Recovering from a Market Drop

We all remember that time… the 2008 and 2009 market drop.  What a scary time that was for investors and even advisors, nationwide.  Now a few years later, we are hearing mutual fund investors ask, ”Have I recovered from those drops?”  Well here are some things we are seeing as we review client accounts.

Many investors are near a complete recovery, if the following happened:

  • Investors stayed in the market and did not try to “time out”
  • Investors maintained their investment allocation in equities at the same level of risk.  For example, a 75% stock investor prior to the drop stayed invested in practically the same equity allocation throughout this time.  Yes, changes could be made, but overall equity allocations remained about the same (No reduction in risk level, such as moving from Moderate to Conservative)
  • Investors did not redeem any sizeable amounts from their investments.  It was very important to maintain at least the same amount of shares as prices recovered.  In fact, as dividends and capital gains were paid out, investors who reinvested these amounts actually accumulated additional shares which proved to be very helpful in regaining lost ground as share prices recovered

We have also seen added benefits for investors who continued to invest (buy additional shares) during any significant market drops.  This is typically done best through “periodic investment plans” or automatic bank drafts, which takes advantage of an investment strategy called “dollar-cost-averaging”.

We hope this helps as you consider your situation.  Yes, some of the suggestions that advisors gave to their clients back during that ugly drop are proving true as time goes on, especially if investors stick to their game plan.

Understanding Dividends

On the heels of Apple announcing they plan to start paying dividends, I hope you find this information helpful and enlightening to your situation.

Most people understand “interest” from savings accounts and CD’s. But few truly understand dividends, how they work, and the benefits long-term. So let’s try to explain.

Simply speaking dividends are payments from corporations to their shareholders (investors of the company). Prior to each dividend, the board of directors declares the amount to be paid to shareholders. Dividends are usually paid quarterly and can be distributed in cash or reinvested to accumulate additional shares. Today you may find companies or stock mutual funds that pay reasonable dividends in the range of 2% to 4% each year.

Many investors prefer stocks or mutual funds that pay reasonable and predictable dividends. These dividends can supply a stream of income compensating the investor with some form of return, while they wait for a potential longer-term overall return.

Stocks that pay dividends can generally be less volatile than companies that pay no dividends. One reason for this is that the investor is compensated for their investment risks each quarter, through the dividend, rather than waiting long-term to receive any potential benefits of growth. Keep in mind this is a general principle and is not always the case for all stocks and mutual funds. Also, savings accounts and CD’s are typically guaranteed (FDIC insured) and stocks are not. This means that the investor can see fluctuations in the value of their stocks or mutual funds. Remember, past performance doesn’t guarantee future investment returns. That said, also remember that dividends can provide some benefit in the meantime while investors wait for longer-term potential growth.