Here's a simple question…
What do you think is the best investment to own during and after a market crash?
Well, logic will tell you that safe haven assets like gold and silver should be number one on your list, as investors flee to protect their portfolios.
Even government bonds will spring to mind as investors seek guaranteed income.
But this is far from the truth.
In fact, you may be surprised to hear the answer.
Let me explain…
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The 1929-1932 stock market bloodbath…
In October 1929, the stock market crashed. It wasn’t until July 1932, that the bloodbath came to an end.
But by then, the market value of the greatest companies in the US lost an amazing 89%.
Even one of the greatest investment legends, Benjamin Graham saw his company's holdings lose 70% of its value during the Great Depression.
It took the stock market 25 years to rebound back to its 1929 highs.
But the thing is, the Great Depression revealed one of the most important investment lessons
This investment would’ve outperformed every asset class and inflation
You may not believe this but it was stocks
Let’s say you were brave enough to invest in shares at the end of 1930 (during the The Great Depression) and after the market fell 50%. This was no means the bottom.
The bear market still has another 18 months to go. But you couldn’t have known this. But you stepped up and bought shares anyway.
Your investment would have delivered a return that beat inflation by 4% over the next 10 years and 5% over the next 20 years. And that’s despite the fact the Dow Jones had three of its worst crashes during this period.
1931 – -53%
1932 - -23%
1937 - -33%
But consider this. In two decades following 1931, no other investment – not bonds, precious metals
, cash or real estate
did as well. Stocks triumphed over all other investments.
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So what can you learn from the Great Depression?
When the stock market crashes, investors usually stay away – but this is best time to be greedy and buy stocks.
The lesson for investors, is that don’t ever panic when the market crashes. Shares will almost certainly outperform and deliver good returns in the years ahead.
So what should you do right now?
Ignore the fear and naysayers and put some money to work into the market. If you’re buying individual shares, do your homework. Make the sure the company has debt under control, cash flow constantly flowing, generating profits and most of all, paying steady dividends.
If you’re cash-light, maintain your exposure to equities and always reinvest your dividends. History shows the dividend re-investment is handsomely rewarded.Think about this…
Stocks on the JSE delivered a return of 12.1% a year from January 1960 to July 2012, with dividends adding a further 5% bringing the total return to 17.2% per year. Dividends contributed roughly a third of the annual return on a per annum basis.
Even better, the compounding effect of reinvesting the annual dividend yield is quite significant over a 50-year period. If you invested R100,000 in 1960, it would have grown to R421.5 million by July 2012, with reinvested dividends contributing as much as 90% of the total return over this period.
Until next time,
Always remember, Knowledge brings you wealth,
Editor, Real Wealth
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