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Making Wise Decisions in Tough Times

By Daniel Cohen, Certified Financial Planner | April 15, 2020

As published at

Bear Market

Investors with only a decade or less of experience in the markets had seen mostly good times until the end of February when that winning streak abruptly ended. After that, we’ve seen records set and mostly the types of records you wish you only would read about in history books. The market had its fastest slide ever to become a bear market, or 20% correction, in 20 days.  It usually takes over five months to reach that level. The market lost its first 10% in only six days which is another record.

During March we had the biggest one-day point drop in history of 2,997 points and the biggest one-day gain in history of 2,113 points. March was the worst month since 2008, the first quarter was the worst since 1987, and the volatility was extreme with the market being up or down more than 1% every day except one, which was the highest volatility ever recorded. Mixed into the month was one week of gains, the best since 1938 and a welcome relief.  Some will throw in the towel and vow to never invest again after a period like we just experienced. It would be better to learn from this time and become a better investor.

Recent History Gives Perspective

Having started as a financial planner in 1993, I have seen great times and very difficult times. From 1995 to 1999 the market gained 20% per year. From 2000 to 2003 the market had a loss of about 50%. From 2007 to 2009 the market had a loss greater than 50%. The latest decade did not have any correction of 20% or more and saw the market nearly triple in value. Through all this, an investment of $10,000 when my career began in 1993 would be worth over $90,000 at the end of March 2020 and this factors in the three bear markets we endured during this time. Anyone throwing in the towel during any of the bear markets including the recent one would not have earned the average annual gains of over 8.5% during this time by remaining invested through the ups and downs of the market.

You might ask, how do I remain calm and keep my clients focused on the long term when world events seem so uncertain and that uncertainty can at times bring extreme volatility to the markets?

At the core of client portfolios are companies that have long histories of paying dividends that are covered by their earnings and that are consistently increasing those payouts. Dividends are an important component of long-term performance, especially during difficult periods. It is comforting to be collecting those regular cash payments.

Why Dividends Matter

bull market

It’s important to study the balance sheet and income statement of a company as dividends can be discontinued at any time, but certain companies like Procter & Gamble, Johnson & Johnson, McDonalds, Coca-Cola, Home Depot, Verizon, AT&T, and Chevron have been paying dividends for at least a decade, each with increasing payouts every year. Proctor & Gamble has been paying annually increasing dividends for sixty-three years and just announced a dividend increase for 2020. Management of that company must feel confident that diapers, personal care products, cleaning supplies, and their highly coveted toilet paper will continue to be bought even though the markets and the economy are suffering a most challenging time. I agree with their approach and have been investing in their shares throughout my career. Johnson & Johnson also announced an increase in their dividend this month to continue their fifty-seven year stretch of continuously increasing their annual payout.

Certain companies have been able to survive the test of time and continually reinvent themselves to offer the products that consumers want even as tastes and times change. Companies like these were holdings of mine back in 2000, and when we went through three tough years in the market, their dividends were always welcomed as they still are now. These stocks were also held through the Great Recession of 2008 and continue to be held today.

Owning a diversified mix of companies including consistent dividend payors makes it much easier to remain invested during challenging times. In conversations with clients that are nervous during times of market stress, I often list the companies we own and that alone can be comforting.

What About Index Funds?

The past decade saw a significant increase of investors buying the indexes. Vanguard was the biggest beneficiary as significant amounts of money were added to their S&P 500 Index Fund and other index funds they manage. When you own an index fund, you own a proportionate interest in every company in that index. By investing in your own managed portfolio of individual companies that are properly diversified, you retain much greater control.

We can purposely avoid taking positions in the very cyclical industries like airlines, autos, and cruise lines that took the biggest hit during the latest market correction. Companies in these industries have a poor history of consistent dividend payments and have had periodic bankruptcies which obviously affects performance. In the worst case, shareholders’ value could be wiped out. When owning an index fund rather than a portfolio of individual companies, it is too easy to become frustrated as your position will lose exactly what the markets are losing and you can’t choose to avoid certain higher risk companies or industry sectors as they are all part of the broad market index.

Former high growth companies like Apple, Starbucks, Visa, and Microsoft were originally owned primarily because they were rapidly expanding and increasing their revenues. At some point each one started paying dividends and has consistently raised their dividend each year since. These companies are a good addition to a portfolio to provide that steady income that is growing at a rapid pace along with the earnings of the business. Further, companies like Amazon, Alphabet, formerly named Google, and Facebook, all which do not pay any dividends but probably will in the future, may be good additions to a portfolio for exposure to these industry leaders.

Apple which pays a dividend that is increased each year didn’t pay a dividend at all until eight years ago which was more than 30 years after it became a public company. Industries which have higher than average dividend yields include financial services, health care, utilities, and telecommunications and leading companies in these fields should be included in a diversified portfolio.

Experience Pays Dividends

I was a freshman at Boston University on Black Monday, the day in 1987 when the stock market dropped more than 20% which was the biggest one-day drop in history. Many of my fellow students were worried what that would mean to their careers. The drop seemed irrelevant to me at that time because I was in business school to learn skills so that I could contribute to my family’s business. Back then I had no idea that one day I would be at the center of the financial industry investing money for clients and accepting responbility for their financial future.

My career plans changed when the real estate market took a big hit in those years following Black Monday, which made the family business no longer an option for me to join.

We should learn from all of our experiences. I share with my clients the lessons I learned from my family’s successes and failures as well as lessons learned from navigating the past treacherous markets I have personally experienced. There is always a recovery after a bear market, and as long as we maintain a diversified portfolio of leaders in each industry, we have always recovered after temporary setbacks. Wise people have often repeated the saying, “This too shall pass.” Looking back on past financial storms followed by long periods of sunshine in the markets, we remain confident going forward.

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