Are we headed for another great depression? Many seemingly credible commentators seem to thinks so, although as is often the case there is conflicting views and rigorous debate. Personally, I have no idea. I certainly recognize the concerns that many hold, not least of which is the ongoing debt crisis in Europe, but also understand that history shows us that the direst of predictions rarely come to pass.
So let’s look at the different ends of the spectrum and see what conclusions we can draw. If the market doesn’t crash again as some expect, but instead continues to recover at a steady pace, regular and ongoing investment is obviously going to be a good thing. No need to justify things under this scenario. But what if we do see a 1929 style crash and great depression?
The pre-depression market high for the S&P 500 occurred in August 1929, and did not return to those levels until November 1954, 25 years later! Too long for even the most die hard long term investor. But to assume that this period did not provide attractive investment opportunities is not entirely correct. For starters, we have not factored in dividends. When you include dividend reinvestment, you have returned to you’re a break even position in 15 years instead of 25. Still a long time, but much, much better than 25 years.
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More importantly, if an investor continues to make regular contributions along the way, the averaging process means that you are in a net positive position very quickly. For example, if an investor puts $10k into the S&P 500 index at the height of the market in 1929, then adds $200/month along the way, they have a net positive return in just 6 years.
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I'm not saying 6 years to break even is a good thing, but it shows you how important it is to invest in dividend paying stocks and to make regular investments along the way as you continue to save. Moreover, in this example you can see that the absolute worst time to invest in the history of the US market, you are still doing reasonably well over time.
But what about those who are already retired, and can’t afford to make ongoing investments, as they are now living off their capital? If you invested into the market a couple months before the great crash of 1929 your yield certainly does suffer, but you still receive a steady income which also recovers much faster than the capital component.
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Again let me stress that I am not saying that it will be a good thing for investors should we suffer another depression like event. But what I am saying is that the patient and sensible investor, one that follows a DividendKey style investment strategy, will still find significant reward from their investments over the long term.
Consider any ongoing weakness as an extended buying opportunity. When the market does inevitably resume its upward trajectory, you will have established a much larger holding, and as such will reap much more significant reward (in dollar terms) from the subsequent bull market.
At the end of the day, we just need to be pragmatic and understand that while the market can offer excellent returns, those returns come at a price – that is, short term volatility. But if you are looking to safely and reliably grow your wealth over time, this shouldn’t be a great concern.
When you do buy share market assets, you buy assets that represent quality and value. You do not buy based on speculation or hope, and you ensure you buy assets that provide ongoing cash rewards (i.e. dividends). Importantly, you buy shares with the understanding that their capital value will likely fluctuate all over the place in the interim and that it takes time for the real value of these investments to mature. Indeed, the best returns are achieved over a period of years, not weeks or months.
Finally, you buy shares with the understanding that no matter how well informed you may be, no matter how much care you have taken with your selections, there is always the possibility for unforeseen events to have a significant, sudden and negative impact on any given share. As such it is absolutely critical we ensure we are well diversified over a variety of different companies and industries. Finally, one of the most important variables to impact your long term wealth, if not THE most important variable, is the amount of money you manage to save and invest over the course of your working life. The more you grow your exposure, the greater you will benefit from rising markets, and thanks to the averaging effects, the more you will be protected from falling markets. In a nut shell:
- Buy shares that represent quality, profitable businesses that have a policy of sharing their profits with investors
- Diversify your holdings over at least 10 stocks, across 5 sectors
- Buy regularly as you continue to save
- Understand that the share market is a volatile place – and that said volatility is only a real concern when it comes time to sell
- Throughout the lifetime of your investments, dividends will represent a significant proportion of your total return and provide you with the opportunity to experience compound growth through reinvestment.
These are the principle teachings of the DividendKey course. If you would like to understand how to build a safe and reliable portfolio and forget the rampant short termism of the market, sign up today.
Make the markets work for you!