Staying In Your Seat Even During The Hard Times
Posted Mar 27, 2020
Investing correctly during times of economic stress is a difficult thing to do. There’s no arguing that we are in a challenging time and faced with rapidly evolving information about COVID-19. The world is adjusting to how to live and work during this time of social distancing. While we are experiencing unprecedented events, there is no evidence to suggest that this time is going to be any different for the stock market and the long-term expected returns of investing in stocks. Despite some of the challenges imposed by the government with stay at home orders, we are living in an amazing era of technology that allows office workers to continue operating virtually and manufacturing companies are finding new ways to generate revenue for their shareholders.
The ingenuity of the world’s greatest companies allows these businesses to adapt to the continually changing circumstances around the world. The objective of publically traded companies is to make money and the management team’s mission is to maximize shareholder value. So you can count on all these companies to continue figuring out ways to make money during this crisis and every new crisis going forward. This is the brilliance of investing in the stock market, even during times of uncertainty. When you invest in the market, you are purchasing shares of stock, which means you become an owner of that company. This means that you have voting rights and receive a portion of the company’s profits through a dividend (and yes, some companies don’t pay dividends, but that’s because the companies management team believes they can deliver more shareholder value reinvesting that money back into growing the company versus paying out a share of the profits).
These companies even during bear markets continue to pay dividends and to invest in the growth of their business. Most of the time, these companies continue to pay out the same dividend amount even when their stock price is down, and that’s an important factor to remember.1 So depending on your investment goals, bear markets can be a good thing for investors. If you are in the accumulation phase, you are continuing to invest more in the market and you are reinvesting your dividends all at lower stock prices. This means that you are buying more shares of these great companies than you would have at the higher market price. This is a good thing for people taking a long-term approach to investing.
For individuals that are either approaching or are in retirement, I totally understand that bear markets can be a terrifying experience. At Thayer Financial we work with each of our retired clients on creating an optimal retirement income planning strategy that helps our clients stay focused on their long-term goals and the expected returns that investing in the market delivers. Our retirement income investment strategy helps clients stay invested, even in times of market turmoil, all while not missing a paycheck. While this retirement income planning strategy needs to be started a few years before actually retiring for optimal results, for those that haven’t there are things that can still be done during the bear market to give you the best chance of success.
What many people don’t realize about successful investing is that it requires discipline to stay in your seat during the trying times. It is impossible to time the market (when to sell and when to buy) and a much better determination of long-term performance is time in the market. By staying invested for the long run, we are able to position ourselves to capture the large returns that are usually delivered unexpectedly in very short windows of time.
Chart is from Dimensional Fund Advisors 2