Historically September is a bad month for stock investing, and September 2023 was no exception.
All of the major stock indexes in the U.S. were down for the month and cap off a red-across-the-board 3rd quarter.
The S&P 500 was down 4.9%, the Dow Jones Industrial Average declined 3.8%, and the Nasdaq led the bleeding with a 5.7% downturn in the month.
Dividend investors primarily focus on the income our portfolios produce, with capital appreciation a close second.
We know that “this too shall pass.”
We know to hold steady with our portfolios.
We know that over time the markets go up.
We know that our timelines are long.
But…
It is still scary, it hurts, and it can be demoralizing.
Watching our portfolio balance go down triggers into our natural biological primitive instincts of self-preservation and initiates our “fight or flight” mindset.
Everything in our mind is saying run, save ourselves, get away. But this is actually the opposite of what history has shown us to do regarding investing.
These are the times to push back against our primitive reactions and stay to fight. Fight our instincts to run away. Fight the negativity in our minds.
History has shown that those who stick it out through downturns in the market come out ahead.
Often the best purchases we make come during downturns. But only if we can muster the confidence to buy when everyone else runs for the exits.
Downturns should not be feared, but instead embraced. You can’t get the long term upside that stock ownership provides if you don’t have risk and downturns. It is this inherent feature of stock investing that makes investing the powerful wealth building tool that it is.
Downturns are a feature, not a bug.
That still doesn’t make it easy to stomach seeing your hard earned money evaporate day after day. Here are some insights I have from being an investor for almost 25 years now that may help you push through downturns and come out the other side a stronger dividend investor.
- Focus on the income, not the swings of the market.
The market is a fickle partner. Price swings happen based on short term emotions of the collective market participants. Fear and greed are some of human’s most intense emotions. This is on full display right now. The market moved from Extreme Greed just a few months ago to Extreme Fear right now.
Does the stock price declining 5% truly reflect that all company’s businesses are suddenly 5% less profitable, 5% less likely to pay a dividend, 5% less likely to continue operating and innovating and expanding. Not likely.
Market emotions rule in the short term, company results rule in the long term.
By focusing on the income your portfolio provides, which is a more consistent and controllable aspect of investing, it allows us to not be concerned as much about the short term fluctuations in stock price. We can’t control the mood of the market, but we can control our income flow. Many of the great companies have raised their dividends this quarter, and will likely continue to raise for many years to come.
Change your mindset and what you focus on. Don’t concern yourself that your investment balance went down this month – remember, as dividend investors we are buying future income – focus instead on the cash flow our portfolio brings in. Even with this downturn, my dividends are higher than ever. I have conviction that my collection of investments will continue to raise my income year after year, decade after decade. That provides me comfort and the mindset to carry on.
- Buy strong companies – and many of them.
By focusing on strong, stable, profitable companies, who have long histories of pushing through rough market cycles, we can rest assured they will continue to perform, as a business, during any short term downturn. JNJ will continue to sell medical supplies, drugs and equipment. WMT will continue to offer low prices on a wide range of goods, WM will continue to collect and process garbage, and MSFT will still have millions of users for its products.
While we have every expectation that strong companies will continue, we should also limit our exposure to any one company by diversifying our holdings. My recommendation is to have no more than 5% of your portfolio in any company, and realistically it should be closer to 3%. This will reduce single stock risk to your portfolio. To further reduce your single stock risk, I recommend using dividend ETFs as the base of your portfolio. SCHD, DGRO, VYM, DIVO, etc will provide instant diversification and stability in your holdings.
- Think like an owner.
Just because we CAN sell a stock every day, doesn’t mean that we SHOULD. If you owned your own business you wouldn’t immediately go click the sell button if your business revenue went down for 1 month. Likewise, we aren’t going to sell our house immediately after checking the value on Zillow and saw it went down 5%.
So why do that for our ownership in great companies? Investing, and especially dividend investing, is a long term process. Do we think our business of investments will be better off 5 years from now, 20 years from now? If so, why would we give up on it after a bad month?
- Time is on our side.
While individual companies can come and go, the market is a conduit for the entire economy. An economy that is innovative, growing, pushing for new highs. It is a self-cleansing machine, getting rid of the old and weak and pushing forward the new and stronger. There has not been a single rolling 20 year period in the US stock market that the S&P 500 has lost money. The longer we invest, the better our chances of making money become. Think long term because time is on our side.
- Control your emotions, control your future.
What is the old saying, it is darkest before the dawn? It is when it feels the worst time in the market that we should be buying. Peak fear is usually peak opportunity as well. September 1987, September 2001, March 2009, April 2020, when the worst was happening, it was the best time to buy.
That is, if you had the emotional strength to carry on. When you buy with a long term focus, buy strong companies with solid dividend histories, and have the conviction that this too shall pass and the future will be brighter than the darkness we feel today, you will set up your future self to benefit from the strength you possessed today.
Conclusion
Investing through a downturn is never fun. I have been through many of them. I started investing in 1999 and have stayed invested through all the bumps, bruises, and market swings between then and now. And these swings will continue to happen, probably a couple dozen more times during my investing career, but knowing why you invest, what your goals are, and with the understanding that with obstacles come opportunities, you can push thorough and be better for it.