Posted by Robert on June 20, 2011
My wife might take issue with the title of this post, specifically the use of the word “sometimes.” Joking aside, while she has taken responsibility for spending and especially saving, I have taken responsibility for choosing investments. I bought some individual stocks which pay good income, and for a while I felt like a genius because I’ve been receiving healthy dividends at the same time as experiencing capital growth.
The last couple weeks have been pretty difficult, however. I bought these companies’ stock because they were cheap and, even though earnings may have been disappointing compared to the past, they were likely to recover with the rest of the economy. And for about a year, it seemed to be working. But recently, most companies have reported their first quarter results and at least four of them came in very disappointing. In a couple cases, the stock price returned to where I had purchased it, erasing my gains. In a couple other cases, the share price fell below what I paid for them. That sure feels like I made some mistakes. How can I minimize the fallout?
Investing for Income. This makes especially good sense because of my goal to live off investment income. When I buy a stock that is yielding 10%, expecting the share price to go up and dividends to remain constant, I may double my money and have a new yield of 5%. This happened with Bank of Montreal (not that I bought it) during the market crash of 2008. Should it fall back to it’s prior price, I would still be getting the same dividend. And where else could I find a yield of 10%? This keeps me from compounding my mistakes when the price falls, and it provides income to sustain me through the market troughs.
Diversification. I used to privately wonder if “diversification” were an excuse to sell a greater number of stocks and earn more commissions. But now I am starting to see the emotional benefit.Even though four of my holdings have been disappointing, I have one that won’t stop going up. That makes me feel better about my whole portfolio, especially since it’s my largest (highest-conviction) holding. And, financially speaking, if a couple companies go through a difficult economic period and are forced to reduce or postpone their dividends, I have income coming from other companies that are affected by different economic variables.
Remember Why I Bought Them. In one case, I bought a newspaper publisher. Newspaper is not the “wave of the future”, I recognize that. But with their expanding online presence and their distribution of flyers and coupons, I think they should do well enough in the future to provide a profit from the gloomy days of 2009. And when I read through their financial statements, I am reminded that their business is cyclical, producing more revenue (and profit) in the second and fourth quarters of the year. I bought their shares after a disappointing first quarter originally, and now they’ve had a first quarter with lower revenues from their recent fourth quarter. But that’s normal, and I don’t mind profiting from other people’s fear or pessimism.
Rebalance. What do I do, now that my largest holding is going up and some of my smaller holdings are going down in price? Take some profit from my winner (which is now yielding less) and buy more of my losers (which are now yielding more). This balances my portfolio more equally and it increases my total income. Unfortunately, it also increases the uncertainty of future results. But I own these companies because I believe in them and I’m getting paid to wait.
What do you do when things go wrong? Do you revise your strategy or do you wait it out?