Ouch! That Hurt!...or Did It?

In case you've been under a rock, or never look at the financial news, let me tell you--the stock market took a dive this week.  While I can't speak for everyone, I can tell you that with our diversified portfolio, we lost everything we've gained since Thanksgiving.  Put another way, we lost five percent of our invested assets.  OUCH, right?

Well, we had just passes a milestone, so it isn't fun to see it slip out of our hands, but on the other hand, none of that money was earmarked to pay bill this month or even this year.  At this point, other than a few small dollar stop-loss sales, we haven't LOST anything except on paper.  We still have the same number of shares of stock or mutual funds.  While there are a lot of factors that do into the calculation of dividends, this week's pullback isn't making companies cut dividends,  In short, unless we need to sell, this pullback is not going to change anything.

According to the front page of my 401k's website, last month my 401k, which includes about 30% bonds , gained 3.8% in January.  Think about that--annualized, that is over 45%.  It doesn't take a genius to figure out that such increases couldn't continue long-term..

There are two major reasons stock prices fall.  The first is a real or perceived flaw in a particular company.  For whatever reason "everyone" decides that XYZ is over-valued and they reduce the money they are willing to pay for it. These reasons run the gamut from poor earnings to a new competitor to investors believing the market for XYZ products has dried up.  If shares of most other stocks are going up in price (or holding steady) and XYZ is dropping, beware XYZ, unless you know something the general public doesn't.  Yes, it may rebound, but there is a reason all those professionals don't want it.

The second reason stock prices fall is because the market as a whole is dropping; often due to some news or economic trend.  When that happens, it is like your favorite store putting a great big "Sale" sign in the window.  The shares that cost $17.00 yesterday cost $15.00 today, but nothing has really changed about the company.  It is still selling the same widgets, it still has the same managers, and that means, in my opinion (and I'm not a financial professional and only play like I know stuff here on this blog) that it is time to buy.

Now is not the time to change your 401k asset allocation to all bonds.  Now is not the time to sell all your stocks.  You picked your asset allocation for a reason.  Unless something in your life has changed, that reason should still be valid.  If anything, now is the time to see if you have a few extra dollars laying around with which you can buy stocks or more mutual fund shares.

Last week I wrote about AT&T.  I bought my first two shares in November, for $37.67 each. Since then each share has paid me dividends of $2.46.  Last year the dividend was $.49 per share; in February it went up to $.50.  Earnings per share are up in the last year.  On February 1, shares closed at $39.16; on February 8, they closed at $35.57, over 9% lower.  Did something happen to AT&T? Did a deal fall through?  Was the CEO caught with his pants down?  Were they sued?  Nope.  There is always some news about a company that big, but the bottom line is that this price differential has little to do with the value of AT&T and everything to do with market conditions.  

What did I do about it?  I bought more shares.  On February 6, I bought a share at $36.00; on Feb 7 I bought one at $37.00, and on Feb 6 I bought 2 at $36 and on at $35.95.  Now my average cost per share is $36.61.  Assuming a $.5 dividend per share per quarter, (and everything I've read leads me to believe that dividend is safe) I have a 5.4% return on my money, as long as the price eventually goes back up (which I think it will). 

Since  Robinhood allows me to purchase individual shares of most companies in realtime for no commissions when the market drops like this, I pulled out my phone, transfered money from my bank account to Robinhood and set a limit order (told Robinhood to buy a share for  you if the price drops to a certain point).  If you want to try Robinhood use my link and you'll get a free share of stock, and so will I.  Last time someone used my link I got a share of Sprint.  I don't know what the other person got, but if I was you, leave a comment and let me know.  

Basically what I'm trying to say is that while most people will say their goal is to buy low and sell high, research indicates that most people do the opposite.  In January "everyone" was buying, and stocks were getting more expensive by the day.  In the last two weeks the price has dropped and people want out, and I'm buying.  Are you?