In 1929 the worst stock market crash in the history of the United States occurred. Most stocks fell by an average of 80%. It would turn out that the stock market crash actually made long-term investors significantly more money than if the crash had never happened in the first place.
The reason the stock market crash was so valuable to long-term investors is the same principle which makes a long-term investor a smart investor today; buying cheap stocks and valuing dividend reinvestment. There is a major fundamental fact with large companies that issue dividends. They never want their dividends to decrease. A decrease in a dividend shows that they are not managing their company correctly and are not able to meet investor expectations which can lead to a major sell off of shares. This is why almost all dividend paying companies strive to meet each quarterly or yearly dividend if not increase their dividends.
The fact that companies never want to decrease their dividend works in an investors favor if the stock price of that particular company absolutely plummets. As the stock price of a company who never reduces their dividends goes down, the dividends they disburse purchase more and more shares. Let’s do a math problem to prove this fact.
Let’s say I own 10 shares stock that is currently trading for $60 and is paying a 5% dividend. This means that my dividend each quarter will be $0.75 per share. Since I own ten shares I will be receiving $7.50 per quarter in dividends from this company. If I reinvest those dividends I will be receiving .125 of a share each quarter.
Let’s pretend the great depression struck and my companies stock dropped by 80%. This means that the share price is now down at just 12 dollars. Since my company never decreases their dividends I will still receive $7.50 per quarter and will reinvest those dividends into more shares. Since the stock price has decreased to $12 I will receive significantly more shares than when the stock was $60. I will be receiving .625 shares per quarter instead of .125 shares. I will be receiving 400% more shares per quarter.
Assuming my company does not go bankrupt and recovers after the great depression, the amount of shares I will have accumulated at the lower share price will dramatically increase my stocks total worth after the recovery. When the recovery happened, long-term investors who survived the great crash of 1929 accumulated far more shares than they would have if the crash never happened at all. As we have learned from history, after each depression or recession the stock market has in fact recovered. This is why if you ever go through a huge stock market crash in your life-time the worst possible thing you can do is to sell your shares.