How To protect Your Dividend Growth Portfolio from the Pending Market Crash
Ever since I first entered the investment industry circa 1970, I have been confronted with a constant and persistent admonition about the next pending market crash. In those early days I contributed much of the negativity toward stocks to a lingering overhang from the Great Depression. Many of the people I was talking with had been literally traumatized by stern warnings from their parents or grandparents about the risk of investing in the stock market. They were told that stocks were too risky for prudent people to invest in and serious money should never be invested there.
Fast forward to today, and once again I am receiving many questions from investors regarding what they should do to protect their portfolios (their money) from the pending and some even say imminent market crash. Many investors, especially those in retirement, are asking if they should go to cash with either a portion or all their money. This is usually followed with a statement suggesting that they no longer have the time to wait several years to get their money back.
With that said, logical thinking investors certainly have some rational justification to worry about the possibility of a looming market crash. After all, we are now in what is surely the late stages of one of the longest running bull markets in history. Therefore, common sense and history tell us that all bull markets end with a bear market – and vice versa. As a result, it can only be a matter of time before this bull market comes to an end. Consequently, many investors feel the need to take action to protect themselves. However, I personally agree with legendary investor Warren Buffett when he said: “inactivity strikes us as intelligent behavior.”
Not All Stock Price Drops Are the Same
The beauty of dividend growth investing is that when done correctly you don’t have to worry about bear markets or market crashes. There are several reasons for this. First, bear markets tend to be short-lived whereas bull markets tend to last a lot longer. Consequently, if you’re a long-term focused dividend growth stock investor and your portfolio is positioned properly, you can easily weather the storm. Dividends are paid on the number of shares you own and not affected by the price volatility of those shares. Therefore, even in a bear market when prices are dropping, your dividend income can still be rising.
Additionally, not all stock price drops are the same. This is precisely why I believe it is extremely important that investors focus on the value of what they own more than they do on the day-to-day machinations of price volatility. However, I also believe, and even recognize, that very few investors can ignore volatile stock price movements. When the price of a stock that they own is rising or falling, especially when the swings are large and/or violent, it is very difficult for people to maintain a steady head and hand. Instead, emotions take over reason which often cause otherwise rational investors to make irrational decisions.
Furthermore, and more to the point of this article, not all stock price drops are the same. I intend to illustrate later in the video with several examples that there is a significant difference between the devastation from the price drop of an overvalued stock versus the more benign price drop from a fairly valued – or better yet – undervalued stock. With the former, the recovery can be unacceptably long and in rare cases it might never occur. With inexpensive stocks, the recovery will usually occur much sooner, and if fundamentals remain intact, recovery is inevitable.