1. An investor’s choice of asset allocation is the single largest factor that will influence the probability of long-term success. Historical evidence suggests that cash investments return the least amount over the long run.
2. There is significant upside potential in equities for long-term investors right now. Stock valuations are well below their highs and have a long way to go to be back in line with what we consider to be fair value.
3. Sustained low interest rates and dramatic increases in money supply combined with increased deficits have many fearful of the inflationary impact once a true economic recovery takes hold.
   Money market investments, non-market linked CD’s and high interest savings accounts offer little protection against the wealth eroding effect of inflation.

That is not to say that there is no downside.  In fact, there is an inherent risk when investing in equities and there may, in fact, be another leg down.

However, I believe the risk vs. reward payoff  favors the astute dividend growth stock investor at this time.

With that in mind, here are three questions that many investors are asking along with answers based on historical statistical evidence.

Why am I still investing in the U.S.?
The message that history has taught us is a simple one. Analysis shows that in the past, when the S&P 500 was trading below fair value and inflation was less than 4.2% which is certainly the case today, there is an 83.3% chance of achieving a positive return.

All the signs and tools that we have to work with indicate that coming out of this crisis there will be significant upside in the U.S. equity market.

How can I keep investing when the economy is in the tank?
This one is easy, stock markets are leading indicators and as such stock markets will likely recover before the ensuing economic recovery. While it is impossible to identify when these recoveries will begin, missing out on the sharp returns that often occur in the early stages of a stock market recovery, is a mistake that investors make very frequently.

How am I ever going to bounce back?
We must remind ourselves that, as a long term investor, it is important to continue to follow the forward looking strategy that was implemented before they felt the emotional pressure of daily market volatility. A very compelling fact to reference is the asymmetrical nature of bull markets vs. bear markets.

The average bull market gain of 79% far outweighs the average bear market decline of 28%. And the length of the average bull market is 34 months long vs. the length of the average bear market of only 11 months.

While these questions are not intended to completely sooth anyone’s concerns about the health of thier portfolio, it is always nice to know what history has shown.  Even though history cannot predict the future, it is the best information that we have to qualify our decisions with.

The Psychology Of A Loss

In a downward trend it is easy to get caught up in the short term emotions of the correction and lose sight of our long term goals. If our goal is to build a portfolio of high quality dividend paying stocks that frequently raise their dividends, we must not allow ourselves to be influenced by the market behavior over a short period of weeks or months.

Investors are often influenced by short term downward movements in the market, not wanting to see their hard-earned cash lose value as the markets tumble. This theory has been studied by scientific researchers Bernatzi and Thaler, who named the phenomenon “Myopic Loss Aversion”. You can read a great article about the development of Myopic Loss Aversion in the Quarterly Journal of Economics from February 1995. the theory makes logical sense and is, in my opinion, very relevant today.

We’re Naturally More Sensitive To Losses Than Gains

The tendency for investors to be about twice as sensitive to losses as we are to gains has been extensively studied by behavioral finance pioneers, Amos Tversky and Dainiel Kahneman and is called “Prospect Theory”. This theory also makes intuitive sense, especially for me. Human behavior is a funny thing; we always want more, but we don’t want to lose what we already have.

In essence, we are naturally risk averse and are pre-conditioned not to understand the basic relationship between risk and reward. Does this theory hold true for you?

Lets ask ourselves a couple of questions and see!

1. What was your general feeling about your investments over the past few years?
2. What has been your general feeling over your investments over the past few weeks?
3. What has changed with regard to the fundamentals of your stocks over the past few weeks?
4. What has changed about your overall investment goals over the past few weeks?

After answering these questions honestly, take a look at them and see if the answers are congruent. If your emotions have taken over and have gotten the best of you, as mine sometimes do you will notice that your answers to these questions will not align with your long term investment goals.

Will you let your emotions get the best of you? I hope not…I don’t want to see you hurtling toward the earth from your office window.

As a friend of mine has said:

The eggs are on sale…let’s look for buying opportunities!