Doomsayers. I’ve been hearing from these people since I first started investing in early 2010. Guess what they were talking about back then? An impending stock market crash.
Guess what they’re talking about today? An impending stock market crash. If I listened to these people, I’d be broke. However, even a broken clock is right twice a day.
And the market could very well drop significantly at any point. So what to do? Well, I’ve got you covered. Today, I want to tell you what I’ll do if the stock market crashes. Ready? Let’s dig in.
The stock market is a crucible. A psychological test. The great Warren Buffett once summed up the stock market in a neat little definition.
Buffett has called the stock market a device for transferring money from the impatient to the patient.
I couldn’t say it better myself. If you can be patient and sit on high-quality stocks for decades, you’ll almost certainly become very wealthy. If you cannot stand to do that, you’ll likely do poorly, no matter how well the stock market itself performs. Indeed, the stock market can perform at a very high level for a very long time, yet individuals can perform extremely poorly at the same exact time. These two concepts are not mutually exclusive.
This performance gap between a market and an individual can be massive.
I’ll give you a great example of this. One of the greatest investors of all time, Peter Lynch, ran the Magellan Fund for Fidelity Investments from 1977 to 1990. He averaged an eye-boggling annual rate of return of 29% during his 13-year tenure. In order to capture those gains, all investors had to do was to buy the Fund and then sit on their hands. They simply had to be patient. Surprise, surprise. They didn’t do that.
According to Fidelity Investments, the average investor in the Magellan Fund actually lost money during Lynch’s tenure.
These investors were too busy trying to time the market, chase short-term performance, and anticipate the future. They were their own worst enemies. One of my favorite quotes about doomsayers and worrying about stock market crashes comes from Lynch himself, who said this: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
What’s my point? My point is to stop worrying about potential stock market crashes.
Successful people focus on what they can control. You can control your own actions. Indeed, all the average Magellan Fund investor had to do was to control their patience and hold their shares. Instead, people too often focus on things they can’t control, like what the Federal Reserve might do, some geopolitical event halfway across the world, interest rate movements, etc.
What can you control? You can control exactly how you’ll respond if the market does drop.
Let’s say the market drops 10% tomorrow. What are you going to do? You should know, right now, exactly what you’ll do. If you don’t know how you’d respond to something like that, or if your natural tendency is to panic, that’s a problem to fix.
If the market crashes, I can tell you precisely what I’ll do. I’ll celebrate and buy my favorite stocks on sale!
If you’re still in accumulation mode, regularly investing, and buying stocks toward a long-term goal, you should be thrilled to see lower prices on stocks. Wishing to pay more for stocks you’re going to buy anyway is like wishing to see higher prices at the grocery store. I mean, you’ll be accumulating food for the foreseeable future, just like stocks, so why would you want to pay more for the same stuff? It’s nonsensical.
I’m still in my 30s. I’m still accumulating shares in high-quality businesses. Naturally, I want to pay less.
Being upset about the stock market dropping by 5% or 10% or whatever would be like being upset to see gas prices drop by 5% or 10% or whatever. If prices on stocks are lower, that means I can buy more shares for the same money. That’s a larger percentage of a business, a greater claim on that company’s profits, and a higher stream of growing dividends for, potentially, the rest of my life. How could I not want that? All else equal, a lower stock price results in a higher yield. And a higher yield only gets you to your goal of living off of dividend income that much faster.
But what about the value of the portfolio? Doesn’t it go down if the market crashes?
Sure. But who cares? You haven’t actually lost any money here unless you pull the same move those Magellan Fund investors pulled and sell stock during a drop. If you can instead pull a Buffett and be patient, the fluctuation in your portfolio means nothing at all. It’s simply a temporary reduction in your net worth. But in everyday life, this has no impact. I don’t go down to the net worth store and buy things with my net worth. I live off of the safe, growing dividends my portfolio produces for me.
And this is where dividend growth investing shines.
As I’ve said in pretty much every video, I’m a diehard dividend growth investor. This is a long-term strategy whereby you buy and hold shares in world-class businesses that pay reliable, rising dividends. While the price of shares in those businesses fluctuate every day the market is open, the dividends they pay to their shareholders do not. They tend to flow and grow in an extremely consistent, predictable manner. The price of say Apple (AAPL) could drop by 10%, but that has nothing to do with the company’s dividend. Apple pays the same dividend, regardless of the stock price. The dividend flows directly from a company to its shareholders, bypassing the market altogether.
Stock prices crashed in 2020, but my dividend income didn’t crash at all.
Because my portfolio is chock-full of high-quality dividend growth stocks with decades of consistently growing dividends under their belts, my dividend income in 2020 barely skipped a beat – even while the stock market suffered through a historic crash. In fact, it’s the opposite. My dividend income during the summer of 2020 – during the thick of the pandemic – was actually up year-over-year.
What do you think I did during the stock market crash of 2020?
Yep. You guessed it. I bought high-quality dividend growth stocks at deep discounts. It was like walking into a store and seeing quality merchandise I love to buy marked down by 30%, 40%, 50%, 60%. How can you not be excited about that?
For example, I added to my position in Discover Financial Services (DFS) during the spring of 2020.
I picked up a small tranche of shares with a cost basis of $31.77/share. This same stock is now priced at almost $125/share. Which would you rather pay for the same exact stock – $32 or $124? Of course, you’d rather pay the lower price. You’d be silly not to.
So let the doomsayers do their broken clock thing. Focus on what you can control, be patient, and celebrate lower prices if they come.
I don’t know when the market will crash again. Nor do I really care. What I do know is that I’d be thrilled to see lower prices on my favorite high-quality dividend growth stocks. I’d have a grand time sorting through the sales and exchanging my cash for shares in world-class businesses while they’re being discounted. You may want to consider doing the same thing if the stock market does drop significantly.
— Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.We’re Putting $2,000 / Month into These Stocks
The goal? To build a reliable, growing income stream by making regular investments in high-quality dividend-paying companies. Click here to access our Income Builder Portfolio and see what we’re buying this month.