Last week, I shared my latest dividend income update. I used to be highly against tracking down my dividend income because I’m more interested in my total return than anything else. However, I thought it would be a great idea to show investors that you can invest at the “top” of a bull market and build a dividend growth portfolio. I want to show that the “top of the market” is always relative. Frankly, it doesn’t really matter what time period you invest your money.
I received an interesting comment from a Seeking Alpha reader. He mentioned that he was a bit afraid for me since the account in question was my retirement plan. He was nervous that the market would eat-up a good chunk of my money during the next market crash. This is especially true because I invest 100% of my money in stocks. I’ve been following this strategy since the age of 23 (I’m 36 now). In fact, I’ll keep this strategy for the next 50 years. In other words, I’ll keep my 100% equity portfolio until I die.
When I think about it there are at least 3 very good reasons to hold off on investing in the market now:
- Tariffs will push inflation higher and reduce consumer buying power.
- Rising interest rates will put additional pressure on consumer (think of the automotive industry for example).
- Government debts haven’t been under control since the last financial crisis.
Still, I maintain my 100% equity portfolio approach as the storm is obviously approaching. Here’s why.
#1 A Crash… 3 years later
The very first reason why I invest all of my money on the stock market is that crashes aren’t that bad. When you look at past market crashes (2008, 1999, 1987, etc), most of them fully recuperate within 18 to 24 months. But let’s get very pessimistic here and let’s focus solely on 2008.
It took about 3 years for the S&P 500 to fully recuperate (total return includes dividend) from the worst yet crash in market history. Considering I have almost 50 years to invest in the market, I can definitely spend 6% of this time waiting for the market to get back on track. Also, keep in mind that no matter which index you track you can build a stronger portfolio than the market. For example, while the S&P 500 dropped by 50% from its highest point in 2008, my portfolio never hit worst than -27%.
By reading this recent article of Market Watch, you will understand that you can build a better diversification than the current S&P 500 composition where the top 5 companies worth more than the bottom 282 in term of market cap:
As you can see, the S&P 500 is now highly dependent on tech stocks. This means that if you build a more diversified portfolio, chances are you’ll do better than them if the tech stocks drop at one point.
#2 I’m going to make more money
Interestingly enough, most investors will agree that investing is all about playing the long game. However, there are legions to talk about the “timing” of investment. If you are investing for the next 50 years, why would you bother focusing on where you are at right now? Okay, you are 65 and you are in for “only” 15 to 25 years. So… chances are you are going to ride two more bull markets… and two bears!
I don’t know if or when the market is going to crash. All I know is that my portfolio will be worth a lot more 10 years from now if I continue to be fully invested. The stock market has proven “market timing strategies” wrong many times in the past and this will continue. You don’t believe me? Look at what the market looked like over the past 25 years. Even the 2008 market crash looks like a small speed-bump now.
#3 Cash is King
It’s obvious to everybody and sounds too simplistic; but cash is king. As long as I hold dividend growth paying stocks that share their profits with me, I’ll be making money over the long run. Real dividend growth companies continue to not only pay dividend during market downturns, but they keep increasing it. When you look at the 2008 crisis with a different perspective, you don’t see what went wrong. Here’s how some of my holdings reacted throughout the largest market storm of history:
How can you go wrong when you get more and more cash in your account as dividends grow? Are you ready to miss a 20-60% dividend growth plus potential capital appreciation just because “the end is near?” I’m pretty sure I read that the end was near last year, the year before, and 4 years before. This seems like a lot of dividend payments missed.
Final Thought – Total Return Will Always Win
At the time of writing this article, my pension accounts showed 21% (CAD) and 27% (USD) total investing return since I started in September 2017. With a total value of roughly $135K, I could lose 20% of my portfolio tomorrow morning and I would still be at the same place I started a year ago ($108K). I’m rapidly protecting my portfolio from the next crash. Thinking the market is going to tumble by 50% once again is looking for the apocalypse. I’m not saying it’s not going to happen, but it is unlikely (try to find how many times the market crashed by 50% over the past 100 years and you’ll see that it doesn’t happen very often).
Each month, my portfolio grows through both dividend payment and capital appreciation. At one point, I’ll see my portfolio value going down during the next market crash. All I will have to do then is to remember how quickly my portfolio grew when I started investing. A couple years later, the same portfolio will go down the same growth path and I’ll still be showing strong total return. In the meantime, I’ll just use dividends I receive to buy more shares! I don’t see how another strategy including keeping lots of cash aside could bring better return in the next 25-50 years. Do you?