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Think Differently: How to Confront New Investor Challenges

How To Deal With Wall Street’s Silly Season

Finding your center, while the sales pitches are flying

It happens during every financial crisis, regardless of what caused it. Financial pros of all types are heard to say things like this:

“Buy stocks with high dividends, because even when the price goes down, you still get your dividend”

“Buy stocks now, because they are “on sale” versus just a few weeks ago”

“Rebalance your portfolio”

“Stay diversified”

“Ignore the volatility, be a long-term investor”

There are 2 things that anger me about constantly hearing this list of tired, old adages that appear at every moment of madness in markets. First, many of the folks delivering the advice are not fiduciaries. They are not held to the standard of putting client objectives before everything else.

Now, even if they are fiduciaries, much of what is said in mass-media channels is with good intentions. But there is a disconnect if the oversimplified advice is interpreted by the investor as something more than it is: one person’s opinion. That is true for what I write here as well.

The key is for you to avoid falling into the trap of personalizing information that cannot possibly be personalized. You risk ending up with your head filled with financial industry buzzwords, many of which are lacking in validity. Or, at the very least, they require a serious application to your own, personal situation.

I will address each of the 5 quotes above, individually.

You can’t “make it up in volume”

There was an old line about a company that produced its goods at a loss. The boss responded by saying that it was OK, because they will make it up in volume. I will let that misguided logic settle in for a moment.

I love dividend stock investing. There is nothing like looking at yield on your stock portfolio, and saying to yourself, “there’s my retirement income.” However, there are limits to this. And your patience will be tested if this is all you invest in.

The above chart shows this quite clearly, based on what happened during the Financial Crisis. This prominent dividend stock index peaked in May of 2007, several months before the S&P 500 and other “headline” indexes caved in. This is exactly what happened this time around as well.

As you can see, despite getting paid a nice dividend that averaged close to 4% a year during this time (it ranged from about 3-7%), this index did not regain its May, 2007 peak until early 2013! Can you bide your time, collecting dividends, while waiting nearly 6 years just to earn a dime? And, do you want to pay a professional to do that? Perhaps it is best to separate the benefits of dividend investing from the horrors of stock bear markets.

This also speaks to the issue of “buying on sale” when the bear market just started. Sure, we don’t know how long this one will last. But more important than that is to have a guiding light, an investment process that you have determined can be used to deliver on what you truly want out your investment portfolio. Investing is best thought of as using the stock market as a tool to get what you want, rather than it being the thing you rely on unconditionally.

Stocks and bonds don’t always pick up for each other

The chart above shows us why these are not normal times, and why the eventual recovery from this stock market decline is different from the others we have seen. To see why, we have to go back to the 1970s (spare me the bell-bottoms, please). The stock market was flat for 10 years. OK, at least bonds were there to rescue us, right?

Wrong. Bonds, depicted here by the 5-year U.S. Treasury rate, endured a decade of steadily rising rates. As you see, they went from 6% to 10% during the 1970s. Today, the 5-year rate is where all rates are: near zero. However, recent events are very likely to bring a return of inflation. Perhaps not right away, but over the next decade.

This all means that if the economy and stock market stagnate, the bond market won’t be there to save it. That’s what it did in every stock market crisis since 1980. But rates are not falling much anymore. That game is over.

Do not get hooked by investment ideas that worked in the past, unless they clearly have a path to work the same way in the future. With so much of Wall Street’s sales pitch to investors today, that does not appear to be the case at all. It is time to think differently: flexible, adaptive investing that incorporates hedging and tactical management is a “higher percentage shot” to confront these new investor challenges.

Related: To Beat Bear Markets, Invest Differently