If things can go wrong, they will, so could this be the beginning of the end?
A few Bay Area tech stocks recently had double-digit declines in value in just a few days of trading, and those investors who are still sitting on the sidelines in cash may just have what they've been waiting for since August 2012 -- an actual decline of 10 percent or more in overall stock market values. Coming up soon may be an opportune time for those folks to take the plunge.
The rest of us who weathered the storm have experienced a sustained 19-month market rise uninterrupted by the meaningful dip that normally occurs at least once every 12 months. But we should begin preparing psychologically. The inevitable, when it happens, should not be a shock that prompts us to do something rash. Just as an exercise, it is wise to assume that money in stocks totals only 80 percent of the actual current balance on your statements.
A few weeks ago, I had pointed out that the market over the past 39 years had gained more than 20 percent for 17 of those years and had lost more than 20 percent in just 2 years -- a confidence-inspiring record. A reader was quick to point out that I had "cherry-picked" my years and that if I had chosen a starting point of 1973 it would have included the disaster of 1973 and early 1974 when the market lost 52 percent. Adding insult to injury, inflation during the two years of 1974 and 1975 reduced the value of the dollar by 20 percent. It's a wonder that anyone had any money after that. And furthermore, it could happen again.
This is scary stuff. However, the dividend yield as stocks plummeted in 1973 suddenly became a very large percentage return. Dividends, as a general rule, remain constant on a per-share basis, so they create what becomes a floor supporting the underlying value of the shares. At some point back then, I personally recall marveling when the dividends from California's utility companies or the so-called Dogs of the Dow (10 highest-yielding Dow Jones stocks) represented a 10 percent return on investment for the few months that the shares were selling at their lowest values. More recently, in March 2009, the average yield for the entire Dow Jones industrials touched 5 percent. Not a bad return compared to zero in money markets.
These circumstances offer the supreme test of our ability to walk on the sunny side of the street. Peering into a glass that's suddenly half full, we should forget about the half that became empty and just marvel at how much our dividends amount to as a percentage return on our albeit reduced capital.
Investors often forget about reinvested dividends and what a great deal they represent when markets have plummeted. Mutual funds reinvest dividends automatically, but investors owning individual shares need to remember to take advantage of Dividend Reinvestment Programs known as DRIPs. Otherwise, without the automatic pilot of reinvestment, the typical treatment of dividends is to let them be swept into a money market fund where they languish instead of being reinvested in those stocks at rock-bottom prices. Dividends, if reinvested, represent an average of about one-third of the total average annual return of the stock market over time.
Dividends as described above may continue to look good for quite some time. Right now, we have $10 trillion sitting in savings accounts and money market funds in this country and $1.4 trillion more on corporate balance sheets of public companies. That figure is double the amount companies normally hold.
Also, the number is for public companies only. Small businesses and non-public companies are thought to boost that total to about $3 trillion. This money, happily sitting in cash earning nothing, and losing 2 percent a year to inflation is a major reason why interest rates show no signs of increasing for awhile. So dividend-producing stocks, or the large-cap value and dividend-growth mutual funds that invest in them, may be our best hope. If we have to endure the long-overdue downdraft in capital value just around the corner it would be a cheap price to pay -- especially since it has always proven to be temporary.
Stephen Butler is the author of "Roadmap to Retirement Security" and can be reached at 925 956 0505 #228 or firstname.lastname@example.org