If you’re like most people with an IRA or any other type of brokerage account, you take a peek at your monthly statement or check online occasionally to see how you’re doing. You might even be one of those folks that have memorized all the tickers in your account and check market prices throughout every trading day.
The Heartburn of Market Madness
Regardless of what sort you are, my guess is that what causes you much heartburn is the damnable volatility of the market. Maybe the overall market has been bouncing all over the place and you take a look at your numbers and your account is down 5% over last month and you think, “Drat, I just wish prices would settle down instead of jumping all over the place.” (Actually, to be more precise, you probably don’t have any such thought when you’re experiencing upward volatility; at least, I’ve never heard anyone complain about that. It’s the downward volatility that unsettles people, right?)
I’ve written previously about the relative nonvolatility of dividends. Over the last 50 years, market prices have declined, on a year-over-year basis, 28% of the time and the four greatest declines averaged 27%. Yikes! Dividends, over the same period, declined only 8% of the time and the four greatest declines in dollar dividend amounts averaged 7%. Clearly, cash returned to you via dividends is significantly less volatile than market prices.
But . . . . you have to own the equities to get the benefit of those nonvolatile dividends and that, of course, puts you at risk for the downward volatility associated with marketprices.