Investing Psychology – Accumulating Assets
I would guess that 99.9% of investors cheer a stock market rally. After all, we’re getting wealthier! Is this really the best situation? What if you’re 25 years old and are planning to hold stocks for 40 years? I would make the argument that you want stocks to go lower. Why? Because you’re in an accumulation phase.
No matter if you’re a 401(k) investor or an individual investor, if you’re looking at long term investing, there are two phases. Accumulation and Selling. During the accumulation phase, you are adding assets, buying stocks and building your portfolio. Do you want to add assets at cheap prices or high prices? Of course, cheap prices. During the selling phase is when you want high prices because you’re exchanging your assets for cash.
If you think about the ideal scenario for your stocks (looking at this from a very simple perspective), you should want the stock market to crash, prices to stay low until right about the time when you’re going to start selling off your assets. Right before you begin selling is when you should want the market to spike higher and stay higher until you’re done selling your stocks. If you put this in place of a typical retirement scenario, you should want stocks to be severely depressed until you retire at an approximate age of 65-ish, then you want stocks to scream higher just in time for you to unload them. Of course, this won’t happen, but it should tell you something.
So, why are you rooting for stocks to go higher when you have a few thousand bucks invested? Don’t you realize that it gives you less for your money moving forward for years to come? It’s akin to if you’re trying to win an eBay auction and you’re cheering on the competitive bidding. Go Go Go! Higher! Higher! It’s nonsense and most people do the same with their portfolios.
Of course, the reason behind it is because we are making money if our positions are going higher, but its short sighted. Let’s turn to dividend stocks. For simplicity sake, let’s say there’s a $100 stock with a 5% yield (pays $5 per share per year). If we loved the company and wanted to continue to accumulate shares of it over time, do you want the price to go higher? Let’s look at two examples.
Example 1: The stock goes to $150 a share. Every share you buy still earns a $5 dividend, but since the price is at $150, your yield is now 3.33%. That money you commit at 3.33% stays at that rate of return unless there is a change in dividend.
Example 2: The stock drops to $50 a share. You’re furious because you’ve lost money. But you realize that if you buy these shares at $50, you will still earn a $5 dividend which now is a 10% yield! Assuming the fundamentals of the company haven’t changed, this is ideal. You can deploy a significant amount of money and lock in 10% for the long haul. A beautiful scenario.
Do you see the difference? Young investors, unless you’re doing trading, most of you are focused on long term results. As such, you are in your accumulation phase and you want to accumulate stocks at low prices, not high prices. It’s time to shift your attitude.
Now, of course there are ugly economic consequences that typically are present along with a terrible stock market, so you might be at risk of losing your job or having other negative effects from a bad economy. But, you get the point.
We want to accumulate assets at low prices. If the stock market corrects, so what? Now I can buy companies I like even cheaper. If the stock market crashes, there really isn’t much you can do about it. Buy even more good stocks and hope you don’t lose your job.
From now on, think about long term investing within the frame of two phases: accumulation and selling. If you’re in accumulation phase, you may want to reconsider you’re reaction when the Dow jumps a few hundred points (or drops a few hundred points).
Some stocks I’m looking to accumulate and therefore hoping for the price to drop SIGNIFICANTLY:
- Philip Morris International Inc. (PM) – ideal buy range under $35 / share
- Wal-Mart Stores Inc. (WMT) – ideal buy range under $40 / share
- General Mills, Inc. (GIS) – ideal buy range under $50 / share
- Sysco Corporation (SYY) – ideal buy range under $20 / share
- McDonald’s Corporation (MCD) – ideal buy range under $45 / share
I recommend making a list similar to this, then when the stock market crashes again, you won’t be freaked out. Instead, you’ll look to see if any of your targeted companies are now in the ideal buy range. If so, pull the trigger!