The Markets Tanked this Week, Why and What does It Mean?
“Buy and hold, and the market will surely come back,” thus goes saying, but this proverb is not actually true anymore and may not be the case as time would pass if one looks at how market has tanked recently.
This week, the market hit one of its biggest setbacks and for those people who invested in stocks; it is going to be a lousy feeling indeed. Most investors are in it for a very long spell and day after day and week after week market drops, as this does not really mean much financially.
This type of setback has meaning if you are using your stock values for credit purposes. However, for the average investors it has no real effect and those investors who often add to their investments are avail with the opportunity of buying at lower prices.
SO WHY THE NOISE WHEN THE VALUES DROP?
A very healthy approach to stock market is that, it should be considered as balanced investment plan as a way to provide long-term financial security for an individual. So, if there are changes in the market, perhaps weeks to weeks, months to months or even annually, it would have no effect.
One of the methods of growth in stock values is increment in the stock values but these values are not something you sell off. This may be likened to a house, when a comparable house is sold off at a very high price, you might of course think you are richer. But, does it really matter?
The truth of the matter is that, it does not matter at all because it is a house you are residing and that makes it to be a sunk cost. If markets are down when you sell it off, you will also have the opportunity of buying another at a much reduced price too.
The only time when these values when these values are meaningful in this case is when you passed away and the family sells it off but how would you care?
Stocks also have a second way of rendering growth and that as to do with the payment of dividends. Irrespective of the stock values, dividends do not decrease except for super-severe drops.
It may happen that the yields change, but the actual amount of dividends do not decline. They are always on the increase. For good twenty years from 1994 to 2013, the dividends paid by stocks in the Dow Jones Industrial Average appreciated from $105.66 to $360.09 and it was in the year 2009 when a 14% drop was experienced ($316.40 to $277.38) during this period. These dividends later increased in the year 2010 to $286.88 and were consequently surpassed with year 2011’s dividends increment.
This simply tells you not to be bothered about these momentary drops or perhaps extended drops in the stock values because it is the dividends you are spending or reinvesting. So if you reinvest, it means that you are purchasing stocks at a sale price.
You should not be overly concerned about the falling values in the markets because as long as the dividends are being paid, you are as good as safe and there should not be any reason to expect the other side of the story. However, if you buy stocks that do not pay dividends, then that is a very big reason to worry about and the aforementioned points do not apply to you.
Finally, momentary decrease should not be a problem to your plans because with time (7 to 10 years), your balanced stock portfolios should have increased in value and such steady flow of dividends will certainly provide cash-flow to reinvest or spend.