Well, 2022 is officially here. The last two years have really been a blur to me. I am sure the feeling is pretty much the same for everyone else. I am paid to talk about the markets, so I will.
I think it is beyond remarkable that the broad stock indices realized up years in both 2020 and 2021. Looking back at the spring of 2020, I would have bet the house that 2020 ended deeply in the red. Given the continuing struggles in 2021, break even should have been a blessing. Yet here we are, having booked two big up years in the face of unimaginable difficulties. I understand the argument (and frequently make it myself) that the market cap indices don’t reflect the whole story and that many individual stocks and other indices have struggled, but the fact remains that for the most part we are solidly in the black. I believe there are two important takeaways for investors. First, markets are incredibly good at discounting future information. Whether good news or bad news, the collective wisdom of millions and millions of investors sees all and sees it first. The absolute resilience and ingenuity of human beings underpins all investing, and the markets discounted that “good news” almost immediately. The earth is still turning, and we have adapted – bruised for sure, but maybe better. The price of the S&P 500 today reflects that. The second takeaway is one that we preach constantly. You must have a process to be successful investing over the long term. If you do not, you are simply gambling. You are gambling that you know more than somebody else. You are gambling that you know more than all the collective wisdom in the world. I think that is a suckers bet, and the past two years is the best example I have seen.
I would lastly like to discuss an often-underappreciated component of successful investing. That is the importance of dividends in a portfolio’s total return. Depending on the index, dividends have made up as much as 50% of the total return of stocks over the past 100 years. Dividends do a number of good things. They get you paid while you wait for markets to sort things out. I am a big believer in getting paid. They can be reinvested and compound over time. That compounding is huge when it comes to long term growth. It is how many of the wealthy get wealthy. They can also provide a source of stability when things become volatile. A company must have sufficient positive cash flow to pay a dividend in the first place. Dividend payers tend to hold up better in times of trouble than non-payers. Remember dividends when thinking about your portfolio. It is the total return that matters, and dividends can be a big part of that.