Are you feeling dizzy yet following the stock market? Down one day, up the next. What the heck is going on? That’s the problem. No one knows what’s going on. Emotions aside, let’s remember some fundamentals of investing and the implications of them to you courtesy of renowned stock researcher Jeremy Siegel:

1. After inflation, a sample size of over 2 centuries shows stocks have returned 6.8% after inflation.
2. From the period of 1957 to 2006, the highest dividend yield stocks have returned an average of 14.22% vs the S & P 500 return of 11.13% over the same period.
   
3. The only long-term, risk free asset are treasury inflation protected securities (aka TIPS or real return bonds). As the name implies, the return on these bonds is essentially equal to the rate of inflation.

Let’s assume that Siegel’s sample sizes are large enough to be accurate and not statistical analomys and the underlying assumptions to his conclusions are still fundamental sound. Let’s also remove the noise the media is creating. What does all of these actually mean for us?

• We need to readjust expectations to historical returns. A 6.8% return after inflation may seem rather puny relative to the period circa 2002-2007 but could a mature economy like North America’s really maintain super-growth and appreciation for longer than a short to medium span of time? Most likely not.
• A pillar of good investing continues to be to investing in cash-flow rich vehicles like dividend-yield stocks. A majority of dividend yield stocks are clustered in financial sector. Some of these businesses are on shaky ground; others are fundamentally sound. Yet, a panicked investor is selling out of financial stocks to put their money in cash or bonds. Assume that some of this selling is in fundamentally unsound and sound stocks; if so, could the baby be thrown out with the bath water? Is this investor not going against the historical grain and moving out of the highest yielding sub-set of all stocks? If you want to know what makes up a good or bad dividend stock, please see the DIV NET for all things dividend.
• There’s a time and place for risk-free investments like TIPS but remember your context in life. A senior moving their entire portfolio into TIPS and money market funds may be executing a prudent strategy to mitigate against short-term volatility in the market and to protect a portfolio that is not likely to increase in size. Someone who is in their 30’s or 40’s may be shooting themselves in the foot executing a similar strategy since a fixed-income heavy portfolio is more about capital preservation than capital appreciation. With time on one’s side, it is important to be offensive and defensive in one’s portfolio.

As for me? I haven’t bought or sold a thing this month (September is always a bad month for investing regardless of the investing cycle). The only thing I am looking at is readjusting my asset allocation as part of my annual review.