An Owner's Mentality

It’s easy to see stock market investing as a game of “up and down” - betting on whether the prices rise or fall, and hopefully making your profit accordingly.

 

I don’t think in these casino terms. Instead, I try to think like the part-owner of a business.

 

Once I’ve bought, I’m an owner for the long-term - decades. My profit is coming when the company makes a profit on its operations. Okay I’m only a small part-owner, but I still get my little slice of the profits, and this doesn’t depend on what the share price does. The market can go haywire all it likes, I still own the same slice of my businesses, and as long as they’re still trading, still making a profit (though perhaps temporarily a bit reduced in bad economic times), then my ownership is still intact.

 

If share prices tank to half what they were, it doesn’t hurt me.

 

This mindset is pretty easy to maintain during the accumulation phase. In a downturn, that means fresh shares are on sale at bargain prices, and my monthly contribution gets me more shares than usual. But it’s during retirement that I have more of a problem, as I’ll be looking to pull my income from that shareholding.

 

It’s still not a massive problem. Part of the profits pops out anyway as dividends. Even if companies retain some of their profit to reinvest, there’s usually a dividend portion, and this is the same in index funds too - there’s generally an annual distribution. You just need to switch to distribution units rather than accumulation units if you want that money to pop out rather than being reinvested.

 

The painful part is selling some shares/units for income, if the dividends don’t cover your needs. Reducing your number of shares whilst the share price is down means that you end up selling a bigger number to cover your income.

 

Naturally we all tend to exercise a bit of restraint when the market’s down. This is a good approach - it means that skipping that expensive round the world trip until the market is a bit better helps defend your portfolio from you deep-dipping into it. This sort of restrain is often all that’s needed in order to weather the storm successfully.