Yahoo Finance Why Investors Shouldn't Worry About the Next Ten Years
There are a lot of things for investors to be worried about these days.
What if Obama is re-elected? What if he isn't?
What if buy and hold is dead? What if there are more flash crashes?
What if the Cubs go on a miraculous 30 game win streak, take the pennant and win the World Series, which will ultimately prove that the Mayans were correct and this is the end of times?
If you're a trader, these scenarios can make a difference in your returns (except the Cubs thing--there's no chance of that happening). But if you're a long-term investor, all if it, including the elections, is nothing but a bunch of noise.
If your investment horizon is ten years or more, you have little to worry about. Since 1937, the market has been up 67 out of 74 ten-year periods. The only ten-year periods in which the market did not produce positive returns were the ten years ending 1937, 1938, 1939, 1940, 2008 and 2009.
Notice that these periods were all tied to the Great Depression or Great Recession. And keep in mind, not every ten-year period tied to those eras were negative.
If you invested in stocks from 1933-1942, which encompassed some difficult years, you still made 41 percent over that decade.
Although you'd have lost 10 percent investing from 1937-1946, you'd have made 45 percent from 1938-1947.
And if you had money in stocks from 2002-2011 and endured the stomach-turning 2008 market, you'd still be ahead by 30 percent.
In fact, including dividends, the average return over ten years since 1937 has been 127 percent. The past seventy-four years were filled with wars, a Presidential assassination, resignation and impeachment, an oil shortage, double-digit inflation, a terrorist attack and a financial meltdown.
And despite it all, over ten years, markets were up 91 percent of the time and on average, investors more than doubled their money.
In the past, it has taken a historic financial collapse not to make money in the stock market over ten years. And as I've shown you, even then, there's no guarantee that the markets won't appreciate.
What if I'm Wrong?
If you're a rational investor and not emotionally reacting to the 24-hour news cycle, you'll understand that your money should be invested in the markets for the long term.
But what if I'm wrong?
What if the next ten years is truly abysmal for the stock market? A nasty bear growls until 2022, so much so that the Dow falls to 10,000 ten years from now, a nearly 25 percent drop.
If you're invested the right way, you can still make money. There is a group of stocks I call Perpetual Dividend Raisers. These are companies that have a track record of raising their dividend every year. Dividends are important for several reasons. Among them:
--They provide a buffer against a down market. If the market slips 4 percent and you receive a 4 percent dividend you've broken even.
--Academic research shows that dividend paying companies tend to have higher quality earnings.
--Dividend paying stocks outperform the market.
But companies that raise their dividend every year provide the ability to generate wealth even if the market goes down.
Here's how:
If you do not need income today and can instead reinvest your dividends, those dividends will compound year after year. Reinvesting the dividend means instead of collecting the dividend in cash, it is automatically invested back into the stock.
For example, let's say you buy $10,000 worth of stock that pays a 4 percent annual dividend (or 1 percent quarterly). In the first quarter you will collect $100 in dividends. If you reinvest those dividends back into the stock (we'll assume for this example that the stock price is the same), the next quarter you'll receive dividends on $10,100 worth of stock. The following quarter you'll receive dividends on $10,201 and so on and so on.
In the beginning the dividends are not that impressive but as the years go on those compounded dividends really add up.
Again, assuming the stock price and the dividend per share stays the same each quarter, after five years, instead of receiving $100 per quarter you're getting nearly $121. And after ten years, you get $147, a 47 percent increase over when you started.
But when the dividend rises every year, you get more money to put back into the stock, which will spin off more dividends, which buys more stock, which spins off more dividends?.
If your dividend rises by 10 percent per year and the stock price stays absolutely flat the whole time, in ten years, your $10,000 turns into $18,815. An 88 percent increase during a period where your stock didn't move.
Would you have been satisfied with an 88 percent return over 10 years during the recent lost decade for stocks?
Now, let's go back to our bear market scenario. Over the next ten years, the Dow falls to 10,000, a 24.6 percent decline or negative 2.79 percent compound annual growth rate (which would qualify as the 5th worst performance in the past 74 years).
If you invested in a portfolio of stocks with a 4 percent average starting yield, that raised the dividend every year by 10 percent and whose prices tracked the market, you'd still finish the decade up 57.9 percent, compared to a 24.6 percent drop in the market.
That's the power of reinvesting dividends.
And you'd own a ton of shares because you'd be buying stock at lower and lower prices. If the market does rebound, you'd likely be sitting on some big gains.
And if the market returns its historical average of 7.48 percent, you'll more than triple your money in ten years if you reinvest the dividends.
For those of you who need the income today and can't afford to reinvest the dividends, you'd still come out ahead in the bear market scenario. While your $10,000 in stocks would have declined by $2,460, you'd have collected $6,374 in dividends, far offsetting the loss.
Finding quality companies with rising dividends takes a little bit of work but they're out there. Look at companies like Intel (INTC), which dominates the chip industry, particularly in PCs. Although the semiconductor business is cyclical, Intel has been raising its dividend for nine years in a row at an average rate of 25.6 percent per year.
It's a waste of time to worry about things you cannot control. Instead, take charge of your portfolio, invest in the right dividend raising stocks and you'll very likely have more money than you started with ten years from now, no matter what the market does or who is President--even if it's that guy you can't stand.
Marc Lichtenfeld is the author of Get Rich with Dividends, A Proven System for Earning Double Digit Returns, the Associate Investment Director of the Oxford Club and the Editor of the Ultimate Income Letter.
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