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The Market Tanked – Does it mean anything?

February 6, 2018

Yesterday and the day before the market had its biggest two day point drop ever. 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 or are making withdrawals to live on, 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 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 should 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-four years from 1994 through 2017, dividends paid by stocks in the Dow Jones Industrial Average increased from $105.66 to $523.94. The only period that had a drop was from the year ended Sep 2008 going from $325.27 (its then all-time high) to $272.78 for the year ended Mar 2010 (a 16% drop). In the year ended Mar 2012 the dividends increased to a new all-time high of $326.87. For the year ended Dec 31 2017 dividends paid were $523.94. During this same period the DJIA rose from 3,757 at the beginning of 1994 to close at 24,719 at the end of 2017.

A lot of numbers, but what do they tell you? They 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 additional stocks at a sale price. As long as the dividends keep being paid, and based on the experience illustrated above, 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.

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. Momentary decreases should be no harm to your plans.

This is a reposting of a blog originally posted on January 28, 2014 with some minor changes and updated number amounts.

One Comment leave one →
  1. 6hawthorne permalink
    February 6, 2018 8:19 pm

    Hi Ed Its just a correction for the last year rise\ Bob

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