I have said and written about how to act during market volatility, but it needs repeating — especially during tumultuous stock periods such as the one we are going through this month.
More 3 percent drops like the one we had on Monday are likely. There have been 21 of them since the start of 2010, according to Instinet analyst Frank Cappelleri.
“Every year and occurrence is different, but if you go by probability and recent history, it would be surprising not to see another one-day, 3 percent decline before this is over with,” Cappelleri said. “When one-day, 3 percent declines have appeared, they have happened in clusters.”
Nicole Tanenbaum of Chequers Financial Management says you should just chill.
“Go to the beach. Go be with your family,” said Tanenbaum, her firm’s chief investment strategist. “The worst thing is reacting to short-term market moves based on your emotions and letting the markets drive you to make an irrational decision that may go against your long-term plan. Pull yourself out of the weeds. Stop checking on the markets. Go live your life.”
One of my buddies asked me with a straight face, “Should I sell it all and get out?”
No, I said. (My colleagues aren’t dopes, but people gravitate to me with questions because I frequently write about stock markets.)
One small piece of advice is that when you decide to make a change in your investments — whether it is to sell a stock or mutual fund, or buy, or go to cash — write it down and wait a day or more. Time clarifies.
If you sell your stocks when the market reverses, you could be locking in losses.
Then where do you put that money? The stock market over the last century has done better than almost every other investment.
“The Dow Jones industrial average, if one goes back to its inception in 1896 and up to the present, has earned 5.6 percent per year on the capital gains of the stocks,” said David Kass, professor of finance at the University of Maryland.
Kass then added another important point: If the dividends those stocks pay to you for owning the stock were used to buy more of the same stock (known as dividend reinvestment), the annual return/gain on the Dow would climb to 10.3 percent per year.
If $1,000 were invested in the Dow Jones industrial average at its inception in 1896 (123 years ago), it would be worth $172.5 million today, Kass said.
The lesson here is twofold: First, stay in the market because you never know when stocks hit their bottom and rebound. Even Warren Buffett doesn’t know. But they always rebound eventually. Since 1965, the value of the S&P 500 with dividends included has declined in only 11 of the 54 years, or just 20 percent of the time, Kass said. It has gone up in 80 percent of those years.
Sometimes the stock market goes down and stays down for a while. But that’s pretty rare.
On only one occasion since 1965, Kass said, has the S&P 500 declined three years in a row. That was between 2000 through 2002, otherwise known as the popping of the dot-com bubble.
If you have a long-term horizon, a stagnant stock market or down market can be your friend because you may be buying shares more cheaply than when stocks are flying high. I only want my stocks to be really expensive when I sell them.
The second lesson is that you should view stocks not on just how much they go up and down in a given day, week or month, but by their total return when you include dividend reinvestment.
When my colleague said the Dow was at the same spot in late July 2019 as it was in January 2018, he wasn’t including the 2.5 percent or so annual dividend yield that you earn on the Dow. Over many years, as Kass points out, dividend reinvestments supercharge your stock returns.
“In the short term, dividends aren’t huge,” said Howard Silverblatt of S&P Dow Jones Indices. Between Jan. 1, 2018, and Aug. 7, 2019, a $10,000 investment in the S&P 500 would be $10,787 without dividends, Silverblatt calculated.
If you reinvested the dividends, however, the “total return” comes to $11,129, or 43 percent more than without dividends.
And going back to Jan. 1, 1990, if you invested $10,000 in the S&P index, your $10,000 investment would be $81,607 based on the stock only. But with reinvested dividends, the investment would be $152,904, Silverblatt said.
“Over time, when you invest the dividends, the difference is night and day,” Silverblatt said.
Sadly, millions of Americans don’t own stocks or mutual funds. So they aren’t benefiting from the huge gains in the stock market.
“When headlines blare all day about what happened to the market, that doesn’t mean much to half the American households,” said Jared Bernstein, a CNBC contributor and the economic adviser to then-Vice President Joe Biden.
“If the bottom half can possibly do so, owning stock is an important way to save for the future,” he said.
“The reason low-income people aren’t getting into the stock market isn’t because they don’t like capitalism,” Bernstein said. “It’s because they can’t afford it. We can talk all day about how great it would be if folks could accumulate assets through an index fund, but if you are struggling to pay rent and put food on the table, it is irrelevant.”
Bernstein, 63, started investing in the 1970s with money he made on the side as a freelance musician playing the bass in jazz clubs and venues around New York City.
He learned the benefits of reinvesting dividends early on.
“My father was a physicist and into numbers,” Bernstein said. “He was very excited about compounding. He taught me about savings, but I was scared off by the market. I am more risk-averse than the average person.”
He read Vanguard Group founder John C. Bogle’s early books on index investing and was captured by its low-risk and low-fee characteristics.
“I had a little bit of money to play with and I put it in Vanguard index funds,” he said, adding that he once interviewed Bogle, who passed away earlier this year, for a book review.
Bernstein has stayed in index funds for 40 years. I wish I had been comfortable enough with the stock market to invest when I was in my 20s.
I didn’t go near stocks until I was well into my 30s. My future wife, Polly, on our first date advised me to save every dollar I could in my 401(k) retirement plan with The Washington Post. I duly followed her advice and started directing a portion of my paycheck into the Vanguard Windsor Fund.
It ain’t romantic, but it worked.