Durable Dividends

Retail Investors Don’t Have To Fear Market Sell-Offs

Nick Ward

56 postsAugust 12, 2021

I saw an interesting interview this week with Jim Chanos, a noted investor, who expressed concern that we’re nearing another market top and that retail investors who are piling into what he believes to be a late cycle environment will end up being bag holders (as usual).

Now, generally speaking, when I see famous investors come onto financial news programs, I take what they have to say with a grain of salt because the cynic in me imagines that they’re talking about their book a bit. However, I will say that Chanos’ career lends credence to his opinions and although his investing style is much different from my own, I enjoy his takes.

Chanos made a name for himself by highlighting the fraud associated with Enron and shorting the stock. Since then, he’s had a string of other high profile shorts work out for him, largely due to his ability to spot something amiss with corporate operations and/or disconnects with investor sentiment and what is really going on with fundamental growth.

So, to a certain extent, he and I are alike. We both focus intently on the underlying fundamentals and try to find irrational valuations. Oftentimes, we agree.

For instance, Chanos had bearish things to say about AMC Entertainment (AMC) due to the poor fundamentals that this company displayed during its recent Q2 earnings report. I’m certainly no fan of an AMC investment myself either. However, the difference between us is how we capitalize on our opinions.

I’m generally looking for cheap stocks to buy however, while Chanos is looking for irrationally high prices to short.

The fact that he’s more of a trader also leads to a difference of opinion with regard to the strategies that investors should adhere to when thinking about minimizing risk and maximizing reward in various market environments.

He mentioned that the major averages are at all-time highs. That’s true. The market has had 46 different days of record closes during 2021 alone. And Chanos’ concern comes down to the fact that it appears that retail investors could be driving a lot of the recent uptrend.

In Tuesday’s CNBC interview, he said:

“The problem with getting more people, retail, involved is that it always seems to happen toward the end of every cycle. Retail wasn’t there at ’09 at the bottom. They weren’t there in ’02 after the dot-com bubble collapsed. They were certainly there at ’99. So the problem in the last few cycles as I see it is that we get promotors and insiders and people who have done very well cashing out as retail is buying.”

The sad reality is, this statement is true.

Studies show that over the long-term, most retail investors underperform the broader markets because they allow fear and greed to dictate their decision making.

When deep sell-offs occur, many retail investors allow fear to inspire them to sell into weakness, which is typically a terrible idea because it means that they’re locking in losses and eliminating the potential of bounce-back gains.

And then the retail cohort tends to sit out the rebound period, because they still haven’t gotten over the fear that inspired them to sell into weakness in the first place, causing them to miss out on the opportunity that the sell-off presented in the first place.

Sadly, most retail investors don’t gain the courage to buy back into the market after sell-offs until the sentiment surrounding the major averages has become exuberant again.

In short, they buy into market rallies (like we’re seeing today) because of greed and the “fear of missing out” of further gains. This is a vicious cycle that really hurts those stuck into it.

Investing 101 teaches us to buy low and sell high, right? Well, the fear/greed cycle inspires investors who give way to emotion to do the exact opposite: buy high and sell low.

So many times, people stuck into this cycle start to believe that the stock market is rigged against them, that success is not achievable, and that the stock market only works for those who’re already rich, have insider knowledge, or are corrupt, in some other way, shape, or form.

I hate seeing this type of hopelessness from retail investors that I speak to because I can say, with certainly, that this is not the case.

I’ve never lived in New York or worked on Wall Street. I didn’t study finance in college. And I’m certainly not a hedge fund baby or a part of the 1%. However, I have done extraordinarily well in the stock market over time, using only information that is publicly available, because of my ability to control my emotions and stay disciplined when fear and/or greed begin to creep into my psyche.

I firmly believe that the American stock market is the best vehicle that everyday Janes and Joes (like me) have to achieve financial freedom and climb the social ladder.

However, doing so requires patience, discipline, and a long-term perspective.

The desire for instant gratification in the markets is what holds a lot of investors back. Blue chip companies usually don’t create immense wealth overnight. However, given enough years (and more likely, decades) the slow and steady compounding that they create snowballs into a very powerful force for good with regard to investors’ financial situations.

And with all of that being said, I wanted to write this piece to say that while Chanos isn’t wrong, we don’t all have to fall prey to the pitfalls that tend to hold the retail cohort back.

Readers here don’t have to play a part of the statistics that point towards retail underperforming, which has earned them the nickname, “dumb money”. Not only can retail investors keep up with the markets, but they can beat them, rather handily, I might add.

We don’t have to worry about complex trades, timing the market, or following the “smart money” as Wall Street traders like to say. Instead, all we have to do to achieve success is to focus on quality (only buy blue chips and best-in-breed companies), focus on valuation (only buy such companies when they’re trading at, or better yet, below fair value), and then have the patience to hold them over the long-term, allowing their fundamentals and therefore, their dividends, to compound.

Exponential growth becomes an extremely powerful force for those who’re willing to wait for it to get started. And to me, this is why the mantra, “Time in the market is much more important than timing the market” is so incredibly important for investors to remember.

The market is at record highs. I think it’s fair to say that the major indexes are expensive. There are numerous macro headwinds on the horizon and I certainly think it’s possible that we see a significant sell-off at some point in the future.

Yet, this doesn’t frighten me. Sell offs are a part of the market’s long-term cycles. And, that doesn’t have to be a bad thing.

Investors who manage their risk accordingly, maintain dry powder (cash) to take advantage of the deep discounts that sell-offs (and better yet, crashes) create, and have the presence of mind to realize that blue chips always bounce back and therefore, these bleak short-term events are very likely to represent opportunistic long-term opportunities, put themselves in situations where sell-offs aren’t events that destroy capital, but instead, accelerate the financial freedom process.

And, dividend growth investors who’ve built portfolios of strong, defensive, blue chips can use their reliably increasing passive income streams as an anchor against fear, knowing that no matter what happens in the broad markets (outside of say, nuclear war) their dividend checks will keep rolling in, quarter after quarter, allowing them to re-invest them, serving as extra fuel for the compounding process.

Because of my focus on passive income, when market sell-offs occur, I get excited. Lower share prices equal higher dividend yields, allowing me to make purchases, increasing yield on cost and the size of my income stream.

It can be scary seeing red numbers across your brokerage accounts when the bears dominate market sentiment. However, it’s all a matter of perspective. If you’re focused on passive income, as opposed to short-term share price movement, then it’s easy to ignore many of the factors that feed fear and instead, remain a rational stance which leads towards outperformance.

If this sort of philosophy is intriguing to you, then please check out The Intelligent Dividend Investor, which is a service all about buying the highest quality companies at attractive valuations and building defensive income streams by holding them over the long-term.

Financial success doesn’t have to be complicated, difficult, or stressful, so long as you’re on the right path. The dividend growth investing path has generated a lot of wealth for me over the years and I imagine it can do the same thing for you!

Disclosure: Nicholas Ward has no position in any stock mentioned in this article.

Nick Ward

56 posts

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Nicholas Ward is a research analyst who currently writes for Seeking Alpha, The Dividend Kings, iREIT, and Forbes Real Estate Investor. Before that, he was Founder and Editor-in-Chief of The Dividend Growth Club, as well as the Income Minded Millennial. Nicholas has also contributed to Sure Dividend, Investing Daily, and The Street, where he covered stocks in Jim Cramer's Action Alerts PLUS Portfolio.

Nicholas holds a bachelor of arts from The University of Virginia, where he studied English and studio art. Prior to transitioning into the financial industry, he managed a vineyard in the foothills of the Blue Ridge Mountains.

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REIT Mutual Fund	Symbol
Alpine Realty Income and Growth Fund	AIGYX, AIAGX
American Century Real Estate Fund	REAIX, REACX, AREEX, AREWX, ARYCX, AREDX
Real Estate Securities Fund	MRESX
AR Capital Real Estate Income Fund	ARIAX, ARICX, ARIPX
AssetMark Real Estate Securities Fund	AFREX
Aston/Harrison Street Real Estate Fund	AARIX, ARFCX
Baron Real Estate Fund	BREIX, BREFX
BlackRock Real Estate Securities	BIREX, BAREX, BCREX
Brookfield U.S. Listed Real Estate Fund	BRUAX, BRUCX, BRUIX, BRUYX
CGM Realty Fund	CGMRX
West Loop Realty Fund	REIIX, REIAX, REICX
Cohen & Steers Institutional Realty Shares	CSRIX
Cohen & Steers Realty Income Fund	CSEIX, CSDIX, CSBIX, CSCIX
Cohen & Steers Realty Shares	CSRSX
Columbia Real Estate Equity Fund	CREAX, CREIX, CRRVX, CRERX, CREEX, CRRFX, CREWX, CRECX, CREBX
Compass EMP REC Enhanced Volatility Weighted Fund	CWRAX, CWRIX, CWRTX, CWRCX
Davis Real Estate Fund	RPFRX, DREYX, DRECX, DREBX
Delaware Real Estate Investment Trust Portfolio II	DPRTX, DPRBX
Delaware Real Estate Investment Trust Portfolio	DPREX, DPRSX, DPRRX, DPRCX
DFA Real Estate Securities Portfolio	DFREX
Dunham Real Estate Stock Fund	DAREX, DNREX, DCREX
DWS RREEF Real Estate Securities Fund	RRRRX, RRREX, RRRAX, RRRSX, RRRBX, RRRCX
DWS RREEF Real Estate Securities Income Fund	REFAX, REFCX, REFIX, REFSX
Eaton Vance Real Estate Fund	EAREX, EIREX
EII Realty Securities Fund	EIIRX
Fidelity Advisor Real Estate Fund	FHEIX, FHEAX, FHETX, FHECX, FHEBX
Fidelity Advisor Real Estate Income Fund	FRIRX, FRIQX, FRINX, FRIOX
Fidelity Real Estate Income Fund	FRIFX
Fidelity Real Estate Investment Portfolio	FRESX
Fidelity Spartan Real Estate Index Fund	FSRNX, FRXIX, FSRVX
Fidelity Series Real Estate Equity Fund	FREDX, FREFX
Fidelity Series Real Estate Income Fund	FSREX, FSRWX
Forward Real Estate Long/Short Fund	KSRYX, FRLSX, FFSRX, KSRAX, KSRCX, KSRBX
Forward Real Estate Fund	FPREX, FFREX, KREAX, KRECX
Forward Select Income Fund	KIFYX, FSIMX, FFSLX, KIFAX, KIFBX, KIFCX
Franklin Real Estate Securities Fund	FREEX, FRLAX, FRRSX, FSERX
GMO Real Estate Fund	GMORX
Goldman Sachs Real Estate Securities Fund	GREIX, GRETX, GREAX, GRESX, GRERX, GREBX, GRECX
Great-West Real Estate Fund	MXREX
Heitman REIT Fund	OARTX, OBRTX
ING Real Estate Fund	CRARX, IREWX, IDROX, CLARX, CRWRX, CRCRX, CRBCX
INVESCO Real Estate Fund	REINX, IARFX, IARIX, IARYX, IARAX, IARRX, IARCX, AARBX
Ivy Real Estate Securities Fund	IRSAX, IREIX, IRSYX, IRSRX, IREEX, IRSCX, IRSBX
John Hancock Real Estate Securities Fund	JIREX
Johnson Realty Fund	JRLTX
J.P.Morgan Realty Income Fund	URTLX, JRIRX, URTAX, URTBX, URTCX
J.P. Morgan Security Capital U.S. Core Real Estate Securities Fund	CEEAX, CEERX, CEEFX, CEESX, CEECX
J.P. Morgan U.S. Real Estate Fund	SUSIX
Lazard U.S. Realty Equity Portfolio	LREIX, LREOX
Lazard U.S. Realty Income Portfolio	LRIIX, LRIOX
Manning & Napier Real Estate Series	MNRIX, MNREX
Morgan Stanley Institutional U.S. Real Estate Portfolio	MSUSX, MUSDX, MSULX, MURSX
Natixis AEW Real Estate Fund	NRFAX, NRFYX, NRFBX, NRFCX, NRFNX
Neuberger Berman Real Estate Fund	NBRIX, NBRFX, NREAX, NRERX, NRECX, NRREX
Nuveen Real Estate Securities Fund	FREAX, FARCX, FRSSX, FREBX, FRLCX, FREGX
Oppenheimer Real Estate Fund	OREAX, OREIX, OREYX, ORENX, OREBX, ORECX
PHOCAS Real Estate Fund	PHREX
PIMCO RealEstateRealReturn Strategy Fund	PRRSX, PETPX, PETAX, PETDX, PETCX, PETBX
Pioneer Real Estate Shares	PWREX, PYREX, PCREX, PBREX
Principal Real Estate Securities Fund	PIREX, PIRPX, PREPX, PRETX, PREJX, PRRAX, PRERX, PRENX, PRAEX, PRCEX, PRLEX
ProFunds Real Estate UltraSector ProFund	REPIX
Prudential Select Real Estate Fund	SREAX
Prudential U.S. Real Estate Fund	PJEAX, PJEZX, PJECX, PJEBX
REMS Real Estate Income 50/50 Portfolio	RREIX
REMS Real Estate Value-Opportunity Fund	HLRRX, HLPPX
Rydex Real Estate Fund	RYREX, RYHRX, RYCRX
SA Real Estate Securities Fund	SAREX
SEI Institutional Mgd Real Estate Fund	SETAX, SEIRX
Spirit of America Real Estate Income & Growth Fund	SOAAX
SSgA Clarion Real Estate Fund	SSREX
Stratton Real Estate Fund	STMDX
T.Rowe Price Real Estate Fund	TRREX, PAREX
TIAA-CREF Real Estate Securities Fund	TIREX, TRRPX, TRRSX, TCREX
Vanguard REIT Index Fund	VGSNX, VGRSX, VGSLX, VGSIX
Virtus Real Estate Securities Fund	PHRAX, PHRIX, PHRCX, PHRBX

REIT ETF	Symbol
Flex Shares	ASET
Wisdom Tree Global Ex-US	DRW
S&P 500 Equal Weight	EWRE
iShares FTSE Industrial/Office	FNIO
MSCI Real Estate Index	FREL
S&P REIT Index	FRI
First Trust S&P REIT	FRI
iShares Real Estate 50	FTY
Flexshares Global	GQRE
iShares Cohen & Streers	ICF
iShares International Developed RE	IFGL
iShares US RE	IYR
Premium Yield Equity REIT	KBWY
ETRACS Monthly Pay 2x Leverage	MORL
Market Vector Mortgage	MORT
iShares Global REIT	REET
iShares FTSE Mortgage	REM
iShares Residential	REZ
IQ US Real Estate Small Cap	ROOF
iShares FTSE NAREIT Retail	RTL
DOW Jones Global RE	RWO
SPDR Dow Jones	RWR
Schwab US REIT	SCHH
Super Dividend REIT	SRET
ProShares Ultra RE	URE
Vanguard REIT	VNQ
Vanguard Global ex-US	VNQI
iShares International Developed	WPS
Wilshire US REIT	WREI
Pacer Benchmark Data & Infrastructure RE	SRVR
Pacer Benchmark Industrial RE	INDS
Pacer Benchmark Retail RE	RTL
Hoya Capital Housing	HOMZ
NetLease Corporate RE	NETL

REIT Name	Ticker	Annual Increases/yr
Federal Realty	FRT	51
Universal Health Realty	UHT	33
National Retail Properties	NNN	29
Realty Income	O	27
Tanger Outlets	SKT	26
Urstadt Biddle	UBA	25
Essex Property Trust	ESS	25
W.P.Carey	WPC	22
National Health Investors	NHI	17
Equity Lifestyle	ELS	15
Digital Realty	DLR	15

Retail Investors Don’t Have To Fear Market Sell-Offs

Nick Ward

56 postsAugust 12, 2021

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Retail Investors Don’t Have To Fear Market Sell-Offs

56 postsAugust 12, 2021

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