There has been a lot of talk lately – or should that be too much chatter recently – about markets having peaked. Sure, stock markets have gone up significantly since last year. And sure, interest rates have come down substantially since 2020.
The way in which those two things, namely, stock markets and interest rates, have moved – in opposite directions – is not coincidental.
The direction of interest rates can have a major bearing on how stock markets react. When interest rates fall there is a tendency for stock prices to rise. They can climb for myriad of reasons. Perhaps the most obvious is that it can provide investors with a way to generate income on their savings, especially when banks are paying next to nothing on deposit accounts.
It is logical, therefore, to infer that when interest rates go up, then stock prices could come down, as people leave the market. There is a better than an odds-on chance that could happen if the US Fed starts to tighten its monetary policy. That could happen later this year, perhaps next year, or maybe in 2023. The question is not if it will happen but when.
So, what should long-term investors do? The clue is in the question. We should accept that stock markets are never a one-way bet. They can go down as well as up, which means that the value of our investments can drop as well as rise.
But share prices are a terrible way to assess how our investments are performing. Point is, we have no control them. We can, however, control the companies we choose to put into our portfolios. We can choose when and how much of those businesses we would like to buy.
As income investors, we can even control to some extent how much income we expect to earn from our investments. In other words, we should try to focus on the things we can control and forget about the things we can’t.
By continually ensuring that our portfolios spit out copious income, we shouldn’t go too far wrong. Benjamin Graham famously said that in the short term, the market is a voting machine, but in the long term it is a weighing machine.
So, keep weighing those dividends, and consider buying more of them when they appear cheap. That generally happens when share prices fall. It is little wonder then that income investors are some of the happiest people in the market when stock prices are down.
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David does not own shares in any of the companies mentioned.