The dog days of summer. How we love them. However, these days, when the media wants you to believe that you can buy into the stock market at the perfect time and then sell at precisely the right time; when the media wants you to believe that we are in a “trader’s market” and that you need to spend every waking moment watching the business channel and then tweaking your portfolio, it pays to take a moment to become better acquainted with some sound, time-tested, investment principles. (Preferably before but if you have not having already done so, there is no time like the present.) Given the recent as well as expected volatility in stocks, it makes perfect sense to review your long term investment objectives and determine whether your portfolio is constructed appropriately to achieve those objectives.
Our first recommendation to the readers is to become an investor rather than a trader. Don’t concern yourself with what will occur in the stock market over the next week, month or even quarter, but rather what do you believe will be the direction of stock prices over the next one to three years. As noted above, keep in mind that the media wants you to be a trader so that you will stay abreast of the markets on a daily basis. Become an investor. Tune out the “halftime report” of each trading day. Tune off “market wrap.” Tune off news teasers like “you can’t afford to miss these earnings releases.” Forget the fact that “September is historically a bad month to invest.”
Assuming that you agree and are an investor rather than a trader (trading may have worked during the last bull market, but is counter productive to long term growth of capital), make certain that your stock holdings are diversified across four to six different industries. You therefore are able to weather any unexpected downturns in a particular sector.
A third recommendation that may help you invest more profitably over time is to realize that you will not be right all of the time. However, the important factor is to be right over time. Once again, don’t appraise your portfolio on a daily basis. It becomes not unlike weighing yourself every day. Given these market conditions over the past couple of years, you will never be happy, eventually become exasperated and give up. Measure your performance versus appropriate indices over time and recognize that you will make errors.
What matters during periods of consolidation is that you exit with the right portfolio. Simply put, when evaluating your portfolio you must assess the potential of your holdings as we exit the current economic malaise. Do you own the companies with earnings growth potential? Do you own the companies that are increasing their share of the market? Do you own the companies with a proprietary product or service?
Continue to invest on a systematic basis through your company sponsored pension plan such as 401(k) or 403(b). Assuming that you are allocated appropriately between stocks and bonds to meet your long-term objectives, it is imperative that you do not make major changes to your investment patterns during this downturn. Use the “sale on stock prices” to continue to dollar cost average. Each dollar invested will now go a bit further in
purchasing shares based upon their low net asset value.
Remember that excessive optimism does not yield stock prices at attractive levels, excessive pessimism does. Where do you think we are now? We perceive value in health care, financials, industrials and technology.
During times like these it pays to upgrade your portfolio to industry leaders. Do not accept the marginal investments that you currently own. If they will not come out of this correction as industry leaders, trade up to ones that will.
Once again, utilize weakness in the stock market to tailor your portfolio to what you believe the serves your best interest. Average down in your mutual fund and/or look for companies that will lead us during the next leg of this market.
BOTTOM LINE: Retail investors have a tendency to buy high and sell low. Look to buy low, when anxiety is high. Also, keep in mind that the intent of the news media is to create a “you can’t miss this next story” atmosphere. We say that, when it comes to your investment portfolio, most of the time, yes you can. Don’t think anybody is smart enough to catch the bottom and top of market moves. They don’t exist. However, what has been proven to work is allocating your assets according to your objectives and then sticking with it.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial adviser. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial adviser prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.
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