Invest Effectively

Staying The Course …

Plenty of people are running scared after the bears trampled -10.5% out of Wall Street on Thursday & Friday. I’m not sure what will happen to the S&P 500 on Monday morning (futures are -2.5% as I write this on Sunday night), but I’m keeping the faith that some order will be restored over the next few weeks, months, and years.

If you saved for your retirement over the last 10, 20, 30, or 40 years – you’ve seen shocks to the market before. I can count at least 4 other significant ones since the year 2000, so I guess that’s about 1 every 5 years.

Here’s what I recall …

Dot.Com Bust / 9/11 Shock – This one shook everyone around the world. First the bloom was off the internet rose, then we had global terror events, leading to war. The S&P 500 had already started to decline in 2000 and slumped -38.1% before the first anniversary of 9/11.

2008 Lehman / 2009 Housing Crisis – It’s hard to believe that the S&P 500 shrunk by -42.7% between June and December 2008. That’s the biggest short-term drop I can remember during my working career. I was fortunate to be working for 1 of only 5 MegaCorps in the S&P 500 whose stock was up that year.

2020 Pandemic Lockdowns – The market plunged -25.7% following the start of the pandemic lockdowns. “Two Weeks to Stop the Spread” kicked off two terrible years of government pretending to know what to do. I made one of the our best portfolio moves ever on St Patrick’s Day.

2022 Bidenomics – Politicians never let an emergency go to waste and the S&P 500 fell -24.8% from January through October, as inflation hit a 40-year high behind reckless government stimulus. We bought the stock market near it’s low that year, after exiting some private mortgages.

Let me say very clearly that I’m not happy about the approach Trump is taking to tariffs, but I’m trying to keep it in perspective right now. The magnitude of the tariffs and the haphazard way in which they have been calculated are a huge surprise to me.

Fortunately, we don’t have any need to sell anything in our equities portfolio, so we’ll stay the course through this storm. We’re long-term investors and as I said at election time, our finances are pretty insulated from political noise. Some of our stock market losses will be tempered by gains in our bond funds.

The one financial move we need to make is to decide where to invest some money that will come our way soon from selling our rental townhouse. I’m thinking we can use to 1) increase our stormy weather cash buffer; and, 2) potentially buy some stocks while they are “on sale”. We’ll see. I’ve gotten pretty lucky in buying low in 2008, 2020, and 2022. Maybe I’ll get lucky again.

Are you prompted to make any significant portfolio moves right now?

Image: Pixabay

15 thoughts on “Staying The Course …”

  1. Coincidentally, I had my monthly investment meeting with my oldest son yesterday and I feared he would be panicking. I was very pleased that he was already in the bargain shopping mode and is staying the course. He has his emotions under control which is very hard to do. We invest in safe dividend stocks that pay a good current yield and are growing. Safe dividend investing doesn’t increase in market value as fast as the S&P 500 when it is in crazy Bull Markets like the recent AI runup, but it doesn’t drawdown as fast during Bear Markets.

    We look very closely at three numbers most people don’t track very closely. 1) How much dividend income are we going to earn over the next year and future years? 2) How fast will the dividend increases and any reinvestment grow the income stream in the future and will it stay ahead of inflation? 3) Are the business models of the companies that pay the dividends still safe so that they can continue paying and growing their dividends?

    Directly answering your question, no, we are not making any significant portfolio changes based on the current Bear Market. However, we will monitor for any stocks that experience a significant decline in their business that jeopardizes their dividends. We will also be screening for mispriced stocks.

    You reviewed the Bear Markets since 2000. I screen for dividend stocks that are paying a high current yield and have the highest dividend growth rates for safe stocks. The current Bear Market isn’t even close to what was available in the 2008/2009 timeframe. When I ran the same screen I still run, names like Home Depot with a current yield of 4.5% and over 20% annual growth rate and Microsoft also at 4.5% with a growth rate that was around 16% surfaced. I estimate that my return on these stocks will be the sum of the current yield plus the dividend increases. Easy to see where HD and MSFT could have returned in excess of 20%. Right now my screening is giving me dividend and growth sums that are slightly over 10%.

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    1. It sounds like your approach is well reasoned, as always! I have to say, I don’t think I am disciplined enough to spend the time necessary to screen and buy individual stocks like that. Many of the guys in our neighborhood investment club do that, but I’m too busy thinking about goofing off. I can see you have a passion for it and it’s nice to have a hobby that you can make money off of!

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      1. I agree with your statement that I find stocks fun. Remember I was first taught about direct ownership of stocks from my FIRE Grandfather who retired at age 50. He bought stocks in companies around the Pittsburgh area. While he was working, he reinvested the dividends through DRIP programs because trading expenses were super high back then. He used to receive dividends in the form of physical checks in the mail. The only thing better than receiving a check was receiving a bigger check after a dividend increase. He also used to attend annual meetings in person.

        Analyzing, buying and selling stocks was much more different back then, but the whole experience seemed more real in that you felt like you were a part owner in a company and had pride of ownership.

        Direct ownership in stocks and becoming a part owner of a company is a great way to get young people interested in investing. My middle son comments that dividend investing is boring, but the returns have been good and he wants to put more money to work this way.

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      2. My Grandpa was also from Pittsburgh (Braddock, actually). His family moved to Wisconsin when he was a young adult. Still, he cheered for the Steelers and Pirates (who both had good runs in the 1970s) and drank Iron City Beer!

        My son has an individual stock portfolio. He is a software engineer with a passion for tech companies, so that is the sector that he invests in. He uncharacteristically talked me (an index fund guy) into buying $5K of NVDIA earlier this year and it’s been nothing but red ever since!

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      3. NVDIA has had a couple crazy runups during the past 20 years. Around 2008 NVDIA GPUs were being used for crypto mining. It was hard buying GPUs for my sons who wanted them for their gaming systems. I don’t do computer gaming myself, but do put my engineering skills together helping my sons build gaming systems. For gaming performance it is all about GPU and internet speeds. NVDIA latest runup is due to people using their technology for AI.

        Dividend investing for income enforces a buy discipline. I screen for stocks that are currently yielding >4%, latest dividend increase >3%, and Simply Safe safety rating >70 (based on dividend track record and current financials). I sort for the largest sums of current yield and grow rate. Most of these companies are selling at five year lows measured by PE ratios.

        Here are two examples of this in action. I bought MSFT in the 2009-2010 timeframe. Their 4.5% current yield and 16% latest dividend increase got my attention. At the time, they were seen as has-been technology company. They were in the midst of a revamp. They were switching from selling licensed software in boxes to hosted solutions paid for on a monthly basis. This switch from one time purchase caused a short term disruption in their revenue as they switched to monthly fees. Office 365 has become the clear cut winner in the corporate office tool space. Towards the end of my career, I hardly ever ran into IBM’s Notes anymore. They grew the platform to include online meetings via Teams. When was the last time you were on a Zoom call? Teams has expanded to offer telephone lines. Many of my corporate customers stopped providing telephones.

        I have also been in and out of Oil Majors including Exxon-Mobil and Chevron over the years. I held them when Obama was in office, because he green energy focus made business conditions harder for their competitors, so counter-intuitively established majors made more money.

        During Trump’s first administration and so far during his second administration he has used cheap oil as a way to defund Russia, Iran and Venezuela.

        BiDUMB’s administration worked out almost exactly the same as Obama’s. I am not a trader. I bought Oil Majors when they were for sale with really high current yields. I sold them when there was a market price runup that pushed down the yield to where I could redeploy the funds into another stock with a higher current yield. During the start of BiDUMB’s Administration XOM had a 6.3% current yield back in June 2021 due to fears about the actions he was taking against the industry. Around a year later, people figured out the XOM is actually making more money because of the adversity heaped upon XOM’s competition. The yield halved because the market price doubled.

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    2. Right there with you. I do track the quarterly dividends paid from the broad-based mutual funds and individual stocks that we own. For the past 8 years, the dividends have easily outpaced inflation. We are not reinvesting all of the dividends, but banking some of them to create our income stream since we are retired.

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  2. Agree all around. My investments are set up such that the only time I take a distribution is to pay taxes. I do have a major payment to make next week but I have the cash in savings to handle it.

    Like Klaus, dividends and bond fund interest is more than sufficient to fund extras in retirement but I have no need to pull from those earnings due to consulting which is what I consider to be a lucrative and enjoyable activity.

    I remember being spooked by Black Monday in 1987. It seemed expensive at the time, but in retrospect it was a relatively inexpensive longterm lesson on investments

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    1. I knew somebody would mention Black Friday! I was in college at the time and my buddy told me that the stock market was down 22%. I thought, that can’t possibly be, could it?? I think it had pretty much completely recovered by the end of that calendar year. Quite a bounce back.

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  3. I’m in the same boat—no planned changes to my investment strategy at this point. I’m staying the course and keeping a long-term perspective. Interestingly, I was watching Fox Business and the commentators were all asking the same question: “Where’s the bottom of this going to be?” I’d be curious to hear your take—do you think we’re close, or is there more pain ahead?

    It sounds like you’re thinking strategically about what to do with the proceeds from the townhouse sale. Bolstering your cash buffer while also keeping some dry powder to potentially scoop up discounted stocks sounds like a solid plan. Looks like you’ve had good timing before, and history could repeat itself.

    Looking forward to hearing your thoughts.

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    1. I think Trump is too mercurial for anyone to know. I see that EU has offered some concessions, but they were very limited and quickly rejected. Still, I guess that means the “negotiations” have begun. I think it’s a game of who blinks first: the GOP in Congress (facing mid-terms in 19 months) or other countries (likely to face much worse economic pressures than we have). We’ll see. I don’t try to play the “time the market” game, though I’ve gotten lucky a few times.

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      1. I agree with your assessment that Trump is trying to cause other countries to negotiate. Oil just went under $60 per barrel yesterday. This defunds Russia, Iran and Venezuela. Expensive oil funds Russia’s Warfare against Ukraine.

        So far it sounds like other countries are mostly wanting to negotiate. Trump will wait until he gets deals that make sense. China is being obstinate and Trump has threatened to crank up the US tariffs even higher. From following Gordon Chang’s analysis on China, they were already having a rough economic time.

        China has also been fighting an asymmetric war against us in the form of COVID – 19 bioweapon against our old and infirmed, the chemical weapon Fentanyl that is killing at least two Vietnam War’s worth of America’s young people every year. Gordan Chang has suggested that China is weak financially and can be given a nudge into bankruptcy.

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      2. I’m fine with him pushing for a deal on reciprocal tariffs (fighting my free trade instincts), but fighting a trade DEFICIT war seems crazy. I buy the scotch … they take my money … no deficit in my mind!

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  4. I have used Simply Safe Full Access since 2020 if my memory is correct. I find their Safety Score and 5 Year Valuation Screens extremely helpful. Prior to getting their service I used to use Yahoo! Finance to screen for stocks with dividend current yield. I would then have to estimate the Dividend Growth Rate myself. The I would eyeball the dividend payouts over time to verify that the stock didn’t cut their dividends, especially during the 2000, 2008-2010 and 2020 Bear Markets. This service dramatically cut my research time and I like their dividend safety scores and current valuation my better than what I was doing.

    Two other extremely helpful features of their system is that they have screens that show what my annual income is by month. Really nice seeing it go up whenever I receive a dividend increase. I also like their alerts about when the financials of a company have changed, especially when it puts a company’s dividend at risk.

    The service looks expensive, but it you manage a million with it, your cost works out to .05%. Manage more and the cost is even lower.

    The only Open Mutual Fund I hold is a Short Term Treasury Fund that my Deferred Comp Plan is invested in. I only had Mutual Fund Options. It is a sinking fund that pays out over ten years, and I am down to 4.5 years to the end. That is my cash equivalent. I also own Closed End Bond and Muni-bond Funds. Everything else is growing Dividend and Distribution paying stocks.

    I hear you that tariffs go against your free trade instincts. China and many other countries are different in that they are Communist or Socialist. China in particular are rampant intellectual property thieves. I am especially tuned to this since I spent the majority of my career working in the software business which is highly dependent upon copyright law. China has also been at asymmetric war against the USA for decades and recently have killed millions of our people through spread of Covid-19 and Fentanyl. Not buying from China is similar to not buying Mercedes and Volkswagens from the Germans when we were fighting WW II.

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