Published July 20th, 2017
This article is a guest post by Mike McNeil, author of 30 Days to Dividend Growth Investing. You can download his book for free on his blog The Dividend Guy Blog.
I guess the biggest fear of any investor is to invest a lump sum of money with very bad timing… like some people did in June 2008, right before the market crashed.
In a few weeks, I’ll be in a similar situation. Not so long ago, I decided to quit my job to build my own business. I use to have a defined pension plan and my employer will provide me with the possibility of keeping my pension as an annuity or receiving about $100K in a locked-in retirement account.
I will be able to invest and manage this money on my own and start withdrawals at the age of 55. But here comes the famous question: should I invest in an all-time market high? That’s the best move I could do!
A History Lesson From Mr. Market
The fear I refer to is real. In fact, you may have forgotten about it, but it happened 9 years ago:
Someone investing during the summer of 2008 would wake up in March 2009 with a serious headache. Note that I’ve used the total return, which include dividend payments during this period. We agree we don’t want to go down that route and as the stock market has been ever rising since then, we don’t really want to be the next fish to be caught in the fisherman’s net:
But there is something to learn from the biggest crash in market history since the Great Depression: The stock market always comes back up. What is catastrophic today will become a minor speed bump in my portfolio return a decade later. By looking at the above published graph, you can see that the “disaster” of 2008 doesn’t look so horrific over a decade of history.
What is the Worst that Could Happen?
Some say the stock market is so high it could drop by 40% like it did a decade ago. True. This is probably the worst case scenario. Therefore, imagine I had my 100K to invest during the summer of 2008 and decided to build my portfolio. If I invested in the S&P 500, it would have taken me less than 3 years to recover my investments. However, if I invested my money in dividend growers, chances are my portfolio would have shown a positive value by the end of 2010:
The worst case of investing at an all-time market high is having to wait for less than 3 years to get your money back. In my case, I need to wait 19 years before I even think of touching this money. What is three years in an investing plan? Nothing.
Nobody knows if the market is going to crash tomorrow, and nobody knows by how much it will when it does. Then, playing Nostradamus is more likely going to end in a fatal result: missing an investment opportunity and missing 3 years of growing dividend payments.
Paralysis by Analysis
Not investing today seems smart when you consider the high chance of seeing the market plunge in a few months. After all, we have been riding a non-stop bull market since 2009, it’s about time the light shuts off and the party ends, right?
The problem with this kind of thinking is determining when the right time to invest is:
● What happens if the market keeps going up in 2017 and starts strong in 2018? You wait?
● What happens if the market goes down by 10% and stagnates, you go in?
● What happens if the market goes down by 15%, goes back up by 5% and then goes back down by 10% again, is the right time to invest after that?
I heard many people brag about the fact they were 100% cash when 2008 happened, however, I would be a lot more interested in knowing when they get back into the market after that. In 2009 when things were shaky? In 2012 when Grexit was another time bomb?
If you keep analysing the situation, you will read tons of articles telling you the market is about to crash even deeper and a few articles telling you the market is going to continue booming. Each article will be written by a so-called expert and will have facts and a strong investment thesis. You can wait months, even years and still balance the pros and cons of investing today. During that time, inflation is eating out your lunch and you miss on great opportunities. Therefore, the right time to invest is always now and the worst time is always tomorrow.
It Doesn’t Mean I Should Invest Blindfolded
While time in the market is a lot more important than market timing, it doesn’t mean I should invest my new money into any kind of company thinking “the market always goes back up.”
Each bull market works a little bit like waves in the ocean. As the wave build up in the air, it brings everything to the surface; the good and the garbage. If you were to pick-up something on the top of the wave, you have to be extra cautious to not end-up with a trash bag that is usually left at the bottom of the ocean.
This is why I need a defined investing strategy to invest my 100K.
I Chose Dividend Growth Investing
I’ve been working in the financial industry since 2003 and therefore, I was front of the line when 2008 happened. I’m well aware of this investment struggle when it’s time to buy or sell holdings. Is it the right time to invest my money? Will I lose more, or make more if I keep my positions? Those are eternal questions with no answers. I decided to ignore those questions and replace them by:
● Will this company continue to grow its dividend in the future?
● How company ABC business model will resist the next recession?
● Is this company a dividend grower?
Then, I worked on an investing process answering those questions. Over the past 7 years, I have developed my own DGI process including a 7 step selection process. The idea is to follow a meticulous investing plan that will avoid making costly mistakes. These rules are also made to simplify the buy and sell trigger as doubt is one of the worst enemies of investors. When in doubt, you often suffer from paralysis by analysis. This never happens to me anymore.
Dividend growth investing has been proven a successful technique over decades. Dividend growers are known to be strong companies in their industry with both revenues and earnings increasing on a steady basis. This is the kind of company that is well armed to face a recession or a market crash and continue to pay dividends while your portfolio value suffers temporarily.