The key to making money is staying invested (and putting more capital to work) when times are tough. It's not easy to do as each bear market is scary.
This article is published with permission from InvestmentU.com and slightly edited from the original version as it appears on InvestmentU.com
The key to making money is staying invested (and putting more capital to work) when times are tough.
It’s not easy to do as each bear market is scary. Every downturn has reasons why pundits (and investors) worry that this time is different and stocks aren’t coming back soon. And each time they are dead wrong.
Despite the mother of all recessions in 2008 and 2009, with the economy on the verge of collapse, the market rallied 133% from the bottom.
And if it climbs 1.2% above Monday’s close (it may have already by the time you read this), it will mark the tenth time out of the past 10 bear markets (over 60 years) that the S&P has hit a new record high after a bear market.
The average length of time from a market bottom to a new high is 23 months.
Think about that for a second…
Remember how awful it felt during the bear markets of your lifetime. As bad as things were, it took less than two years, not only for stocks to gain back what they lost, but to set a new high. So on average, not only were investors made whole in two years, they actually made money — if they held on.
Make it Easier on Yourself
It’s easier to have the intestinal fortitude to hang on to your stocks in a bear market if you’re getting paid to wait it out. When you own a stock with a 4% dividend yield you tend not to worry as much about a weak market — particularly when the dividend is growing.
It’s important to understand that dividend growth and stock price growth are not tied together — although typically, a stock with a growing dividend will rise over time.
But in a bear market, while stocks are falling — and most will, even the dividend stocks — companies can and do continue to grow their dividend.
In fact, there are 471 companies that have raised their dividend for each of the past five years — which includes the ugly 2008 and 2009 recession years.
And if you own some of those stocks that are boosting the dividend year after year, it’s easier to weather the storm.
Since 1900, the average bear market has lasted 13 months. Combine that with the average 23 months it takes for stocks to hit a new record high after the bear and we’re looking at 36 months or three years to turn a profit if you bought at the very top.
If you own a stock with a 4% yield and the company raises the dividend by 10% per year, after one year you’ll have a 4.4% yield on your original cost. After two years your yield is 4.8%.
During the three years you’ve waited to make money, you’ve collected dividends amounting to 13.2%. That’s a 13.2% return over three years — not bad considering you bought at the very top of the previous bull market.
And as those dividends increase every year, it’s easier to hold on to the stock. A raised dividend is as strong a signal as management can send to shareholders that the business is performing well and there will be plenty of cash to return to investors.
So when the stuff hits the fan, stop looking for complex strategies to make up for the losses. Buy yourself some dividend growers, sit back and remember that this time is not different. If it wasn’t different in 2008, it sure as heck is not going to be different next time.
Marc Lichtenfeld is a senior analyst at Investment U. See more articles by Marc here.