Reader Question: Thoughts on Recent Stock Market Drop?

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I don’t really enjoy talking about stock market movements, but given that it has been the most common reader question recently and I wanted to start answering more reader questions, here we are. My overall take is the same:

  • In the short term, nobody can predict the movement of the overall stock market. Especially over the next year. Sure, anyone can make a guess (“forecast”) and sometimes those guesses are right. But last time I looked, the billionaire list is overwhelmingly business owners, not market timers.
  • In the long term, I still believe that businesses will grow in value as product of human ingenuity and hard work. I like owning the entire haystack, knowing that I will own the next Amazon, Google, or Visa.
  • In the medium term, the awesome run during the last 10 years greatly increase the odds of modest returns over the next 10 years.

If you are already making withdrawals from your stock market investments (like me), that last bullet point may make you nervous. As a result of having modest expectations, my main goal is to not sell any shares. I don’t plan to spend 4% of my portfolio given the sequence of returns risk of a 40+ year time horizon. My plan is to limit my withdrawals to just the dividends distributed, whatever that might be.

Above is a chart of S&P 500 earnings, dividends, and buybacks over the last 20 years, via Axios. Dividends and buybacks are both ways that companies can direct profits to shareholders. However, you can see that the earnings jumped around and the stock buybacks tended to go up and down with those earnings, but the dividend payout had a much smoother ride. Companies raise dividends cautiously because they know that their profits can be cyclical, but their shareholders expect their dividends to be consistent.

If you are NOT making any withdrawals from your stock market investments, then your job is to tune out the short-term noise, and maintain the long-term faith in what you own. Why do you own stocks? Why do you own bonds? Why do you own real estate? I know that simple money rules may fit on a 3×5 index card, but you need a foundation of knowledge to keep you following those rules. Otherwise it’s just like saying being healthy is “don’t eat too much, and eat mostly plants”. Simple is not the same as easy.

This is also why financial advisors recommend a written “Investment Policy Statement”. That’s where you are supposed to write these things down when you are calm, so you can read it again when you are panicked.

Don’t anchor yourself to the high point of your portfolio. You reached $10,000 and now it’s $8,000? You reached $100,000 and now it’s down to $80,000? That high number was just a mirage anyway. Remember, the stock market is always either at an all-time high or in a drawdown. See: The Only Two States of Your Portfolio: Happy All-Time High or Sad Drawdown.

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  1. Accurate and timely article.

  2. It’s easier when you are a dividend growth investor, especially at this time of the year as most companies have already announced their increases for the next year. Yeah the stock price might be going wild right now but you know you’re going to get a “pay” increase next year regardless.

    • I do like the psychological benefit of looking at the dividends instead of the stock price.

    • Until they dont that is. See the 07-09 recession when plenty of companies suddenly dropped their dividends all together. These were mostly bank stocks like citi and bank of america, so maybe your strategy works with all other sectors–tough to know for sure though.

      • Which is why you diversify the sectors when building one of these portfolios (there’s gotta be at least one company paying something in every major sector). I think with the banks in particular, the surviving banks had to stop due to conditions of the government bailout. If it weren’t for that I’m sure many of the survivors would’ve just reduced their dividend instead of stopping it altogether. For an example of how strongly these companies would try to keep paying something look at GE. GE’s got some serious problems and yet instead of just dropping the dividend to take care of their mess, here they are paying 1 cent a quarter.

  3. “If you are already making withdrawals from your stock market investments (like me)” !?

    I’ve been in cash most of the year w/ a brief investment in the early-mid part. The market is not the same as it used to, now algos and frequent tradings rule aka machines that humans set the rules.

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