After all the excitement earlier in the month as stocks fell, August turned out to be about as dull as you can get.
The S&P/ASX 200 index gained a paltry 0.05% from 31st July to 29th August.
But as always, looking at stock returns from an index perspective can give you a distorted view.
That’s especially important in a market like this, with stocks seemingly going nowhere.
Of course, the reality is that there is plenty of stock movement. You only have to look at last Friday’s market to see that…
Free Reports:
Many folks will say that volatile markets are dangerous for investors.
That may be true.
But we’ll argue that go-nowhere markets are just as dangerous.
Perhaps not for the reason you think. It’s not because the market’s failure to rise means that investors won’t make money. Rather, it’s because a go-nowhere market will often make an investor think that stocks aren’t moving.
That’s when investors can lose confidence and abandon the market.
And that’s why a go-nowhere market is bad news for investors.
We keep an eye on 31 listed ASX stocks on a ‘blue-chip’ watch list.
The list contains all the blue-chip stocks you’d expect to see (such as the big miners and big banks). But it also has a bunch of other blue-chip stocks.
Remember, last month the main Aussie index gained 0.05%.
Last Friday’s trading day actually contributed more than half of the month’s gain. The index gained 0.03% on Friday.
What a boring day.
What a boring month.
Well, that’s the impression you would have if you owned a fully diversified portfolio of stocks that tracked the index. Yawn.
But what if you owned a bunch of individual stocks?
Take these three stocks from our watch list, and how they performed last Friday:
Those are good, better-than-the-index gains.
Of course, not every stock on our watch list went up on Friday…but most did.
The biggest loser out of the 31 stocks on our watch list was Wesfarmers Ltd [ASX:WES]. It fell 3.2%.
The point is, regardless of what you read in the press, some stocks are moving up. Yet, if you do read the press, they will fool you into thinking that stocks are either doing nothing, because there is no volatility, or that stocks are too volatile and therefore too dangerous!
However, now that we’re in September, you can be sure that the mainstream will fire up the ‘fear meter’ again.
We hear the same thing every year. In September, the commentators start preparing you for what they always warn is the coming October crash.
And yet, as September and October turn into November, the same commentators gear you up for the so-called Santa Claus rally.
But what are the facts about September? Is it really that bad a month to invest?
The reality is that the fixation in the mainstream with calendar months is just plain silly. In all our years as a financial advisor, not once have we made a decision to buy or sell a stock based on the day, date, week or month of the year.
If we like a stock, we’ll just recommend it.
But let’s say you do care about these things and you’ve got a bunch of cash to put in the markets today. Is it such a good idea to buy stocks now, while the mainstream is telling you that the market is so bad?
Well, let’s look at the numbers.
It’s not as bad as the mainstream would have you believe.
In fact, September is a darn good month to invest.
Now, having just said that it’s better to buy individual stocks rather than an index, we’ll use an index to highlight a key point — simply because there is more data available.
If you had invested $10,000 in the All Ordinaries on the first trading day of September 1984 and then another $10,000 on each anniversary, it would have cost you a total of $290,000.
Roll forward to today and based on the returns of the All Ordinaries, that sum would now be 155% higher at $739,177.
Or put another way, that’s an average 7.96% annual gain.
But that’s only part of the story. It doesn’t include the compounding effect of reinvested dividend income. If you take the dividends as new shares rather than cash, you’re looking at a return that could be two or three times the straight capital gain return over the long term.
For instance, the $10,000 invested in 1984 with an average annual capital gain of 7.96%, a dividend yield of 5%, and 5% annual dividend growth, would be worth $266,757 today.
That one investment would provide a dividend income of $13,337.
Of course, investing can be risky, but make a few of those investments over your investing lifetime, and you’ll end up with a nice income.
Now, that’s the index. Individual stocks will produce different returns. But if you can identify stocks that stand to outperform the market over the long term, then you can produce even better results.
But the key to it is the magic of compounding. It’s why we’ve always advised investors to place a significant portion of their stock portfolio in dividend paying stocks — preferably those that operate a dividend reinvestment scheme.
What we’ve just shown you highlights how effective it can be to invest in the stock market over the longer term. Forget the short term noise about geopolitical risks and central banks; focus on the important stuff.
If you could have made these kind of returns over the past 30 years with everything that’s gone on in the world, is it really so hard to think that you could do it over the next 30 years?
Regardless of what the mainstream says, it’s a great time to buy stocks.
Cheers,
Kris+
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