How many shares you own: Why it’s important
How a focus on your share balance can help you cope when your account balance is down.
Why share balance is important
Many investors focus primarily on the dollar value of their accounts each month. This can cause anxiety and sleepless nights during periods of market decline.
But investors should also look closely at their share balance, or the total number of shares in their account.
The number of shares you own doesn’t depend on the market; it’s an amount that you control. When you invest regularly, you will add shares to your share balance even as your account balance fluctuates up and down. You may not be able to control the market, but you can continue to acquire shares regularly by taking advantage of dollar cost averaging. And you’ll get a lower average cost per share over time by purchasing more shares when prices decline.
Share balance is also one of the hidden engines that drives growth and income in mutual fund portfolios that include dividend-paying funds. These types of funds include growth-and-income, equity-income, balanced and bond funds.
Share balance helps drive dividend income
Since dividends are paid based on the number of shares you own, your share balance can make a significant difference in your current and future dividend payments.
Consider a hypothetical $500 monthly investment in Standard & Poor’s 500 Composite IndexSM, with all dividends reinvested, over the 20 year period ending on December 31, 2012. As the dollar value grew, so did the share balance and the investment’s income-producing power.
In this hypothetical example, the investor received $81 in dividend payments in 1993 based on 13 shares owned by year–end. By the end of 2003, having acquired 95 shares, the dividend payment grew to $1,582, a considerable difference. With 163 shares by the end of 2012, the dividend payment grew to $4,978.
|Year-end||Share balance (number of shares)||Annual dividend payment|
Source: Thomson InvestmentView
Reinvested dividends help build share balance
If you own a dividend-paying fund, reinvesting your dividends is another way to help your share balance grow. One of the reasons the investor in our example above was able to acquire 163 shares was because the shareholder reinvested dividends. Reinvesting dividends rather than taking them in cash can help share balance grow even when financial markets are down or relatively flat. The investor who reinvested dividends ended up with 33 additional shares and a much larger account value than if he or she hadn’t reinvested those dividends. In fact, the dividend payments themselves grew as well.
In the case of a hypothetical $500 monthly investment in the S&P 500® over the 20 years ending on 12/31/12, reinvesting dividends rather than taking them in cash helped build the share balance.
|Investing $500 monthly for 20 years beginning 12/31/93||Dividends reinvested||Dividends taken in cash||Advantage of reinvesting dividends|
|Total dividend income||$38,704||$33,300||+$5,404|
|Total shares acquired||163||130||+33|
Source: Thomson InvestmentView
For more information about dollar cost averaging and dividend-paying funds, contact your financial adviser.
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