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How Not to Be Scared by the Stock Market

Stock-Markets / Stock Markets 2014 May 29, 2014 - 04:33 PM GMT

By: Investment_U

Stock-Markets

Marc Lichtenfeld writes: I sat there in stunned silence.

We were having dinner with our friends, when the husband told us he doesn't invest. "I don't trust the markets," he said. He keeps all of his savings in cash.

This isn't some fool we're talking about. He's owns a successful small business that he's operated for years. We had talked about his business for about a half hour before his shocking comments. The man knows how to make money.


He just doesn't know what to do with it.

He went on to say he just feels better knowing that his cash is liquid if he needs it. Now, maybe he thinks someday he'll have to buy a one-way ticket out of the United States with all of his money in a duffle bag, but I don't think that's the case. He, like many others, simply doesn't think the market is a place where the little guy can make money.

I can say with 100% certainty he's wrong.

Without the benefit of investing, there is no way my family would enjoy the lifestyle we have today. I was smart enough to start investing after receiving my first paycheck as an adult.

I made plenty of mistakes along the way, but having been invested in quality stocks and index funds over more than a decade has generated substantial returns.

But I kept going back to his statement that he doesn't trust the markets. Another common assertion I hear is that the market is rigged and the little guy can't win.

Sure, if you had a supercomputer and an algorithm that could reach the exchanges' servers faster than everyone else, you could probably scalp fractions of a penny millions of times a day like the high frequency traders (HFT) do and rack up millions in profits.

But you don't need to do that to be successful.

And if HFT guys beat you to the punch forcing you to pay half a penny per share more on your 200 shares that you hold for 10 years, that little bit won't make any difference.

As Good as It Gets

The stock market is the greatest wealth creator of modern times.

Where else can you own young companies that go on to do great things like Apple (Nasdaq: AAPL) or Google (Nasdaq: GOOG)? You can also put your money right along with the cash of brilliant fund managers like Seth Klarman of Baupost Group, who bought Cheniere Energy (NYSE: LNG) in the last quarter.

And you can invest in established companies with experienced management that return capital to shareholders every year like Exxon Mobil (NYSE: XOM).

In fact, if you invest the right way, you almost can't help but make money over the long term. Of course, you have to be able to handle short-term corrections and down markets, but if you know the market goes up over the long term and you don't bail when things get scary, you'll make money.

The stock market goes up roughly 7.5% per year over the long term. That includes some strong years like 2009 when the market was up 23% or some very bad years like 2008 when the market tanked 38%.

Here is the best way I know of to invest and stay in the market, even when times get rough.

Buy Perpetual Dividend Raisers. These are stocks that raise their dividends every year. If you reinvest the dividends automatically, you will compound your investment so that over the long term, you will accumulate a huge amount of shares.

The best part about this strategy is that when you reinvest the dividends, a bear market is your best friend. It's hard to imagine, but think about it.

You buy 100 shares of stock at $20. It pays a $1 dividend. The stock falls to $18. Instead of buying 5 shares ($100 in dividends divided by $20 per share), you now buy 5.55 shares ($100 dividend by $18). The next year instead of collecting $105 in dividends ($1 per share times 105 shares) you collect $105.55 ($1 per share in dividends times 105.55 shares).

That extra $0.55 may not seem like much, but over time those shares generate more dividends, which buy more shares, which generate more dividends, etc.

Look how powerful this method is.

If you bought 100 shares of stock for $20 that paid a $1 dividend that increased by 10% per year, but the stock price fell 5% per year, here's how much money you'd wind up with if you reinvested your dividends.

That's not a misprint. Your $2,000 investment in a losing stock rose to $158,455 over 20 years, a 7,822% return. You bought a stock at $20 and over 20 years the price fell to just over $7, a 65% loss. Yet because you reinvested the dividends your 100 shares have turned into 22,100 shares, each of which generates an annual dividend of $6.16 per share.

I hope my buddy sees the light.

He's got a bright daughter to put through college and a retirement to plan. Having a stash of cash in the bank, even a meaningful amount, isn't likely to get him where he wants to go, as his cash will be eroded by inflation.

Investing in Perpetual Dividend Raisers can help him ride out the bad times and beat inflation as those dividends keep increasing.

You never get ahead in life by being scared. But even if you are, you can still make money in the markets if you do it the right way.

Good investing,

Marc

Editor's Note: Marc's buddy may be wrong about the average person's chances in the stock market. But there's a real basis for his cynicism. A good example is the little-known private stock market, where returns predictably dwarf the little guy's. This market is usually available only to Washington insiders, celebrities, and the already-wealthy. But you, too, can access it... if you know how. Learn more by clicking here.

Source: http://www.investmentu.com/article/detail/37729/dividend-reinvestment-dont-be-scared-by-market

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