You Still Need Stocks, Just Not the Headaches!
Maybe you’re starting to breathe easier, maybe not. After a wicked first quarter (the Standard & Poor’s 500 index tumbled 9.4%, including dividends), the stock market has opened the second period with a tentative advance.
If you’re not convinced that a turnaround is here just yet, I can certainly sympathize. We’ve endured several false starts—in August, November and January. The news flow continues to be pretty bleak, with endless talk of foreclosures, job losses and the prospect of $4 gasoline this summer.
And yet, over the past half-century and more, the best time to buy stocks has been in the midst of an economic slump. Since 1953, measuring from the first month of a recession to six months after its end, the S&P has gained an average of 42%.
The most important thing to remember when Mr. Market decides to throw us another curve ball, is to remain calm. This too shall pass. Until it does, there are three steps you can take to make investing less stressful and more enjoyable during this stock market transition from bear to bull!
#1: Maintain a reserve of cash and short-term bonds that will let you sleep easy. We’ve earmarked 30% of our Model Portfolio for CDs and money market funds. Is that too much for you, or too little? If youfind the current turmoil boring, you’ve got too much cash. If you find it frightening, you’ve got too little.
#2: Bump up the dividend yield on the stocks you own. Obviously, you can’t order the board of directors of GE or IBM to raise your dividend. However, you can switch out of lower-yielding stocks to those that offer a more generous payout. In rough markets, higher-yielding stocks tend to hold their value better.
#3: Upgrade the quality of your stocks. Again, this means doing some shifting and shuffling.
It’s O.K. to take a few speculative flyers. In a difficult market, though, most of your equity
holdings should consist of companies with strong finances, well-entrenched franchises and a market capitalization exceeding $10 billion.
Make no mistake about it. There’s no need to sugarcoat the truth these days. The first quarter of 2008 was a bust. But despite the year’s rough start, I’m not trying out for Walter Matthau’s part in the next sequel to Grumpy Old Men.
From where I sit, it looks as if most of the bad market news is now behind us. In fact, in the May issue of Profitable Investing I recommend buying 3 big-name blue chip stocks that investors may never see at this bargain price again!
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