Thursday, April 5, 2012
I’m not a huge fan of the stock market, but I’ve learned to look at certain aspects of stocks and stock funds in a more positive light. I don’t actively invest in the stock market, but I have an IRA account that I rolled over from my previous employer’s 401(k) before I became self-employed. Since I don’t particularly enjoy the feeling of my money being at risk, I have pooled the various funds in my IRA into one fairly evenly distributed equity/bond income fund, which means I have dividends paid out (and reinvested since I’m not yet of retirement age) each month.
While this fund rides the hills and valleys that are bound to accompany any stock market, my reinvested dividends provide a silver lining of sorts when it comes to those down years that many of us with money in the stock market would prefer to forget.
Breaking Even isn’t Always a Bad Thing
I don’t really mind breaking even when it comes to stocks. Breaking even means I likely haven’t lost anything, except maybe some sleep or a few bucks to inflation while my money’s been asleep at the wheel. But otherwise, breaking even isn’t necessarily a bad thing. It might seem like between stock prices falling and dividends being paid out, I’m just treading water, but I could actually be gaining in the process, even though it doesn’t appear to be that way upon first inspection.
Dollar Cost Averaging
Dollar cost averaging can almost turn a down stock market into a good thing. Having my monthly dividends paid out in shares at a lower price, means that I can buy more shares. And the more shares I have when prices go back up, the more in dollars I’ll have in my account. Therefore, by regularly receiving shares over a long period of time at a variety of prices that are high, low and somewhere in between, I can get a pretty good average of share prices over the course of time and hopefully even out some of those bigger loss years.
My Long-term Approach
With this being the case, I tend to take a long-term approach to my stock/bond based retirement plan. In the near-term, I actually like that fund shares prices might be low. Since I’m continually gaining shares, I hope that over time these prices will eventually rise. Even if they don’t go up significantly, I’m at least gaining more shares by way of the dividends that are paid to me and being reinvested at lower prices. And if shares stagnate at the same price over the next 20 to 30 years, it’s like I’m gaining interest on my money anyway by way of the dividends I’m being paid, even if the stock shares really don’t budge much. So it’s kind of a win/win…hopefully at least.