There is an old saying in baseball that when you are on a winning streak, you are never as good as you think, and when you are on a losing streak, you are never as bad as you think. The psychology of the situation makes the brain work overtime. The stock market is not much different.
When we check our investments and see nothing but red, we tend to feel as if it will never end. On the other hand, when we see nothing but green we feel we are the most savvy investors on Earth and we could never lose. I suppose it is a human condition.
Our portfolio now consists of Exxon Mobil (XOM), Johnson & Johnson (JNJ), AT&T (T), General Electric (GE), BlackRock Kelso Capital (BKCC), KKR Financial (KFN), Procter & Gamble (PG), Intel (INTC), Realty Income (O), Coca-Cola (KO), Linn Co, LLC (LNCO), Wal-Mart (WMT), Cisco (CSCO), Bristol-Myers Squibb (BMY), Healthcare Select Sector SPDR (XLV), and General Dynamics (GD).
The Stock Market Is Facing Headwinds
There is no denying the fact that the stock market has been under pressure from an array of different directions. Let me note the most impactful:
- The infamous "fiscal cliff". If I hear this one more time I might explode, but it is out there. The effect on the markets has been obvious. Investors, both institutional and individual, are selling really good stocks that have had some nice gains. The tax implications are still up in the air and it might be prudent for large investors to take profits now, prior to any tax hikes for 2013. This is placing pressure on the good stocks.
- Rebalancing this time of year means that some individuals/institutions are shifting investments from one sector to others. Obviously, this will affect the ones being sold as well as the ones being bought. The ones being bought might not be bought at the same levels right now so that investors, both large and small, can build some cash reserves to deploy later.
- Normal tax season selling happens every year around now. As we get closer to the holiday season, investors of all sizes sell stocks simply because they might have some carry over losses from previous years. Taking profits that can be offset by losses is something that happens every year around now, and is prudent for many. Of course it also sets up the "Christmas Rally" when those same investors begin buying back those very same positions. Time will tell if it occurs this year as well.
- The Euro soap opera is in its 5th season. All we can do is watch this unfold, and as I have said before, I believe that the countries will not fail and that money will be printed. In the meantime, tune in for the next "show" every week.
- Earnings season has not been robust. Even with lowered forecasts earnings have come in barely fair. Obviously this means that the economy is still struggling to heal. It will heal eventually, but investors want faster results.
- The post election blues are also causing some investors to run and hide. Some folks believe that we will have another 4 years of malaise and Washington D.C. gridlock. Well maybe, but I doubt that the market will nosedive because of this anyway.
Ok, I won't add anymore pain to the list. I will simply state that I believe that the markets will survive. The markets will rebound. The markets will move upward over the long term, just as they have since the stock markets first began.
So What Should The Prudent Investor Do?
Nobody has all the answers. Not even me! Hard to believe, right? Seriously though, I think the only thing we can do is to review our portfolio and see if there are any fundamental changes. Let me outline some steps:
- Look at each stock in your portfolio and make sure that nothing has fundamentally changed in each.
- Has the business model of the company changed?
- Is the company taking unusual steps to 'save' their business?
- Has the company announced that they will miss future earnings?
- Make sure you listen to the latest conference calls of each company. Read the transcripts right here on Seeking Alpha for some forward guidance.
- Are you still receiving income from the dividend producing portfolio? Even if the price of the shares has dropped, are you still getting "paid"?
- LOOK FOR BARGAINS THAT CAN TWEAK YOUR INCOME!
These are just a few obvious ones but also the most important steps. If you are an income seeking investor and have received $5,000 in income thus far this year, will you receive the same $5,000 next year, if not more? If that is the case, isn't that why you are a dividend income investor in the first place?
Keep in mind that fear and panic works against investors and clouds solid judgment. Knowing that there are steps you can take to clear the cobwebs will help you get through turbulent times. Knowing WHY you are invested will serve as the key reminder when you are seeing red.
Remember that red will turn to green eventually, as long as you let it.