After following the market for almost two decades, I must say that we are in a unique situation for 2023. I’m not going to tell you that “this time it’s different”, but I’m fascinated by a high inflation, high-interest rate environment that may not end in a recession.
Labor shortages will continue in 2023. We finally hit the wall of having an aging population as more and more people retire while not enough young folks seek jobs. The search for qualified workers will support a form of inflation as unemployment rates should remain low.
Rising salaries and low unemployment rates will force companies to become more productive and efficient. This was the recurring theme of a technology conference I attended earlier this month. While facing the threat of rising costs (human resources and raw materials), companies don’t sit around and complain. They return to the drawing board and find ways to become more efficient. In the next two years, the world will belong to those who focus on productivity. This should be the cradle of the next bull run.
However, I don’t think we are there yet. In fact, I’m pretty sure the bear market will continue for a few more months. At least until the central banks have concluded their efforts to increase interest rates.
What we fear
The obvious! We fear a market crash that will take years to recover from. It wasn’t fun in 2022, but we somewhat kept the hope that the FED would finally terminate their efforts to increase interest rates. They obviously didn’t. Powell made it clear that it would track, hunt, and kill inflation no matter what it takes.
Therefore, the sequel to this movie may very well look like what we endured in 2008.
In 2008, it took about four years to fully recover from the crash. Those in the accumulation phase were smiling as they got the deal of the decade. But for retirees, it was another story. Based on this experience, I suggest keeping a cash reserve of 18 months to 2 years’ worth of your retirement budget. You can then withdraw from your cash reserve without being too nervous about the stock market. Your dividends should be deposited in that cash reserve. Depending on the pace of your withdrawals and the yield generated by your portfolio, this strategy will extend the lifespan of your cash reserve up to 3-4 years (maybe more!). The cash reserve will help you sleep well at night on top of providing you with extra flexibility.
To deep dive into the 2023 major themes and get my thoughts on many stocks for 2023, save your spot for my Investing in 2023 Webinar now!
The investment strategy for 2023
The point is not to transform your investing strategy and start from scratch. This section is more about adjusting your portfolio to make sure you are well-invested and that you have seen clearly what is coming. A potential long bear market will impact two types of investors: those who are invested and those who have cash on the side. Here’s a playbook for each of them.
Invested investors (like me!):
- Review your portfolio to ensure you are well-diversified across many sectors
- Identify weaker-rated stocks and make sure you still want to hold them
- Trim overweight positions (Apple and Microsoft could be good candidates in my portfolio)
- Optimize your holdings with better-rated stocks using the DSR PRO replacement list
- Build a cash reserve if you are retired and depend on your portfolio to generate income
The cash reserve will supply income in addition to the dividend payments you will receive. I don’t intend to build a cash reserve as I’m still in growth mode.
Cash on the side investors (sitting, waiting, wishing…)
- Build a buy list right now
- Invest 33% of your money now
- Wait for another quarter, review earnings, and invest an additional 33%.
- Rinse & repeat for another quarter to fully invest your money over the next 6 to 9 months.
The key with this strategy is to make sure your portfolio thrives no matter if you invest right before a market crash or if we are about to ride another 5 years bull market. Imagine your worst fear materializes and you invest literally days before a crash starts. Major market crashes are usually violent, and the down trend doesn’t last very long. Therefore, you’ll be buying the dip 3 months and 6 months down the line. You may not buy at the bottom, but you will surely be averaging down your position with cheaper prices. On the other side, if markets continue to rise, you’ll be slowly building a profit cushion with invested money. If you wait, you may wait for years and never get today’s price. I’ll bet you thought 2017 markets were overvalued and that you would likely have many opportunities to buy stocks at better prices, right?
Start with the dividend triangle
My first stock screener is a simple but greatly effective one called the “dividend triangle”. I’m looking for leaders in their markets with strong growth vectors. Companies that have the ability to not only increase their sales but also show profit growth. Finally, I’m looking for companies that are shareholder-friendly and that will increase their dividend year after year. This is why the first three metrics in my filter are:
Revenue growth (5 year trend)
Earnings per share (EPS) growth (5 year trend)
Dividend growth (5 year trend)
If you are concerned about market uncertainties, your best bet will rely on finding companies with a strong dividend triangle. Those companies won’t let you down during the next recession and will likely recover faster upon a market correction. I’m not the one saying this, even Vanguard established that dividend growers outperform the market with less volatility.
3 Metrics won’t do it for 2023
Using the dividend triangle will only get you on the right foot, but that’s far from being enough. First, 5-year metrics will only tell you what previously happened. This is not a guarantee for the future. To have a better idea of where to invest in 2023, I look at the 5-year trend for various metrics.
- Dividend triangle trend (how revenue, EPS and dividend increase year per year)
- Payout and cash payout ratios
- Long-term debt and debt-to-equity ratio
- Cash flow from operations
- Price-earnings ratio (PE)
Studying trends will tell me which quarterly earning report to open and where to dig to find answers to my questions. Any jump or sudden drop in the following metrics needs to be explained. Once this is done, I’m ready to write my investment thesis.
Top stocks for 2023
Now, let’s continue to play “what if” and look at my top picks for 2023. Enter your email address here and you will access 6 of my favorite stocks for 2023:
Many factors will have an influence on the market this year. However, the best way to invest remains the same: having a straightforward strategy!
Thank you for your articles. Much appreciated.