There are a number of common myths surrounding investing. Most serious investors have seen and heard these myths and most of us ignore one of more of them at times. These may be myths but they do seem to fly in the face of common sense.
Just the other day I said I was taking money off the table and increasing my cash holdings. The market is booming and I am reducing my exposure to the market. Why am I doing this? I fear a correction or worse -- a bear market. This is called moving to the sidelines in anticipation of a market downturn and it is a myth-driven action according to the National Bank and others.
According to the National Bank: If you're anticipating a stock market pullback, you're probably right, as declines of at least 5% occur virtually every year; corrections of 10% occur in six out of ten years and corrections of around 15% occur in four years out of ten.
Nevertheless, history shows that investors willing to stay invested through these fluctuations are well advised, as even the average return in years marked by a correction of 10% or more is positive.
Investors whose investment horizon allows for patience are probably better off accepting rather than fearing the inevitable market pullbacks.
The above is a lot like the much discredited market timing belief. Timing your stock purchases to the market highs and lows is much harder than it sounds and if you could do it you would not be rewarded with a greatly improved income.
In the example given by the National Bank, invest when the market is at its low point for the year each year for more than three decades and you might see an annual return of 9.1%. If you had ignored market timing and simply invested at the start of each month, you would have had an annual return of 8.6%. But, do you really think you could nail the low for each year steadily for some three decades or more? I assure you; you can't. You would be lucky to see an annual return of 8.6%.
At least taking some money off the table when a downturn is anticipated protects some of one's investment -- or does it? Sadly, it is difficult to time the rebounds. If you stay in, you benefit fully from the rebounds. If you are out of the market, you may miss some or all of the rebound. Miss the rebound and you may finish out of the money.
Investing in the market is not gambling. With gambling, in the long run the house always wins. With investing, in the long run the investor wins. Look at any graph of the TSX. Over a long time period, the market always goes up. Buy, hold and win.
And while biding your time, patiently holding those stocks that have briefly tanked, cash you dividends and smile. According to the National Bank, dividends account for 70% of the total stock market gains since 1980.
Hold the right stocks and the dividend will be awfully secure. The Bank of Montreal has maintained its dividend without cutting or reducing it for over 190 years. The Bank of Montreal is not alone. Enbridge has paid its dividend without cutting or reducing it for over 69 years and Fortis Inc. has not disappointed for over 49 years and the telecom Telus has racked up an impressive 20 year winning streak.
Buy, hold and enjoy the dividends.
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