Continuing with yesterday’s parable about an investor, Donna, who ignores the market over the past year and breaks even plus some dividends, Canadian Capitalist observed that she could have earned even more money by reinvesting dividends. This led me to think about the benefits of steady investing during down markets.
In my story Donna collected $2020 in dividends while her $100,000 portfolio of S&P TSX units (ticker: XIU) was unchanged at $16.80 per unit from 2008 October 2 to 2009 September 8. However, if she had reinvested her dividends into XIU units, her gain would have been $2440, assuming a $10 commission on trades. This isn’t such a dramatic improvement, but she might think that an extra $420 is better in her pocket than elsewhere.
What if Donna had invested her $100,000 slowly over the year instead of piling it in all at once? Spreading the money into 12 equal-sized purchases at the start of each month, Donna would have come home to just over $117,000! This is a 17% return over a “terrible” year for stocks.
Of course, not many of us have large lump sums to invest like this, but investors in the working phase of their lives can make regular contributions to savings. For these investors, big drops in stock prices are an opportunity to pick up more stock when it is cheap.