release. https://www.apple.com/newsroom/2020/02/investor-update-on-quarterly-guidance/

2Ben Doherty and Katharine Murphy, “Australia Declares Coronavirus Will Become a Pandemic as It Extends China Travel Ban,” The Guardian, February 27, 2020. https://www.theguardian.com/world/2020/feb/27/australia-declares-coronavirus-will-become-a-pandemic-as-it-extends-china-travel-ban

3Ben Butler, “Coronavirus Threatens Australian Economy Reeling from Drought and Fires,” The Guardian, February 5, 2020. https://www.theguardian.com/business/2020/feb/05/coronavirus-threatens-australian-economy-reeling-from-drought-and-fires; Ed Johnson, “Australia Says Economy to Take ‘Significant’ Hit from Virus,” Bloomberg, February 5, 2020. https://www.bloomberg.com/news/articles/2020-02-05/australia-says-economy-to-take-significant-hit-from-virus

4Alistair MacDonald and William Boston, “Global Airlines Brace for Coronavirus Impact,” The Wall Street Journal, February 26, 2020. https://www.wsj.com/articles/germanys-lufthansa-makes-cuts-as-it-braces-for-coronavirus-impact-11582712819

Yields of Dreams: An Informed Look at Dividends

Many Investors in recent years have developed a preference for stock dividends to generate income needs. In today’s historically low interest rate environment, such stocks are more attractive than the familiar bonds or bank CDs they used to buy and hold.

But dividend strategies with stocks are not the only way to produce income. Moreover, investors should be aware of the potential tradeoffs and unfamiliar investing risks that accompany a portfolio managed to provide income primarily in the form of dividends. While dividend-paying shares appear to have a reliable schedule (quarterly, in many cases), much like the bonds conservative investors favored for so many years, the cash to fund a dividend must come from somewhere, and it does so very differently than a bond.

We know the price of a stock is influenced by all expected future cash flows to the firm, and thence to shareholders. If cash is paid today in the form of a dividend (rather than be retained for future growth), the stock price — and total market capitalization — of the issuing company should be expected to fall by a corresponding amount, such as in hypothetical Portfolio A in Exhibit 1, below. That means, all else being equal, shareholders who receives a dividend are left with a equity holding made less valuable by that dividend.

Chart comparing methods of income generation
Chart showing income via stock sale - Portfolio B


A simple alternative method of raising cash for income when needed is to simply sell shares. Firms like Charles Schwab have $0 commissions with on-line trades. Exhibit 1 compares these two methods of generating income by contrasting hypothetical Portfolio A with the similarly valued Portfolio B. While Portfolio A receives income through a periodic dividend payout, Portfolio B generates it through a stock sale.

The investor in Portfolio A, in which a dividend is issued, ends up holding the same number of shares as were held prior to the dividend payout — but we assume that those shares have declined in value. The investor in Portfolio B holds a reduced number of shares with no value decrease because of no dividend payout. The two approaches arrive at the same place—both investors end up with $100 in cash and $1,900 in stock, notwithstanding potential trading costs or tax implications, if any. But the dividend approach has potentially greater downsides in contrast to the stock-sale approach.

First, the average proportion of U.S. firms paying dividends was about 52% from 1963 through 2019,1 meaning an investor focusing only on high dividend stocks excludes nearly half of all investible U.S. companies. A second consideration is that a dividend’s value, while not subject to stock price fluctuations, isn’t guaranteed. Just 10 years ago following the financial crisis, more than half of dividend-paying firms cut or eliminated those payouts.2 More recently, a venerable company that had consistently paid dividends for more than a century, General Electric, slashed its payout to just one cent a share.3 The UK’s Vodafone Group cut its full year dividend for the first time in two decades.4

Thirdly, investors lose flexibility with the timing and the size of payouts when they rely on company-issued dividends. With stock sales, an investor determines both the amount and the best income schedule for them. And lastly, dividend-focused investors tend to substantially under-diversify, typically owning only a limited number of stocks, thereby incurring unnecessary risk—the fewer the stocks, the greater the uncompensated risk.

Graph showing income facts - Exhibit 2

Source: Dimensional calculations using Bloomberg data. For constituents with reported returns of less than one year, returns shown since earliest date available. S&P data© 2020 S&P Dow Jones Indices LLC, a division of S&P Global. Dividend yield is calculated as the sum of dividends paid in calendar year t divided by end of year t-1 price.


When considering an investment strategy, it is equally important to assess the potential total return, which accounts for capital appreciation (or loss) alongside dividend income. High dividend yields does not mean high total returns. Exhibit 2 plots the trailing 12-month returns of S&P 500 Index constituents as of December 31, 2019 (each dot representing a company). Those companies with greater dividend yields—the dots located higher up the vertical axis—weren’t consistently those with a higher total return.

The need to prioritize income generation may be important for many investors, but that objective should not preclude other important investment considerations, such as diversification and flexibility. While the use of stock sales instead of dividends to create cash flow may involve trading costs and tax considerations, there are growth benefits for investing in companies that don’t currently pay dividends. An informed investment planning strategy focused on income should balance broader concerns such as longevity that do not exclude safer allocations into fixed income and annuity income approaches.


1Source: Dimensional, using data from CRSP. Stocks are sorted at the end of each June based on whether a dividend was issued in the preceding 12 months.

2Stanley Black, “Global Dividend-Paying Stocks: A Recent History” (white paper, Dimensional Fund Advisors, March 2013).

3Janet Babin, “GE cuts dividend to a penny per share. Why bother keeping it at all?M” arketplace, American Public Media, October 30, 2018.

4Adrià Calatayud, “Vodafone cuts dividend after swinging to 2019 loss.”M arketWatch, May 14, 2019.