During a stock market crash, there are plenty of reasons why investors shouldn’t panic. The first is that investing is a long-term game. If you sell your FTSE holdings at the first sign of trouble, you’ll never build a decent pot of wealth for your retirement.
Selling the FTSE today would be a disaster, because then you’re locking in all of your losses from the stock market crash. Worse, you then face the tricky decision of when to buy back into the market, and you’ll almost certainly leave it too late. You might even re-enter at a higher point than you sold, and you don’t want to do that.
There’s another reason why you should stick it out during a stock market crash. Dividends. Although many FTSE companies are scrapping their payouts amid current uncertainty, your income may hold up and here’s why.
Stock market crash boosts yields
Others are continuing to pay out, judging by the latest quarterly report from one of my holdings, an index-tracking unit trust called HSBC FTSE All-Share Index.
I’ve got a few thousand pounds in there, and it gives me a regular flow of dividends, which I reinvest back into the fund. This is how investors make real money over the years, by reinvesting dividends, that buy more stock or units, which pay more dividends, in an endless virtuous circle.
Dividends are the unsung heroes of investing. They work especially hard during a stock market crash.
Markets down, wealth up
Thanks to them, investors make money even when stock markets fall. For example, on 31 December 1999, the FTSE 100 peaked at 6,930. It actually ended 1998 trading 2.9% lower (and is lower still today). However, with reinvested dividends, investors would still have made a gain of 81.3% over that 19-year period.
Most will have done a lot better than that, because they continued to invest when the market was much cheaper. That means they’ll have picked up stock at much cheaper prices, and generated more dividends as a result.
This is why you should stay invested in the FTSE during and after a stock market crash. That’s because your regular dividends are picking up more stock or units at the lower price, and will be worth even more when markets rebound. Investing in new money will help even more.
I’ve just had an email from my online investment platform, which sets out how this works in practice. In January, before the crash, HSBC FTSE All-Share Index paid me £69.06, which reinvested bought me 10.62 fund units. Yesterday, it paid me another £69. But thanks to the stock market crash, that now bought me 15.33 units.
That’s roughly 50% more. And it’s happening across my investment portfolio, not just this one fund.
There’s another way of stating this. Last year, the FTSE 100 typically yielded around 4.25%. Right now, it yields 6.6%. This may fall due to all of those dividend cuts, but investors should still come out on top.
Provided they stick it out…
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.