MacroPass™: Steven Bavaria On Income Investing

The goal: earn equity-like average annual returns with lower risk

This week’s submission for our popular MacroPass™ service available to premium members of this Substack comes from income investor Steven Bavaria.

In the article below, Steven details out the fundamentals of investing for income, explaining the strategy underlying his Income Factory® framework. Its mission is to get equity-like average returns with substantially lower risk.

As a reminder, MacroPass™ is a weekly rotating selection of premium analysis from many of the big thinkers interviewed on Thoughtful Money.

To-date that list of contributors includes experts like Lacy Hunt (Hoisington), Stephanie Pomboy (Macro Mavens), Danielle DiMartino Booth (QI Research), Tom McClellan, Michael Howell (Capital Wars), Darius Dale (42 Macro), Doomberg, Ted Oakley (Oxbow Advisors), Kevin Muir (The Macro Tourist), Alf Peccatiello (The Macro Compass), Lance Lambert (ResiClub), Ed Yardini (Yardini Research), David Hay (Haymaker), Melody Wright (M3_Melody), David Stockman (Contra Corner), David Brady (FIPEST Report), John Rubino, Adam Kobeissi (The Kobeissi Letter), Sven Henrich (Northman Trader), Jeff Clark (The Gold Advisor), Charles Hugh Smith, Steven Bavaria (Inside the Income Factory®) and Chris Whalen (The Institutional Risk Analyst).

The reports issued so far in this MacroPass™ series include:

• Charles Hugh Smith on returning to a gold-backed currency

• Chris Whalen on the health of the banking industry

• Jeff Clark on the promising outlook for junior mining stocks

• David Stockman on Bitcoin's threat to fiat currency

• Darius Dale on the market's transition from 'Goldilocks' towards Deflation

• The Kobeissi Letter on tech stock weakness & recession fears

• Melody Wright on fast-worsening housing data

• Lacy Hunt on his quarterly outlook & review

• Ted Oakley on his latest market outlook

• Lance Lambert on rising housing inventory

• Doomberg on the future of nuclear energy

• Jeff Clark on Outcrop Silver

• Ed Yardeni on the labor market, fed rate cuts & more

• David Stockman on stolen economic growth

• Michael Howell on global liquidity

• Melody Wright on mortgage default risk

• Edwin Dorsey on the short argument for Primerica

• Danielle DiMartino Booth on the debt-default reckoning lying ahead

• David Hay on the wild action in the Japanese yen

• Kevin Muir on the emerging opportunities in Chinese stocks

• Alf Peccatiello on the growing fragility in credit markets

• Tom McClellan’s excellent April Market Report

If you’re already a premium subscriber to this Substack, just continue below to access Stevens’ write-up.

And if you’re not (yet), read the start of Steven’s article below and consider upgrading to premium and access the full version, as well as all past and future MacroPass™ content.

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Equity Returns Without The Angst

Steven Bavaria

Oct 2024

Over the past century, the average annual return on equities, as represented by the S&P 500, has been about 10% per annum. That’s a worthy goal for any investor, and anyone who invested in an S&P 500 index fund and left it alone to re-invest and compound would have seen their portfolio double and redouble about every seven years. That means a 25-year old who invested $10,000 in an index fund would have ended up with a portfolio worth about a half-million dollars when they retired 40 years later at 65. Of course in reality they’d have had much more than that, since they would undoubtedly have added new money to the original portfolio over the 40 year period.

The point is that an “average” return of 10% actually represents an excellent investment return, and any investor who can achieve that over their investing life will most likely be very happy with their final result. In fact, Nobel Prizes have been won by economists pointing out how long-term equity “index” investing is the surest way for the average investor to maximize their investment returns.

This chart shows the S&P 500’s actual performance since 1927. The overall upward slope is quite obvious, confirming the general wisdom that a buy-and-hold through thick-and-thin strategy has actually worked over many decades and generations.

S&P 500 Since 1927:  Source - www.macrotrends.net

But the reality is that many investors do not achieve an “average” investment result, because the path to a long-term average result of 10% often includes a lot of “non-average” years, where the short-term return is just as likely to be negative as positive. These “non-average” years can be scary for many investors, causing them to “lose their faith” and take so-called defensive actions that end up reducing their returns.

One of my favorite investment books is