For the first time since I have been seriously investing in the stock market, I am faced with a crash.
I first started buying stocks and shares back in 2011 and enjoyed a very comfortable ride for the first few years.
Then, just after the end of the tax year, I greatly increased my portfolio. That was on April 17th 2015 and you can guess what happened next. Ten days later the market would peak at just over 7,100 and has been falling ever since.
Last week it dropped below 5,700. That is a 20% drop! Wowsers.
That may not be a lot for you seasoned investors, those who shrugged off the 31% tank in 2008, but I was broke back then so this is the biggest test of my investing mettle so far.
How should I deal with it? Thousands have been wiped off the book value of my portfolio and on paper I am now poorer than I was this time last year.
Well, despite my stomach doing a few backflips I am trying to convince myself that this is a good thing. Why? Because the FTSE 100 looks really cheap. And cheap is good.
In technical terms, dividend yields are at 4.2% and the CAPE ratio is at 11. That is the best they have been since 2009!
Well, that sounds like gobbledygook, even to me as I write it. So let me try and explain.
Investing in the stock market simply means that you are buying parts of companies. Let’s compare it to buying a house.
When you buy a house you pay a price up front for the actual building. But once you own that house its value doesn’t really mean anything, whether the value goes up or down you still own one house. What instead you care about is the rent – provided the rent you are receiving doesn’t go down, you are a happy landlord.
In fact, after a few years of collecting rent you may go out and look to buy another house. In this instance, you want house prices to be as low as possible. You want to able to get the most possible house, and the most possible future rent for your money.
When you buy stocks and share you are buying parts of companies, and instead of receiving rent you receive a share of that companies profit. To put it simply, right now you are getting a lot of ‘rent’ for your money.
Well, that’s all well and good. But what about when I want to sell my shares in those companies? If the FTSE is still cheap, I won’t be getting much money.
Here’s the part that kind of blew my mind. There is a chance I might never sell my shares.
If I get to the point where I stop earning and want instead to live on my investments. I will start by trying to live off the dividends – the share of profits I receive from those companies.
Just like your rich landlord uncle will probably never sell his housing portfolio and will hopefully pass it on to you, I will most likely sit on my stocks and shares till I die and then either donate them or pass them on.
Last week I received the dividend payout from one of the companies I started. I am putting my money where my mouth is and have invested it all into this lovely cheap stock market**. And as long as I am still earning, I plan to buy more, and more, and more.
* All numbers are taken from some financial blogs I follow. If you want some advice from people who know what they’re talking about and aren’t just opinionated amateurs check out: Retirement Investing Today, UK Value Investor and The Motley Fool.
*** Ok. I know it is not quite as simple as I have made out here. I am sure there are some flaws and nuances I am missing. But this is how I like to look at it. It helps me to be a long-term rational passive investor.
**** This is not financial advice. Just what I am doing.