Should you raise cash here? Is being “foolish” and just staying fully invested with every available dollar such a bad idea? Well, did you know that if an investor bought at the very top of the stock market in 2008 right before the crash/Great Recession, and held until now, they would have made a total return of over 9% annually. Take a look at the S&P 500:

Source: BAD BEAT Investing

Staggering isn't it? What you may not realize is that a massive portion of that return is due to reinvesting dividends into depressed shares. This return comes after being "foolish" and holding on through one of the worst market crashes in history.

Why did this happen? Well, we know that stocks, in general, represent ownership in real companies which pay dividends and keep generating profits year after year. The day-to-day business of companies tends not to be impacted by the fluctuations of the stock market/ The fact that stocks are overvalued compared to historical multiples won’t affect how many Big Macs McDonald’s (MCD) makes this year, nor will it impact how many iPhones Apple (AAPL) can sell. Even after the latest pullback in AT&T (T), the telecom will continue bringing in new wireless and video subscribers while paying a growing dividend.

You see, regardless of the stock price, these companies are still making money, year after year, and paying dividends to go with it. Some talk about a bubble or being overvalued. Is the market really overvalued when Apple sells for 12 times earnings after adjusting for cash? Is this really a bubble? Sure with the S&P 500 selling for a P/E ratio around 24, this is higher than the historical mean, but what if stocks were just historically undervalued? Few consider that risk goes both ways. Remember, valuation must be done based on earnings, not stock prices!

Sure, staying fully invested runs the risk of falling victim to further market selling. When risk events surface and new reasons to sell get highlighted in the media, listening to these distractions also runs the risk of missing out on great market gains because you were on the sidelines in cash. Make no mistake, you should always have cash, but recognize that risk runs both ways. What we are trying to say here is that the more you try to time the market, the more you risk underperforming it, unless you are a proficient trader. For most of us that is not possible. As such, everytime one of these market events surfaces, it seems like markets must "flash crash" because of it, and we must sell. Historically, it is very rare for any of these distractions to be a real reason to sell after a few weeks or months. Essentially, experience says that we should ignore them and continue the course. Here are some recent examples:

Flash Crash of 2010

It was May 6, 2010. In the UK it was general election day, in the United States markets were gripped by mounting anxiety about the Greek debt crisis. The euro was falling against the dollar and the yen, but despite the turbulent start to the trading day, no one had expected the near 1,000-point dive in share prices. In a matter of minutes, the Dow Jones index lost almost 9% of its value – in a sequence of events that quickly became known as “flash crash.” 

There was a frenzy of speculation about what might have caused the rout, with explanations ranging from fat-fingered trading to a cyberattack. But within days, officials in the United States were blaming big bets by a trader on Chicago’s derivatives exchange. By the end of September, an official report by the two main U.S. regulators pointed to a $4.1 billion sell order instigated by a U.S. mutual fund, said to be Waddell & Reed. Within days the market was trending higher. If you panicked, you lost.

2011 Sovereign debt crisis crash

Black Monday 2011 refers to Aug. 8, 2011, when U.S. and global stock markets crashed following the Friday night credit rating downgrade by Standard and Poor's of the United States sovereign debt from AAA, or "risk-free," to AA+. It was the first time in history the United States was downgraded. Moody's issued a report during morning trading, which said its AAA rating of U.S. credit was in jeopardy, this after issuing a negative outlook in the previous week.

By market close, the Dow Jones Industrial Average lost 634.76 points (-5.55%) to close at 10,809.85, making it the 6th largest drop of the index in history

2015 Chinese decline

On August 17, 2015, the S&P 500 stood above 2100. The stock market in China had been crashing for several months already, beginning with the pop of the bubble on June 12. The markets in USA then began to fall in sympathy, with several days of deep declines. Finally, on August 24, 2015, known as “Black Monday,” Chinese markets dropped 8% leading to the Dow Jones opening down 1000 points, ultimately closing down 588 points. The next day was not much better, with the Shanghai index dropping another 7.6%. However, the market quickly bottomed and rebounded with U.S. markets rallying heavily on August 26th, with gains of about 4%.

Oil decline triggers early 2016 selloff

The beginning of 2016 saw another marketwide sell-off. Oil dropped to around $27 per barrel. The markets dropped about 10% to open the year. This was a perfect time to do some buying, with the S&P 500 recovering quickly and continuing its upward trajectory for the year.

June 2016 Brexit

On June 24, 2016, the S&P 500 fell almost 5% when more than half voted for UK to leave the European Union. You may recall the 'fears' over Brexit. The doom and gloom led to heavy selling, which ceased rather quickly and a rebound began weeks later, leading up to the November 2016 elections which led to a supreme market rally. Had you bailed and waited for a further pullback, you would still be in cash!

Putting it all together

Looking back these issues clearly were non-events that should not impact the market's long-term. They were blips on the long-term chart. At the time, they clearly were buying opportunities. The media often stokes fear, and many experts were pounding the table to raise cash and brace for volatility. In each of these events, the best solution for all those but the best of traders was to buy more, or at least hold strong to your well-diversified portfolio,

The buy and hold, long-term view is a winning one. This does not mean individual tickers will perform the same as the overall market, but this is why we strongly suggest that you own a core, well-diversified portfolio. A well-diversified portfolio that pays dividends will almost always deliver long-term annualized returns.