A lot of people are worried about the direction of the world right now.
All this creates a lot of uncertainty. And this uncertainty causes a lot of confusion.
But what most investors…and mainstream pundits…forget is that it’s a direct result of uncertainty that we have markets in the first place. If the future were known, we would have no need for them!
Take futures markets, where people buy and sell commodity contracts for delivery on a specified future date.
One of the first futures markets were the rice-futures markets of seventeenth century feudal Japan.
The country’s feudal lords relied for their income on rice. But of course, weather conditions affected harvests. So a market developed that allowed brokers to take away some of the risk of a bad harvest by buying part of upcoming harvest in advanced for a fixed amount.
This meant the feudal lords were guaranteed a certain amount of cash upfront. And if bad weather affected the harvest, they wouldn’t suffer an outright loss.
They “hedged” against future losses in other words.
The brokers ran the risk of a loss if the harvest was lost. But they also stood to gain if the weather conditions allowed for a healthy crop. Because they would be able to sell their part of the harvest at higher prices.
Now, if the Japanese feudal lords didn’t have to deal with the uncertainty of future weather conditions, none of this would have been necessary. They could have simply planted rice, watched it grow and sold it into the market at harvest time.
But the fact future weather conditions are unknown meant a complex market mechanism was necessary.
This market mechanism helped the Japanese reduce their risk in the face of uncertainty – essentially what all free markets are there for.
Your job, if you’re an investor, is to apply judgment in the face of uncertainty. This takes hard work. And guts. But once you understand that uncertainty is part of the game, making investment decisions becomes a lot easier.
Dividends – A “No Fail” Way to Make Money in Stocks
Smart investors know how to reduce the amount of uncertainty they have to deal with.
One great way of doing this is to buy dividend-paying stocks. These pay out a portion of a company’s earnings to shareholders.
(Think of these dividend payments as a “paycheck” from the company to you, the shareholder.)
It doesn’t take a genius to work out that owning dividend-paying stocks offers you a great chance of making money in highly volatile market conditions, when the overall trend is hard to determine.
Put simply, dividends are a lot easier to predict than things like inflation rates, Fed policy and the myriad other macroeconomic variables out there.
The great thing about adding dividend-payers to your portfolio is you don’t even need to spend time picking stocks. These days you can now collect dividend “paychecks” by way of a number of specially focused exchange-traded funds (ETFs).
And the U.S. isn’t the only market where you can go dividend hunting. You can buy shares of ETFs that solely focus on emerging market dividend payers.
A Great ETF for Overseas Dividend Exposure
One of my favorites – and a great way to collect dividend income while adding exposure to fast growing overseas markets – is the WisdomTree Emerging Markets Equity Income ETF (NYSE:DEM).
This ETF has returned over 10% annualized since it was set up in 2007. It charges fees of 0.63%. And top names include Brazilian bank Banco do Brasil S.A., Russian oil giant Lukoil and Brazilian brewer AmBev.
Uncertainty in the markets is nothing to be feared. But when levels of uncertainty are unusually high, owning dividend-payers gives you one of the best chances of making money in stocks.