Major drop in the stock market. Should you keep investing?

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Note: This post was originally written in March 2020, when the Dow stood 14% below its all-time high of 29,551 set on Feb. 12, 2020.

Major drop in the stock market last week. Should you keep investing?

Market drop

Last week (Feb 24-28, 2020) the Dow Jones Industrial Average dropped 3,583 points, or 12%. It was the steepest weekly percentage decline since the 2008 financial crisis. The index now stands 14% below its all-time high of 29,551 set on Feb. 12th. It all sounds dim until you broaden your perspective, the market is still higher today than it was in 2019, 2018, 2017, 2016…

Date

Dow Jones Industrial Average

Today (Feb 29th)

25,409 points

2019 (May 27)

24,815

2018 (Mar 19)

23,533

2017 (Apr 10)

20,453

2016 (Apr 4)

17,576

 

When not to sell

Anyone who invested last year or in prior years is still seeing positive gains. Besides, how much money did I lose last week? My portfolio dropped in value just like everyone else, but how much money did I lose? None. Because I did not sell any stocks. A market down turn is exactly the wrong time to sell your investments. You solidify your losses only when you sell at a loss. Our stocks are still paying us dividends, in some cases increasing dividends (due to increases we’ve already received this year). Our income producing machine (portfolio) is still doing it’s job, generating passive income for us.

 

Market drop presents buying opportunity

As I said before, if you are looking to invest a market drop is a good thing. Dropping stock prices increase the dividend yield. Take a look at how GWW’s yield has grown in just 29 days: 

Date

Stock Price

Dividend

Dividend Yield

February 2020

$301

$5.76

1.91%

March 2020

$277

$5.76

2.08%


We are overdue for a market crash

Normally stock markets go in cycles (up and down and up and down) on average every 6-7 years. We are now in the 11th straight year of going up. We are overdue for a market crash. A market crash will provide for a great opportunity to buy some quality stocks at very low prices. The problem is no one knows when the crash will happen and how long it will last. My philosophy is to invest in specific quality stocks that are undervalued (priced low) instead of buying an ETF that invests in thousands of stocks. It might make sense to buy an ETF when the stock market is down, but at it's current high-level with an ETF you are investing in thousands of overvalued stocks. I've distilled my approach into a single article that you can read here.

No one can predict the future, will this current virus problem go away in 3 months or in 3 years?

 

What's your opportunity cost?

What is the opportunity cost for not investing your money in stocks for 3 month or 3 years? Because we buy when a stock is undervalued (priced low) your margin of safety is increased. If you buy at overvalue and the market crashes your stock price will really come down hard. But if you buy at undervalue, the stock price will come down but not as much if you had bought at overvalue.

I bought TRP (TransCanada) at $13.40 and the stock is now at $69 but I will not sell it. Why? Because that stock is paying me 22.4% each year (as a result of dividend increases), I can't get 22.4% return from bonds, term-deposits, or any bank account. Plus the 22.4% is all passive income now, and the stock has been completely paid off, I invested $2479 but have received $6134 in dividends alone just from this one stock.

 

Stay focused

The focus should remain on investing in quality dividend-paying stocks when they are undervalued. Have a look at the last 90 years:

- Wall Street Crash of 1929

- Recession of 1937-38

- Flash crash of 1962

- The oil crisis in the 1970s

- Double digit interest rates in the 1980s

- Black Monday Oct 1987

- Early 90s recession (lasts 8 months)

- 9/11 in 2001

- US invades Afghanistan in 2001

- US invades Iraq in 2003

- Dot-com bubble bursting in 2000

- Financial crisis 2007 - 2008

- Flash crash 2010 (Dow drops 1,000 pts)

- 2011 crash (S&P 500 drops 21.6% May to Oct)


Even with all these terrible events, look at the increasing dividends from companies like these:


 

Some of these companies have been paying dividends since 1816.

How to invest going forward
Remain calm, do not succumb to any knee-jerk reactions, do not buy or sell in haste. I prefer to wait a bit for the dust to settle. No one knows how long this market downturn will last, and no one knows when the market will hit bottom. Wait for things to calm down a bit, keep your eyes open to quality stocks that are undervalued (priced low) and invest in small portions over a period of time.


My 12 Rules of Simply Investing provide you with a step-by-step guide on what to avoid and what to invest in for the long-term. Start building your growing stream of passive income today.


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