Why fear the cycles of Fear and Greed?

Before we begin our discussion of how market downturns benefit income investors, let’s look at what causes downturns in the first place.

As everyone knows, the stock market never behaves rationally. This is due to several factors. New information arrives constantly and the macroeconomic environment changes frequently. Further complicating the problem is about 70% of stock trading is done via high-speed computerized trading known as ‘high-frequency trading’ Stock orders are placed and withdrawn in milliseconds based on computer-generated algorithms, which have nothing to do with stock market fundamentals. But more than anything else, investors themselves are the chief cause of the chaos that defines the stock market. There is an old saying on Wall Street that the market is driven by just two emotions, fear and greed. When greed is the prevailing emotion, investors pile into the stock market, creating unrealistic and unsustainable bubbles. But as certain as night follows day, fear eventually takes over and investors bail out of the market, creating downturns, and not infrequently, market crashes.

Why fear the cycles of Fear and Greed? – Don’t! –

While these downturns and crashes are devastating for stock traders, they are wonderful buying opportunities for income investors. This is because stock market volatility, no matter how extreme, does not affect companies’ ability to pay dividends…

Remember, dividends are generated from earnings and as long as earnings aren’t affected, your dividends will not be affected either.

So, as your dividends come in you can reinvest them in stocks whose prices have gone down. The net result is an increase in the rate your passive income stream grows. For example, let’s assume one of your stocks pays $1 a year in dividends and the stocks price hovers around $10. In this scenario, your dividend yield is around 10%. But sooner or later a market downturn or crash will come around. When this happens, your $10 stock will go down in price for all the reasons we discussed earlier. Let’s assume the stock price drops to $5, not an unrealistic scenario given how many times the stock market has crashed more than 50%. Because you are still getting your annualized dividend of $1 and you can reinvest in shares that now only cost $5, your dividend yield has increased from 10% to 20%. This is what we mean by a buying opportunity. Eventually, the stock price will go back up to a more rational price, but the shares you can accumulate while they are depressed will pay you a 20% dividend yield for as long as you own them, so long as the company’s earnings allow.

We started this discussion by talking about what causes stock market downturns and crashes. The combination of a constantly changing economic environment, high-frequency trading, and investors whose behavior is governed by the two irrational emotions of fear and greed, combine to create a stock market that can only be described as chaotic and unpredictable. In contrast, income investors focused on dividends, and not the insanity going on around them, are constantly presented with buying opportunities that result in accelerating the growth of their passive dividend income stream. We hope that you will join us at FlyHighInvesting.com and get on the fast track to financial freedom by compounding dividends that produce a never-ending exponential explosion of passive income.