Dividend Money

Finally, Good News For Investors

As we saw on Friday, the current financial crisis has investors all over the world living in fear now. And this time, it’s the government who is helping businesses to bring down what is crippling markets – the credit crunch precipitated by the U.S. housing collapse.

Governments in North America, Europe and Asia have provided bailouts to troubled financial institutions, liquidity to money markets and guarantees to banking systems. And all of this is in addition to drastic interest rate cuts. Fortunately, there are some very encouraging signs that these initiatives finally are starting to work.

Some Good News For A Change

Indications that credit is starting to flow

•  The rate at which banks lend to one another known as the London Interbank Offer Rate (LIBOR) decreased from a peak of 6.88% earlier this month to less than 1.3%.
•  The spread between 3-month LIBOR and U.S. Treasuries (the risk-free rate) decreased from a record high 4.65% earlier this month to 2.7% on Friday. A narrower spread means that banks are more willing to lend to each other.

Good news for U.S. housing

•  U.S. fixed-mortgage rates decreased helping more borrowers qualify
•  Variable rates continue to decrease due to Fed rate cuts
•  Oil and gas price declines result in more affordable heating costs for homeowners as we head into the colder months
•  Data from August and September shows reduced inventory of U.S. homes. The 10.6 months supply of homes in August slipped to 9.9 months supply in September
•  The FDIC and the U.S. Treasury are working on a proposed plan to prevent avoidable foreclosures by offering guarantees to lenders and companies that service mortgages

Despite these encouraging signs, we will continue to see volatility as investors react (or is that overreact?) to every new piece of information released.

Facts About Stocks and Recessions

There’s a lot a worry about the recession now. But what’s important to remember is that equity markets tend to be leading indicators of the economy.

Looking back through history, equity markets have typically retraced prior to, and in the early stages, of recessions. Once equities have reached their lows, they tended to rise quickly preceding the broader economic recovery.

So, make sure you don’t let yourself  fall into the mob mentality or you may find yourself missing the upturn in equities.

We don’t know exactly when the recovery will commence, but over the long-term equities has still been the top-performing asset class. And out of all the equities, the dividend growers have been the most stable.

Posted in Investment News | 4 Comments »

Why Investors Jump From Skyscraper Windows!

With the recent markets heading lower, I thought it would be a good time to run an article on why investors act the way they do in a downward trending market.

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!

Posted in Investor Education | 2 Comments »