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When to Panic and Stop Investing in Stocks

Over the last several weeks I’ve been mulling over exactly how low the market would have to go before I became uncomfortable buying stocks.  The more I thought about it, the more sure I became that there’s no point at which I’d stop buying stocks.

If the market dropped to 1/4 its current price (yeah, that’d make an 85% one-year decline), I’d still be buying stocks. In fact, I’d still be buying them at that price even if I knew they had no prospects for appreciating in value.

Why?

Dividend Yield.

As I write this, the dividend yield on a share of an S&P 500 index fund is approximately 3%. (For reference, dividend yield is calculated as dividends paid per share divided by the current price per share.) As the price of our stock market declines, the dividend yield goes up. That’s just how the math works.

And that is why I plan to continue buying equities regardless of how low the market goes. For example, if the market really did fall to 1/4 of it’s current price, the dividend yield would be greater than 12%. That’s absurdly high. High enough that it would provide an excellent return even without any price appreciation. Of course though…

None of this will happen

…precisely because of the dividend yield. As dividend yields rise (due to falling share prices), shares begin to look more and more attractive (and not just to crazy equity zealots like me, but to mutual fund managers as well).

This is a part of the reason that bear markets eventually bottom out and begin to turn upward. In effect, there’s somewhat of a floor below which stock prices tend not to fall.

So again, we come to the conclusion that the the only scenario in which stocks would not be an excellent long-term investment is one in which corporate earnings (and thus dividend payments) decline precipitously from where they are now. Call me crazy, but I just don’t see that happening (at least, not in the magnitude that would be required in order to make stocks a poor long-term investment).

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Comments

  1. PennySeeds.com says:

    My position exactly. The lower a stock goes the more shares I get for my money.

    I’m shopping for dividend payments right now. : )

    I currently only invest in individual stocks, but I’m wanting to get something into some type of fund. Not sure which way I want to go with that yet though.

  2. Hi PennySeeds.

    Thanks for stopping by and commenting. 🙂

    I’m sure with a little bit of research, you’ll be able to find fund that fits your needs. (Or if you use a broker/financial advisor, I’m sure they have one they can recommend.)

    Cheers,
    Mike

  3. gustongroves says:

    I believe this is the right time to invest in the stock market as market is trading down and so, blue chip companies stocks are also trading low. We can’t expect market to be in the same position; it would definitely make a way to bullish.

  4. Chase Saunders says:

    This seems like magical thinking to me… as though dividends will remain high through some other natural law, even when all the economic indicators are screaming “we overestimated”.

    During the Great Depression dividends fell by 70% as the financial markets declined.

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