Investors always have things to be thankful for, though that’s hard to recognize in bad times and easy to overlook in good ones.
While it would be easy to focus this year on double-digit gains for the Standard & Poor’s 500 that have extended the current bull market to the fourth-longest uninterrupted upswing in the last eight decades, the things investors should be grateful for are less tied to short-term results and more about how they can succeed in all conditions over time.
The best thing is that most of what investors should be thankful for are like the things on the holiday table: They can be shared and passed around and there’s enough for everyone. Moreover, like holiday traditions, they are there every year, in all conditions.
Here are some of my favorites:
While there is plenty of debate over whether Albert Einstein actually said that compound interest “is the most powerful force in the universe,” (I’m not buying it), there’s no denying the influence of compounding. Compounding is the ability to generate earnings from previous earnings. It’s how a $2,000 Roth IRA deposit made by a 25-year-old and growing at 6 percent annually turns into more than $20,000 by the time that youngster reaches retirement age. If the saver can generate a 10 percent annualized return – the historic norm for large-cap domestic stocks – it turns that $2,000 deposit into more than $100,000. It’s how small amounts of money become large amounts, given enough time, and it’s free, just for setting money aside and letting it work.
While not available to all workers, the ones who have an employer who matches their savings have a real leg up on generating a significant portfolio that beats the market. Think of every matching dollar as a real return; if your employer matches dollar-for-dollar, you get an instant 100 percent gain on everything you set aside. That’s a huge head start on solid investment performance, because the market would have to crater for you to come away with fewer dollars than you put into the program. The market doesn’t give investors those kinds of guaranteed returns; whether your employer gives a small match or a full one, you should be thankful for – and take advantage of – what you get, because it’s the best deal out there.
President Franklin D. Roosevelt pushed through Social Security in the 1930s over strenuous objections from opponents, and the benefits of the system have gradually expanded since. It’s far from a perfect system – there’s no denying that it’s flawed and that the program’s status lies somewhere between badly injured and completely broken – but anyone who saw their investment portfolio crushed in the crisis of 2008 (and that is nearly everyone) should be thankful to have some safety net in the event the market collapses. It’s not meant to be your sole support in retirement, or even a huge part of your income when you have stopped working, but it’s a nice salve for the mistakes people make as a saver and an investor throughout their lifetime. For as much as we can grumble about the politics of it, we should spend some time focused on the cushion it creates.
Dividends represent a portion of a company’s earnings paid out to its shareholders. They make it easier for an investor to weather the daily ups and downs because they are a payout that typically can be counted on in all conditions. Moreover, beyond simply boosting your total return, they tell you whether a company’s management is sincere in thinking that its profits are sustainable. For average investors, that’s a barometer reading that helps to keep them comfortable staying invested even when the market is making them queasy.
You don’t have to like or use index funds to be thankful for them, because the ability to buy, say, 500 stocks in the SPDR S&P 500 exchange-traded fund (SPY) at an annual cost that is fractions of pennies on the dollar has forced all money managers to be cost-conscious, and to prove that their methods might be a superior choice. Everyone pays less for investment management simply because no one is willing to pay any amount that is ridiculously higher than what it costs to buy the index. Moreover, for those investors who like and use index funds, it has allowed them to plan on and actually capture the market’s return over time, which helps to create the kind of emotional wherewithal to stick with a plan in good times and bad.
•Low trading costs.
While many observers believe that low-cost trades encourage average investors to make more moves and to short-circuit their portfolios, the truth is that reasonable transaction costs allow investors to manage their holdings better. It’s not so much about whether each trade goes well, it’s more about the mentality that allows an investor to feel like they can take the actions they believe are best and do the deal at a reasonable price. No investor makes the best moves all the time, but all investors should be grateful that the days of getting soaked for making a trade – good or bad – are gone.
Who doesn’t love a turkey on Thanksgiving? While you might be focused on the bird for the feast, you could also be talking about the flightless stocks of 2013, the honking, waddling losers that the market has put on sale. In the middle of a raging bull market, there are plenty of stocks that have been beaten down – think everything oil sector right now – or put on sale. It might be hard to bite on them now, but for anyone who is worried about the market trading near record highs, the idea of buying quality businesses at bargain prices should be mouth-watering and tasty.
•All the things money can’t buy.
No matter how your portfolio does, it’s important to remember that the best things in life are free. Holidays and spending time with family tends to prove that to us, but it’s something we should be thankful for every day, no matter what the market is doing.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at firstname.lastname@example.org or at Box 70, Cohasset, MA 02025-0070.