From an investor’s point of view, it would be dangerous to think that things will turn around quickly and rush to buy up stock purely because they are “cheap”. Nonetheless, that doesn’t mean that we should avoid the market altogether, just that we should approach it in a rational, considered and realistic fashion. In these uncertain times, investors would do well to remind themselves of the following:
- Capital appreciation is only part of the equation. The biggest and best established companies will continue to reward shareholders through regular and reliable dividend payments. Many have argued that a lot of companies will be forced to lower their payouts and that currently quoted yields are not an accurate indication of what to expect. So what? It’s very likely that payments will drop, but even if this is the case, yields will still remain above the long term average.
- Picking bottoms is notoriously difficult. Besides, one doesn’t need to enter into stocks at their nadir in order to do well. The fact is that the long term investor can rest safe in the knowledge that in years to come the main thing will be that stocks, for the most part, will be well above their present levels. As I’ve mentioned before, BHP dropped a further 25% after the initial pull back of the 1987 crash. But after a few years was rewarding shareholders with substantial capital gains. Go long, stay strong!
- Not all stocks are equivalent. The market is measured via aggregate indices, which can hide the fact that certain stocks and sectors continue to perform (and even excel) in these tough times. Defensive plays such as staples, utilities and healthcare offer the kind of consistency that other industries don’t enjoy. Although the ASX200 is down over 45% from its all time high, AGL is only 8% weaker and has returned over 4% in dividends (all of which have been fully franked).
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- It doesn’t matter that some supposed “blue chip” stocks may fold. Who would have guessed in 2007 that some of the biggest and best companies in the world would have come so close to folding and require huge government bail-outs to stay afloat? Who’s to say that we won’t see more shocks like this over the next couple of years? As far as I am concerned this is just part of the risk of investing, and is something that we can never guarantee against. That’s not to say though that we can’t mitigate our risk considerably. These events simply remind us of the importance of a properly diversified portfolio. If you hold at least 15 stocks in your portfolio, the risk that even a third of these will fail is extremely remote. Indeed, the gains made elsewhere usually more than compensate for the losses suffered.
- Focus on quality. Companies that have a great track record of solid earnings, cash flow and conservative debt will suffer like most in a bear market, but these companies will weather the storm and reemerge stronger and better than ever. Forget rumour and speculation, stop chasing the penny dreadful and target quality businesses.
- Investing is not about getting rich quick. Investing in the market is all about achieving solid returns that outstrip alternative asset classes in the long term. Regular contributions, reinvestment of dividends, a well constructed portfolio of quality blue chip stocks and a long term perspective won’t make you an instant millionaire, but it will build your wealth substantially with minimum risk.
It’s likely that the market will take many more years to return to virgin territory, and it’s more than likely that things will get worse before they get better. But instead of letting fear and uncertainty dictate your decisions, turn the situation to your advantage and use this period to build your stake in a range of quality businesses. It won’t be an easy ride, and it’s likely that you will be tempted to hit the abort button on more than one occasion, but if you stay true to your plan and remind yourself of the lessons of history you will reap significant rewards in years to come.
In the DividendKey course, I demonstrate the advantages of this kind of approach and support it with overwhelming empirical evidence. I strongly suggest that you take the time to at least consider adopting an income investing strategy. To learn more visit www.dividendkey.com; with a 100% money back guarantee, you have nothing to lose!
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