“I’m down big on my Oxford Income Letter recommendations since January 1. I’m getting ready to bail. What should I do?”
That’s an email I received from one of my paid subscribers.
You may be surprised that I’d go public with a message like that. (Especially since I hope you’ll consider signing up for The Oxford Income Letter.) But I’ve got nothing to hide. In fact, I think it illustrates a critical investing concept: knowing your time horizon.[ad#Google Adsense 336×280-IA]If your time horizon doesn’t mesh with The Oxford Income Letter, that won’t be a good fit for either of us.
That’s why I regularly emphasize that any money needed to pay bills, rent and other living costs over the next three years should not be in the stock market.
I don’t care if that’s the only place you think you can generate the income you need.
You can’t take the risk that stocks will be down, keeping you from affording daily expenses.
As we’ve seen these past few weeks, anything can happen in the short to intermediate term.
Since the beginning of the year, the S&P 500 is down 4.9%. At its lowest level, on January 20 – probably when the subscriber decided to send me that email – the market was down 11.3%.
From the highs in July to last month’s low, the S&P fell 15%. It’s certainly understandable that investors would be antsy.
But they shouldn’t be.
If an investor isn’t planning to sell their stocks for three years or more, who cares where those stocks are trading today?
Imagine if you bought the absolute high in the market in October 2007, right before everything came crashing down. But you had a five-year time horizon. So, although it was nerve-wracking during 2008 and early 2009, you held your ground. You knew that over the long term, stocks go up.
Five years later, with dividends, your return was 2.9%. Nothing spectacular. BUT, considering we were on the verge of financial Armageddon just a few years earlier, that’s nothing to complain about either.
And remember, that’s buying the previous all-time high in 2007. If your dividends were reinvested, you made 5.4%.
What’s more, if you held on for just one more year and reinvested the dividends, your return would have been a healthy 25.8%.
The longer you go, the better the returns.
As of January 29, 2016, you’d be looking at a 52.2% return.
Honestly, the idea that someone would write to me complaining that their account was down during one of the worst starts of the year in stock market history leaves me sad. Because that person will never make money in the market.
They will always sell at the bottom and buy at the top. Their emotions are in complete control of their investment decisions – when a sound strategy and clear thinking are what’s necessary to prevail.
Some investors, like me, see a sell-off and instantly start reviewing a mental list of stocks they’re interested in. They research to see if the fundamentals have deteriorated… or if the only thing that has changed is the stock price.
In other words, they dig to see where the bargains are.
Others are simply content to let time work its magic. They know they’ve invested in great companies with strong dividend yields. They’ll collect their dividends, secure in the knowledge that even if they’re in a bear market, their stocks will very likely be higher in five years.
If you’re reinvesting dividends, you should be salivating over the prospect of automatically buying shares at a lower price than they were at a month ago. Those shares will, in turn, generate more income for you in the future.
Of course, if you’re scared by what’s been happening in the markets, that’s natural. No one likes to see their stocks go down. But if you don’t need the money that’s invested in those stocks for at least five years, do yourself a favor and turn off the news. Do something fun instead.
Five years from now, you won’t remember this recent slide.
Just do me a favor…
Write to me then and tell me how much money you’ve made since January 2016.
Source: Investment U