Fundamentals for Long-term Investing
It’s been a rough couple of weeks as the U.S. and the world face the challenges brought forth by the COVID-19 virus. We’ve been receiving calls from people wanting to move to cash and others looking to invest more. Some just want reassurance that the world isn’t going to end.
So, we thought this would be a great time to revisit some of the fundamental investment principles vital to the long-term success of a retirement savings plan. If you’re in it for the long-haul, think of this as weathering a storm. Continue to be forward-looking and stick to your course. Remember, all storms shall pass; it's how you weather them that counts.
Shares, Shares, Shares!
When you add money to your retirement plan you are buying shares of companies at the current market price. Let’s look at an example. A year ago, if you invested $10,000 in ABC stock, costing $400/share, you were able to purchase about 25 shares. But if today you invested the same $10,000 in ABC stock but the cost dropped to $105/share, you’d have 94 shares. When the market dips it may be emotionally trying, but it’s best to keep buying shares and take advantage of the fact that your same investment is buying more shares at reduced prices. As those shares recover in price, your account will benefit significantly. So, should you stop your retirement plan contribution and wait for things to get “better” – absolutely not; it’s usually too late at that point to take advantage of low prices.
Buy low, sell high, as the adage goes.
Investing is for the long-term and we do not see COVID-19 having significant, lasting ramifications on businesses. This is an opportunity to buy things on sale. One of the advantages of systematically investing within your 401(k) is ‘Dollar Cost Averaging’. Put simply, as you’re making contributions you are adding to your investments on the up days as well as the down days. Overtime, you’ll purchase more shares at a lower average price by continuing to make your retirement plan contributions. One of the best investment quotes from Warren Buffet states to, “Be fearful when others are greedy and greedy when others are fearful.”
So, when does the price of your stocks ultimately matter? When you sell them! Remember that your online portal or quarterly statement show the value of your account if you sold your shares and moved to cash that day. If you’re not going to sell anything, then that value doesn’t really matter day to day; you haven’t actually “lost” anything since you still have your shares. We’d like to see values only go up, but that’s not how investing works, hence why we emphasize the long-run.
Paid to wait.
Investing in stocks is similar to owning an investment property. You collect rent from your stocks in the form of dividends. The average dividend yield of the S&P 500 is about 2%. Most bank savings accounts yield between 0.03-0.05%, and if you loan money to the government for 10 years, they’ll pay you 0.76%. So even if stocks have zero growth over the next 10 years, you’d have made more money holding them versus sitting in safer places.
One of the many benefits of diversification is that, over time, your investments will be less volatile and less risky than picking and choosing individual stocks. The investment options available to you to in your retirement plans are generally cost-effective to own and provide adequate market exposure – you have quality stuff to choose from! Owning a variety of companies and regions will help increase long-term performance with less overall risk.
Keeping things in perspective.
While you’re working, accumulating money for retirement should be one of your financial priorities – your future self will thank you. Remembering that there’s nothing fundamentally wrong with the economy will help you filter out the short-term noise. There will be economic ramifications from the pandemic, but we believe they will be short-lived and will be followed by a rapid market recovery. We don’t know when this recovery will begin; it could be in a matter of weeks or several months, but we do know that you don’t want to miss it.
As events continue to unfold, use these big-picture principles as a guide when making decisions regarding your financial future! These concepts have helped people build wealth through prior recessions, and we’re confident they’ll continue to work as you invest over your lifetime. These are the same guiding principles we follow at our firm; we continue to contribute to our 401(k)s and IRAs, knowing this isn’t the end but an opportunity. Consider it a “spring deal” or a “winter clearance sale” where you can get quality merchandise for discounted prices.
~The KWB Wealth Team