Through Thursday September 8, 2016 the S&P 500 hadn’t closed up or down 1+% for 44 consecutive days; the longest such low volatility streak in history. Rather, for over two months, stocks basically did nothing as financial TV pundits, analysts, investment writers, and regular retail investors parsed every word coming from anyone at the Federal Reserve. Some hawks said dovish things, some doves seemed to turn hawkish, and all the while economic data flooded in that was as clear as mud about whether or not the recovery was about to stall…or achieve lift off velocity.
Then on Friday, September 8th, EVERYTHING changed.
Boston Fed President Eric Rosengren said, and not for the first time mind you, that he thinks the bigger risk to the economy is in not raising rates. He did not say exactly when, or by how much, just that rates need to gradually rise. In other words, EXACTLY what the Fed has been saying since 2014 when it ended its final QE program and began warning that rates would start rising soon.
The market’s reaction this this non-event? The worst day since Brexit, S&P 500 down 2.5%. Meanwhile, high-yield stocks such as REITs, utilities, and MLPs, suffered far worse, sometimes falling 2-3X as much. In fact I had three of my holdings fell 7% or more. The overall carnage to my portfolio? -3.21%. Guess what my reaction was? Hysterical laughter and gleeful buying.
I truly love days like this, when the market loses its mind, and decides that the same thing that we’ve been experiencing for YEARS suddenly is a game changer. When I get more money in a few days, I’m hoping the market route continues because I’m eager to add more quality shares, at even higher discounts.
The thing investors need to realize is this: Bonds provide stability and income, Stocks do not. Whatever your risk profile is, whatever money you have in stocks WILL rise, and fall, and the falls happen much quicker than the escalator like rides to record highs. Any stock you own, needs to be thought of as a long-term investment, a piece of a company, an income producing asset.
You need to be willing to buy a stock and think of it like a seed you planted. It will take years for a mighty Oak Tree to grow, and during that time there will be storms, rain, tornadoes, and heat waves. Most days will be nice and sunny, but plenty won’t be. But in the end, if you’re patient you’ll have something beautiful that will endure far longer than you, or even your children will.
My advice to all investors is this: If you don’t have the time, the interest, or the temperament to individually own stocks, AND check in on them from time to time, then simply put all your money in a low cost, dividend growth focused index ETF like the Schwab US Dividend Equity ETF. 0.07% expense ratio, tax efficient, massively diversified, high-quality blue chip dividend growth names that you know and trust, and a 2.8% yield that grows every year. Buy it anytime you have money you won’t need for 5+ years, and then never look at it! Don’t track it at all. Don’t check the market news, don’t turn on CNBC, because nothing you see, or hear will affect the fact that you are betting that US companies with a consistent history of paying growing dividends, will continue to do so.
And as my readers must surely know by now, total return = yield + dividend growth.
NOW if you do love the thrill and challenge of investing in individual companies, and want to spend the rest of your life learning about how to invest better (believe me it’s a life long process), then you need to be prepared to not just tolerate days like September 9, but actually look forward to them. Embrace them like a lover. Use the fiery passion of other people’s panic selling to take advantage of the fact that the world is not ending and corporate profits will keep doing what they’ve been doing for centuries, growing, and the dividends right along with them.
We’ve all heard the famous Buffettism: “Be greedy when others are fearful, and fearful when others are greedy.” Like all things in investing this contrarian way, of taking the opposite side of people who just want out of any kind of uncertainty, and the guaranteed (inflation destruction) of cash, is hard, AT FIRST.
Only until you’ve lived through several corrections, bear markets, and outright crashes and market meltdowns, do you realize that, barring an apocalypse, stocks always come back. The hard part is guessing when the bottom has been reached. Which is why studies show that the absolute best way to time the market? Be in the market all the time!
Buy quality dividend growth stocks, never sell unless the original thesis breaks, reinvest the dividends, and keep adding to your positions all the time. If the market rises, you win. If it falls, you accumulate more shares for less, thus raising your yield on cost, and your income stream even faster. In other words, you win even more. Because the rate at which your exponentially growing river of cash expands will now be even greater.
That’s all there is too it. And if you are thinking “if that were true then everyone would be rich”, just remember how you felt on Friday, or during the financial crisis of 2008-2009, or the dot com crash of 2000-2003. THAT feeling of dread, panic, an almost unstoppable need to sell it all now before it falls more, THAT is why so few people can beat the market.
If you want to become rich, then you don’t need to know what companies to buy, or when, rather you first need to conquer your fears, your emotions, in other words, yourself.