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A long-term plan for a 2020 market crash

Fears of a market crash have waxed and waned lately. In the UK markets there was a worry before the general election, then optimism and now gloom about a possible disorderly Brexit. Globally there was a China-US trade spat that got worse before a partial agreement was signed. Then we have the coronavirus, which western markets have pretty much ignored.

On Monday Apple released a profit warning because production and sales of its iPhone have been affected by the coronavirus outbreak. Will this bring markets down all over the world? Maybe, but then again, maybe not.

People that keep calling a bear market will be right at some point. However, bear markets do not last forever. Rather than worrying the market will head lower, it may be better to accept that there will be ups and downs, and just invest for the long term.

Time and dividends

Responding to every up and down in the markets could be a path to ruin. Trying to ‘buy low, sell high’ is tricky. Pull a chart of the FTSE 100 up and go back to a random point in time and it will be difficult to predict where the price is heading the next day, next week, or next month. Consider that the news being reported at the time – some of it would be positive, some negative. Predicting the short-term direction of the markets is difficult.

Knowing where the market will be in 10 years is easier to predict. It will probably be higher, so long as dividend reinvestment is included. A lot of the FTSE 100 stocks pay dividends. The FTSE 100 total return index includes these dividend payments, and 95% of the time it’s higher after 10 years.

An investor can buy a fund that tracks the FTSE 100 and reinvests dividends, hold for at least 10 years, and they are very likely to end up wealthier.

Regular investment

Time in the market is likely to bring investor success more than trying to time the market when dividend reinvestment is involved. Investing doesn’t happen all at once though. Making regular investments means investing when the price is high, sometimes low, and all points in between. This is another way to smooth out the ups and downs in the markets.

If investing in entire markets is not desired, these principals work for some individual stocks. Big, stable, dividend-paying companies, that have been around for a while and have competitive advantages are good candidates.

RELX and Unilever are two examples of such companies. RELX publishes scientific and technical journals that researchers, academics, and practitioners need to do their work. Unilever has brands that people love to eat and drink and take care of themselves and their homes with. Both company’s dividends are well covered by their earnings, which bodes well for sustainability.

The annual total return on Unilever shares was 11.54% on average over the last 10 years while RELX averages 16.96% each year. Both are good candidates for a long-term dividend reinvestment strategy. But, be aware that individual stock picks are riskier than investing in entire markets. The more quality, income stocks that are held in a portfolio, the more the risk is spread out over them. 

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James J. McCombie owns shares in Unilever. The Motley Fool UK owns shares of and has recommended Apple and Unilever. The Motley Fool UK has recommended RELX. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.