Peter Hodson: Sometimes, it makes a lot of sense to sit back and look at the big picture

With investors continuing to fret about how the market has to correct one day, and with war narrowly being avoided this week, we thought we would calm investors down a bit with some interesting market trivia that you may or may not know about. Sometimes, it makes a lot of sense to sit back and look at the big picture.
Volatility is surprisingly common
According to the Motley Fool investor service, “U.S. stocks rose 6,150 times from 1928 to 2019, but lost at least 20 per cent of their value 21 separate times. A 20 per cent decline is considered a bear market, but based on this data they are surprisingly common.” Every investor always worries about a ‘crash’ in the market, but historically, it is a fairly common occurrence. Yet the market grinds higher over time. Maybe you should be a little less worried, assuming you have a good time frame in mind for your investments.
Dont miss the markets big days (which almost always follow huge declines)
J.P. Morgan Asset Management’s 2019 Retirement Guide shows how significant time in the market is on a portfolio: “Looking back over the 20-year period from Jan. 1, 1999, to Dec. 31, 2018, if you missed only the top 10 best days in the stock market in that period, your overall return was cut in half.” That’s a huge difference for missing only 10 days over two entire decades! What’s more interesting is that, over a 20-year period, if you missed only the 20 best market days, your portfolio’s annualized performance actually goes below zero. Think about this: In more than 7,300 calendar days, if you are out of market for only 20 of the best days, you lose money. The point here: don’t even bother trying to time the market. The odds are so stacked against you.
Successful investors always have to fight the urge to sell
We have discussed this before, but if you sell a stock too early you lose the magic of compounding. Selling a stock because it is up means selling a winner (that others also think is good), likely paying taxes, having the ‘reinvestment’ problem, and missing out on more gains. Compounding is a wonderful thing in the market, and selling early essentially robs you of this power. In his book “100 to 1 in the Stock Market,” Thomas Phelps advised: “Never forget that people whose self-interest is diametrically opposed to your own are trying to persuade you to act every day.” Keep this in mind the next time a media talking head, analyst, doom-sayer or target price tempts you to sell a winner.
Markets almost never do what you expect anyway
This a good mantra to repeat if you find yourself constantly worried about a crash. If investors are worried, prices likely already reflect the worry. Markets are great at making your expectations fail. This week was a glaring example. Monday night, everyone was concerned about the Middle East. Futures plunged. Gold soared. Oil rallied. It did indeed look like our decades-long stock market party was over. But then, the exact opposite occurred. Investors re-examined Middle East risk, Trump made some soothing comments, and the market went way up. More record highs were set this week, just when most investors feared the worst. So, why bother forecasting at all?
Most investors like dividends and for good reason
Investors, it seems always seem more concerned with the price of their stocks. Did it go up? Did it make money? But many forget the power of dividends. According to the CFA Institute, “the contribution of dividends to total return for stocks is formidable. For example, the total compound annual return for the S&P 500 Index with dividends reinvested from the beginning of 1926 to the end of 2015 was 10.0 per cent, as compared with 5.8 per cent on the basis of price alone.” Essentially, with dividends included, your return on investments in this period is 72 per cent greater than it would be without dividends. “Similarly,” the CFA Institute goes on, “from 1950 to 2015 the Nikkei 225 Index returned 8.3 per cent compounded annually based on price, but 11.5 per cent with dividends reinvested.” In addition to adding substantially to investment performance, dividends also may provide important information about future company performance and investment returns. Essentially, a dividend is a sign from a company that business, at least for now, is good.
Peter Hodson, CFA, is Founder and Head of Research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (https://www.5iresearch.ca).