Thanks to the recent market drop, every single investment category has now performed poorly in 2018, wiping out gains going back into 2017. There has been, in the words of a friend, “nowhere to hide.”
Many investors have for the first time seen their accounts decline substantially since the second half of 2015 or summer of 2011. It’s important to stress that declines are normal, to be expected, and in many ways necessary, because they allow us to refuel for future gains.
I say this knowing that many of us were investing through the 2000-02 dot-com crash as well as the 2007-08 credit crisis and Great Recession (I’ve been investing since 1968, so add the 1972-74 and 1987 crashes to the list). Stocks dropped dramatically those times for sure, but in every case, the broad market indexes recovered and exceeded their pre-crash highs. Patience won. This is why, to those who ask, “What to do?”, I invariably answer: “Nothing.” No matter how unnerving things may seem, they are not new. This time is never different.In the absence of a sudden life change, the right advice is, “Don’t do something, just stand there!”
The only time that is not the right advice is if your long-term investment plan is no longer what it was before. Otherwise, if you own stocks that issue dividends and perform stock buybacks, you have every reason to sleep soundly at night. And a major reason for that is, yes, even while you sleep, your money is still working for you in positive ways, especially if you have an advisor who will help you set up automatic dividend reinvestments like we do for many of our Huckleberry clients.
When companies pay cash dividends, they deposit them on a monthly or quarterly basis into your brokerage account. With dividend reinvestments, that cash is then used to buy more of the stock at the current market price. So, without doing a thing, in a market drop, you are buying more bargain basement priced stock of the same great companies you’ve already chosen to own.
Think of it this way: Someone gives you a check for $4.00 every quarter. A pack of gum (or share of stock) usually costs $1.00, allowing you to buy four packs. But if the price of a pack of gum (its “stock price”) drops to $.80, you’re now getting five packs every quarter – 25% more! In the long run, that means you will own more valuable stock. So unless you want to bet against the long-term growth of American business (which has been a losing bet in every era, even the Great Depression), lower stock prices are good for long-term investors.
Therefore, the only time changes in investment strategies are warranted is if your situation has changed – perhaps you married, got a divorce, had children, changed jobs, or your retirement plans have shifted – but not because the market rose or fell (that’s just noise and emotion).
With dividend reinvestments, you snag the benefits of new cash invested at lower prices — automatically — while you get to turn off the noise and enjoy the holidays (and far beyond too).
My very best wishes to you and yours for the holidays and New Year,
Tom
Why Dividend Reinvestments Will Help You Sleep in Times Like These
