The market has been on a tear since mid-March rallying strongly from the year lows. The FTSE 100 is up 20%. The FTSE 250 is up 35%. The S&P 500 is up 50%. The NASDAQ index is up 80%. This is a good thing or a bad thing, depending on your investment strategy and time horizon. If you’re a value-oriented dividend growth investor, a market on fire can dim the prospects of finding companies at attractive valuations that you can buy into.
The current market environment is very polarising. There is a clear divide amongst investors. On one side stands the bulls who are of the view that stocks only go up. On the other side are those that remain cautious and have been sceptical of the COVID recovery rally the whole way up and believe a pullback is on the way.
I must admit that I am closer to the latter than the former. Even though I am a firm believer that recessions make big companies stronger and there is so much easy money to be had, I can’t help but admit that valuations looked stretched at the moment, particularly across the Atlantic.
If I had to use my gut instinct, I would probably have stopped putting new money into the markets since April. If I followed my gut, I would have missed out on the huge rally that has taken place since and would be kicking myself right about now.
This is why it is important to have a plan when it comes to investing. A plan helps me keep my emotions in check and allows me to focus on the end goal. Without a plan, I would just be a rash investor making decisions on a whim.
My plan involves buying attractive dividend growth stocks month after month after month regardless of what the markets are doing. Sure there might be certain month where I slightly overpay. But there will also be months where I pick up bargains (and I keep excess cash to take advantage of these periods as well). Having such a plan in place ensures that I am allocating a chunk of my capital to cash flow producing assets each month and don’t feel like I’ve missed the boat.
It has been said countless times that investing is as much about emotional control as it is about financial acumen. My plan is there to keep my emotions in check. It ensures I keep accumulating stock even though I think or feel the stock market is expensive. The market doesn’t care what I think. It will keep gyrating upwards and downwards regardless of what I think or feel. And that is why I need to remove emotions from my investing process. I instead need to focus on my end goal of creating enough passive income to cover all my expenses. And having this plan in place certainly helps me get there.