At my age, I've seen a few big market dislocations. When I was younger I let the mood on Wall Street drive my own emotions, getting jubilant when stocks were going up and despondent when they were falling. It ended up being a terrible plan and, in the end, a huge mistake (I often did things that, in hindsight, were rash and poorly timed). Here's how I avoid doing this today, and why you might want to follow my lead.
You are your own worst enemy
When it comes to investing, the biggest problem you are ever likely to encounter is taming your own emotions. That's not a huge insight -- in fact, Benjamin Graham, the man who helped train Warren Buffett, said as much when he first published his iconic investing book The Intelligent Investor in 1949. I wish I had taken his advice on that much sooner.
Image source: Getty Images.
The thing is, it's hard to accept that you aren't above average in every way. And when you are young, well, you often let emotions get the best of you. I certainly did, believing that I would find the hidden gem that everyone else was missing, or that I could jump in and out of stocks with more skill than others. History has proven that neither of these things is true, and they are highly unlikely to be true for most investors.
So today, my first reminder to myself during dark days is that I can't control the markets. And I try my best to ignore the daily ups and downs, which includes ignoring hyperbolic business news videos. Their job is to get you worked up so you keep watching. Now I get most of my business news via stock-specific news feeds, so I know what's going on with my own investments, and The Wall Street Journal, which keeps me up to date with the market but on a bit of a time lag.
Dividends, dividends, dividends
While I've found a way to minimize the emotional impact of fast-moving markets, the real key to my success in avoiding rash decisions is a shift from monitoring stock prices to a devotion to dividends. Dividends tend to be highly consistent over time, and you can easily find lists of companies that have incredible histories of dividend consistency, like the Dividend Kings.
I own a number of companies on that list, including Federal Realty (FRT +1.24%), Hormel (HRL +1.54%), and Procter & Gamble (PG +2.00%), among others. With stocks like this, I'm paying more attention to the quarterly dividends I collect (which I track on a spreadsheet each month) than what is happening with the stock price. That saves me the stomach upset I historically experienced when stocks I owned fell in value. As long as my dividends keep coming in at equal or higher levels, I'm happy.
NYSE: HRL
Key Data Points
But this is a totally different mindset and requires a totally different investment approach. Notably, I try to buy companies with incredible dividend histories when their dividend yields are historically high. Yield and price move in opposite directions, so I'm inherently trying to buy stocks when they look like good value investments. So when I buy them I'm generally happy with the yield I've bought into, and the stock price swings aren't as meaningful to me. It is the dividend that has to be maintained or increased to keep my emotions up.
Although Federal Realty and Procter & Gamble are both much more expensive than when I first bought them, Hormel's yield is historically high again today. In fact, I just added some more shares to my position. Medtronic (MDT +0.58%) is another stock I've recently bought more of because of its historically high yield, though its dividend streak of annual increases, at 45 years, doesn't quite earn it the Dividend King moniker.
NYSE: MDT
Key Data Points
Keep it simple
The key is that I'm not trying to time anything. I'm just buying companies with long histories of success behind them (highlighted by the dividend streak) at a point when they look relatively cheap (historically high yields). And to track my portfolio, the key factor is the dividends I collect, not the inherent ups and downs of the stock market. While it's true that I'll likely find more investment opportunities during bear markets, that, too, is a benefit of the dividend focus -- now I actually see downturns as long-term investment opportunities and not a reason to fear for my financial future.
