The 2015 year was one where many markets struggled. Not only did we see oil giants lose over half of their stock value, but it has become even more clear that the world’s economies are closely tied together. China’s struggling economy caused markets around the world to plummet virtually overnight, and the European Central Bank introduced further monetary policy measures help alleviate the euro zone markets.
We’ve learned quite a bit in 2015, and many of these practices are what you would learn in basic investment classes.
Dividends Are Not Safe
Stocks that pay out dividends are certainly a major bonus, but we’ve seen many investors that were under the assumption that companies need to pay dividends out every year. In 2015, these investors quickly learned that dividends can be cut or removed altogether according to the board’s discretion.
Even companies such as Kinder Morgan (KMI) cut their dividends despite having operations in a stable industry. The company cut their dividends in December from 51 cents a share to just 12.5 cents a share. While the company is in the struggling energy market, investors did not expect such drastic cuts to be made.
Diversification is Still a Necessity
Diversification in your portfolio should always be your top priority. Many investors who believe that they are diversifying enough money choose several different companies within the same sector, such as energy.
As oil prices have shown, even the world’s biggest companies can have their stock prices plummet virtually overnight.
The only way to survive in the uncertainty of the stock market is to diversify as much as possible. Anyone that chose to diversify heavily into energy stocks exclusively are regretting their decision at the end of 2015.
Diversification should occur not only within the United States, but within other markets as well. You want to invest internationally (at least somewhat), and invest in bonds, different sectors, commodities, real estate and other financial vehicles as well.
If there’s one thing that we learned in 2015, it’s that diversification should always be at the top of your priority list when investing.
Stock Market Corrections Hit Hard
The end of August was a difficult month for investors. One thing that we learned is that stock market corrections will make investors much poorer as a result. S&P 500 suffered a loss of 12.4% at the end of August following a correction.
This the first correction that occurred since 2011, but nearly $2 trillion was erased from companies that were listed on the S&P 500.
This will continue to happen now and in the future, but it does solidify that there are good and bad times to invest in the market. As an investor, you cannot try to time the market, as upswings and downswings occur far too often.
Market meltdowns are intensified when you do not diversify enough. Apple stock fell dramatically following the correction, but has since recovered. The issue is that many investors fail to diversify, as discussed earlier, and major losses are experience.
The good news is that corrections last are much quicker than the average recovery time for the losses. According to data based on the last 19 corrections of the S&P 500, the corrections only lasted for 138 days, while investors recovered in just 110 days.