Tuesday, December 18, 2018

Thoughts on market correction

The S&P500 has pulled back around 13% from its highs. For those that only focus on price, 2018 has not been a good year. My portfolio has pulled back from the $600K levels and is now sitting in the high $500k's :(  I made a vow to myself that I will climb myself back up!


The lower prices a lot of companies are dropping by is creating a lot of good value. Each share I can purchase now contributes more dividend income compared to when the S&P500 was at its peak. Although this site says my goal is to reach $1MM by some time, the real goal of the portfolio is income appreciation. Since I am still in my accumulation stage in life, I want my dollars to be put to their best use. A market sale provides are more efficient way for me to deploy cash as yields will be higher. I am developing a list of stocks I am planning to purchase after the holiday season. I do not expect to purchase anything from now until the end of the year as I will be going on vacation.

After New Years I plan to have around $15,000 in capital around mid January. Hopefully values are still attractive by then. My feeling is that since the S&P500 is ending the year quite negative, tax loss harvesting is going to exacerbate a lot of the losses. I do not plan to tax loss harvest as I do not like selling any stock. February is traditionally a bad month as well. And since the trend now is downward without any recovery, I am feeling rather patient waiting for a floor of resistance before deploying anything quickly. This may mean waiting in January or waiting until February. After my recent large purchase a few weeks ago, my portfolio has had a large swing upward in dividend income so I do not feel a need to increase it as quickly in the interim.

My focus is on defensive type businesses with conservative yields and conservative payout ratios. There are discussion about recessions and slowdowns. A defensive portfolio with business types that still function very well under larger unemployment will preserve capital and pay dividends better than cyclical industries like oil & gas, industrials, transports, banks, and discretionary. Defensive industries include sectors like consumer staples, healthcare, and utilities.

Eventually stocks will fall hard enough during hard times and the dividend yield will be the only thing keeping a stock from falling any further. The yield acts as a floor. If JNJ or Clorox falls in price to a 4% yield, then that will be a huge bargain as those payout ratios are safe and the business is defensive in nature. When a stock like Netflix or Tesla falls 60% there is no dividend to pay you to hold along, there is no floor of protection. The only thing keeping you in is the prospect or hope that the price will rise back up again.

I don't believe I can invest in a business just based purely on price speculation, hope that the price will go up one day. I need to have some form of payment periodically to allow me to hold it comfortably during a recession. The dividend is reassurance to me that the business is still profitable and that I can still rely on it to provide income even during bad economic times. Dividend aristocrats are examples of companies that have survived countless recessions while still maintaining a increasing dividend year after year, these companies RAISED their dividends during recessions. This is why my portfolio is heavily concentrated towards dividend aristocrat types of businesses that are in defensive sectors. Dividends don't lie and at the end of the day if a company is cash flow negative, there will be no dividends.

4 comments:

  1. Philip Morris's yield just topped 6% after Credit Suisse downgraded it. Are you considering adding to nicotine? I notice you haven't bought much in a while, but obviously already a sizeable block in your portfolio.

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    1. I think the yields are great and I prefer MO over PM right now due to their efforts in diversifying to other products besides traditional smoke.

      MO and PM (high yield stocks) are important to my portfolio since they help offset my low yield very high growth purchases. I like to have a balance of high dividend growth and decent yield. When I buy something like a Visa or Stryker, I will pair it with a MO/PM or another higher yielding company above 3 or 4% to avoid having the portfolio move to a low weighted yield. Right now I have a lot of MO or PM so I avoid adding to them in isolation.

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  2. Hi There,

    You are definitely a big motivation for me. Try to spread your purchases over several weeks instead of going 100% in one day. You are way ahead anyways. I for example invest nearly every single day. I have about 100 different positions and add to them as time goes on. I rarely sell, very rarely.

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  3. I hope that values are attractive at that time.

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