Do you remember March 24, 1980?

Bill Parrott |

Do you remember March 24, 1980?  I don’t.  I was 15.  I was probably concerned with three things.   Was I going to the beach?  Were the Dodger’s going to win?  Where were my friends and I going to eat lunch?   I probably went to the beach, the Dodger’s undoubtedly won and I most likely went to McDonald’s (where thousands were served).

On March 24, 1980 the S&P 500 dropped by over 3%.   I am sure the morning newspaper headlines were full of doom and gloom.   The “experts” were almost certainly publicizing that this was the beginning of the end and that the buy and hold strategy was over forever.

If you were fortunate enough to buy the S&P 500 Index on that horrible day and hold it until the end of 2015 you would have made a lot of money.  Let’s say you purchased $10,000 worth of the Vanguard S&P 500 Index Fund on March, 24 1980, your investment today would be worth $506,785 for an average annual return of 11.59% (Source: Morningstar.  Dividends and capital gains reinvested.  Returns do not include taxes).

What if you had the foresight to buy McDonald’s stock after eating your Big Mac on that frightful down day?   If you had gobbled up $10,000 worth of McDonald’s stock, your original investment would now be worth $2,190,000 giving you an average annual return of 16.25%!  During this great run in McDonald’s stock, you would have received $307,052 in dividends.  In 2015 your dividends from your original $10,000 investment would have been $38,363!  (Source: Morningstar.  Dividends and capital gains reinvested.   Returns do not include taxes).  

I still believe in the buy and hold strategy.  When the market comes down it gives you an opportunity to invest in great companies at lower prices.  It is similar to flying.  The only way to get on airplane is when it is on the ground.   If you are not on that plane, when the pilot leaves the gate and roars down the runway, you lose.   

However, I realize that not everybody has the confidence to buy during a market meltdown so here are a few suggestions to help strengthen your portfolio.

  • If you need your money in one year or less, do not invest in the stock market.   It is recommended to keep your money in cash or short term CD’s.
  • If you are going to retire in five years or less, then I would recommend keeping three years’ worth of expenses in cash, short term CD’s or U.S. Treasuries.   For example, if your annual expenses are $100,000, then your cash holdings should be $300,000.
  • If you are in your 20’s or 30’s, I would back up your environmentally friendly pick-up truck and buy great companies at discounted prices.
  • If you are concerned about the international turmoil, then invest in small and mid-cap companies headquarter in the U.S.  These smaller companies typically do not have any international exposure.
  • Look to add dividend paying companies to your portfolio.  According to Morningstar, there are over 1,000 companies that are yielding over 3%.
  • Asset allocation and diversification still work.  A balanced portfolio of stocks, bonds and cash will treat you well over the long term.
  • With a holding period of 3 to 5 years or more, then I would let your investment holdings run. 

The current markets are not fun but this can be an opportunity for you to reexamine your investment holdings and financial goals to make sure they are both in line with your long term financial plan.

Be on your guard, stand firm in the faith; be courageous; be strong.  1 Corinthians 16:13.

Bill Parrott is the President and CEO of Parrott Wealth Management.