It is amazing to me, but there are obviously a lot of people who are selling into this crazy market that we have been seeing in past few weeks. Of course there are a lot of people who are buying, but as markets work on supply and demand, there are more selling than buying hence the declining indexes. I have heard and read a couple of times that the North American markets are going into the perfect storm – many things at once going on to create conditions ripe for dramatic events. Most recently, Michael Sivy spoke about the fact that we may be heading into a recession and perhaps a bear market.
Personally, I have not sold anything and have no plans to do so. I am even holding onto my Citigroup holdings, which have lost 30% in the past month (but coming back today a but). I actually plan to take advantage of this price drop and will be reinvesting the dividends I receive from the company into more shares through my brokerage account. This got me to thinking about what it actually takes to make it through really bad market times like this. I came up with 5 things that I beleive can help:
1. Think Long Term Only – short-term speculation and guessing what the market will do is crazy and impossible to do at best. Dividend investors have a long-term horizon and acting on emotion because of the pain we are all experiencing today will do nothing to maximize our long=term profits. Do not get sucked into short-term thinking by avoiding the newspapers and TV news shows who love these markets because it sells more papers!
2. Get Some Invest-able Cash – if at all possible, try to get some cash into your brokerage account to take advantage of the market turmoil. Companies like Citigroup, which is sporting a 6.5% dividend yield and have dropped dramatically may be good additions to your portfolio (do your research first though!). If you are not into individual stocks, then check out the SPDR S&P Dividend ETF (SPY) tracks the S&P High Yield Dividend Aristocrats Index. This will help diversify away some company specific risk while giving you a yield that is higher than normal due to the market decline.
3. Reinvest Dividends – when dividends are reinvested, you end up owning more shares of a company whcih leads to more dividends in the future. When stock prices have declined a great deal, your dividends end up being reinvested into even more shares because of the lower share price. Essentially, you are doing some additional dollar-cost averaging with your dividends.
4. Believe In Your Portfolio Strategy – if you are a do-it-yourself investor then you more than likely have a strategy which you have applied to build your portfolio. This strategy will include components such as asset allocation, domestic and international breakdown, and perhaps sector allocation. In declining markets, it is more important than ever to stick to your strategy so that mistakes are not made because of emotional reactions. You created a strategy based on research and best practices, so stick to it.
5. Step Away From Microsoft Money or Quicken – let’s face it, being able to checking our portfolio’s performance every day is both a blessing and a curse. It becomes even more of a curse when things are not going well. The best thing to do may be not to log in for a couple of days (or weeks) and let the issues work their way through the markets. If all of the above (1 through 4) are in place, then there is not much else you can do other than wait, and checking in on how you are faring on an hourly basis will get you nowhere.
These four things work for me – how about you. What things are you doing to get through all the fun the market has been throwing at us lately?