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The Market Tanked Last Week – Does it Matter?

January 28, 2014

Last week, the market had its biggest one-week drop in two years.  For those invested in stocks, it is a lousy feeling… but, does it mean anything?

Many individual investors (including those with 401k and 403b plans) are in it for the long haul.  Daily or weekly drops really don’t mean much, financially.  If you are using your stock values for credit purposes it might, but, for the average investor, I don’t see any real effect.  Those that regularly add to their investments actually have the opportunity to buy at lower prices – so why be upset when values drop?

My approach to the stock market is that it should be part of a properly considered balanced investment plan as a method to provide long-term financial security.  Week-to-week changes or even a month-to-month or year-to-year change do not have much effect.

One method of growth is the increases in the stock values.  However, you do not spend stock values.  It’s like a house.  When a comparable house is sold at a high price, you think you are richer.  But, what does it matter?  You are living there.  It is a sunk cost.  If markets are depressed when you sell, you will buy something also at a reduced price.  Only when you die and your family sells the house, will that value be meaningful, and then, will you really care?

Stocks have a second way of providing growth and that is with the payment of dividends.  Regardless of the stock values, except for super-severe drops, dividends do not decline.  Maybe the yields change, but the dollar amount of dividends do not.  They actually increase.  For the twenty years from 1994 through 2013, dividends paid by stocks in the Dow Jones Industrial Average increased from $105.66 to $360.09.  The only year in that period that had a drop was 2009 going from $316.40 (its all-time high) to $277.38 (a 14% drop).  In 2010 the dividends increased to $286.88 and the 2011 dividends exceeded the previous all-time high.

What does this tell you?  It should tell you not to worry about momentary drops or even extended drops in stock values.  It is the dividends you will spend or reinvest.  And if you reinvest, you are buying stocks at a sale price.  As long as the dividends keep being paid, and based on experience, there is no reason to expect otherwise, you should not be overly concerned about falling values in the market as a whole.  If you typically buy stocks that do not pay dividends, then you are in a different circumstance and what I wrote would not apply to you.  Although, the DJIA rose from 3757 the beginning of 1994 to close at 16577 at the end of 2013.

Over long periods of time [minimum of seven to ten years] balanced stock portfolios should increase in value and the steady payment of dividends will provide cash-flow to spend or reinvest in additional shares.  Momentary decreases should be no harm to your plans.

3 Comments leave one →
  1. Michael P. Mattimore LLC permalink
    January 28, 2014 2:54 pm

    Hi Ed,

    enjoyed the article.

    any recommendations on what would be good stocks with steady dividends cash-flows?

    Thanks,

    Michael

  2. January 29, 2014 7:27 pm

    Michael,
    I have no recommendations, but if your investment plan calls for stocks, why not consider the DIA or SPY index funds (or their fund equivalends). The dividends are about 2%, very low management costs and you will earn the market rates of those two major indexes. I refer you to some prior blogs I posted: August 8, 2013, Feb 28, 2013, May 8, 2012.

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