The 10 Commandments of Retirement Investing: Part I

The first five of 10 important guidelines for long-term planning

   

Downtime gives us the chance to catch up on financial planning and topical reading, and Hurricane Sandy — which knocked out market activity for two long days — gave us plenty of downtime.

During my reading, I came across an article penned by Richard C. Young, Editor of Intelligence Report, that contained a synopsis of a 20-year-old mini-report he wrote on the “10 Commandments of Investing.”

The specific details of the article are lost to the archives, but the notion and ideas embodied in the synopsis are worth spelling out, as they provide a nice road map for retirement investing at virtually any age.

Let’s take a look at the first five commandments — again noting that they are in abbreviated form — and see how each can be put into practice. (Check out the final five here.)

#1: Capital Preservation

Nobody wants to see their assets go from hero to zero regardless of whether the asset is a home, stocks or bonds. So what can you do?

For one, be honest with yourself. You can’t possibly plan for every contingency (i.e., Sandy), but you should take control of what you can. That starts by making a portfolio mix that includes assets that can stay stable, even when the markets swing hard.

For stocks, that means a focus on “beta,” which essentially measures how much a stock fluctuates relative to the market. A beta of more than 1 means when the market moves up or down, the stock is likely to move up or down with even more gusto. Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) are examples of stocks with betas over 1 — they’re nice when they rise (and both have), but they’re murder when they fall (which they have).

Conversely, stocks with betas below 1 are more apt to hang tough when the broader markets get shaken up (though they’re also less likely to produce outsized gains).

Preserving capital means straying away from higher-beta stocks as time goes on, as you don’t want to suffer through the big “down” times when you need your money the most. So pay attention to this metric when adjusting your portfolio for long-term security.

#2: Dividends

This is a catch-all for so many investing ideas — indeed, you’ll find this theme all over the commandments list — but for our purposes, it means you want solid, dividend-paying stocks for the bedrock of your portfolio (and in most cases, you can expect these stocks to have lower betas).

The list is long, but InvestorPlace‘s Jim Woods provides a decent starting point with these five long-standing dividend payers that have been writing checks for decades without interruption — even through the Great Depression! These stocks include Coca-Cola (NYSE:KO) and PPG Industries (NYSE:PPG).

I might add that IBM (NYSE:IBM) survived that event, and has been paying dividends like clockwork since 1916.

#3: Compound Interest

If there is an underappreciated investment tool out there, it’s this one: the power of reinvesting every dollar earned back into an earning asset.

Sure, money market and CD yields out there today are crazy low — in some cases barely holding their own against inflation, — but continuing to reinvest the money in these types of funds will at least use the power of compounding to your advantage.

In a simple form, with a $1,000 investment in an instrument that pays out 2% per annum, compounding provides an investor with a little more than $1,100 at the end of five years:

Initial Investment: $1,000
Year 1: $1,000 @ 2% = $1,020
Year 2: $1,020 @ 2% = $1,040.40
Year 3: $1,040 @ 2% = $1,060.80
Year 4: $1,060 @ 2% = $1,081.20
Year 5: $1,080 @ 2% = $1,102.82

Compounding also works for dividend reinvestment plans, though, allowing investors the benefit of using cash payments to buy new stock, essentially providing “income averaging” for long-term investors.

In many cases, companies even allow employees to invest in their own stock through “DRIP” (dividend reinvestment plan) accounts, so take advantage. That’s how my wife — and myself, as we’re now joint owners — became long-term investors in Exxon Mobil (NYSE:XOM). It works!

#4: Core Equity Holdings

You’ll find that many stocks found by following this commandment will be similar to those found in Nos. 1 and 2. Essentially, you want to find and own stock of companies that simply will be around for the very long term.

Again, we can always go back to the basics with consumer staples companies like Johnson & Johnson (NYSE:JNJ) and Clorox (NYSE:CLX), but if you’re willing to expand your horizons a bit, there’s other sectors where you can find such companies.

For instance, tech stalwarts Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) come to mind as core portfolio holdings, both for their dividends, and because they possess what Warren Buffett refers to as “wide moats.” Or, there’s less-ballyhooed industrial names, such as maintenance & repair product distributor W.W. Grainger (NYSE:GWW), which has been around since 1927 and has paid dividends since 1965.

#5: Buy Dividend-Paying Stocks During Bad Times

Buying dividend stocks is important, but you can really maximize your gains by exercising a bit of good timing. Full-on bear markets, or even news-driven single-stock pullbacks in otherwise outstanding businesses, can provide the perfect time to jump into dividend stocks at a bargain.

After all, it’s great to have your long-term patience rewarded with cold, hard cash every quarter. But like many things, it’s even nicer to get the same product on the cheap.

Some ideas? Currently, AT&T (NYSE:T) — which yields more than 5% and constantly tops our list of Dow dividend stocks — has pulled back almost 9% in the past month after a brisk year of gains. Or there’s Kimberly-Clark (NYSE:KMB) — the maker of Kleenex and other well-known consumer brands — which recently lost more than 3% in about a week and is yielding roughly 3.5%.

So look through the markets during downdrafts — you might just be able to pick up a solid long-term investment on sale.

Tomorrow, we will look at Young’s remaining five commandments, so make sure to rejoin us then.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he is long AAPL, MSFT and XOM. What do you think? Let us know by leaving questions or other comments below.

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Article printed from InvestorPlace Media, http://investorplace.com/2012/11/the-10-commandments-of-retirement-investing-part-i/.

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