Yesterday was the worst day I've had, in terms of absolute one-day drop in value, since the crash of 2008. During that period, I lost - on paper - close to half of my IRA. Fortunately I never left the market, although I moved from some asset classes into others, taking advantage of areas that seemed unusually beaten down in relation to their intrinsic value. As a result of not losing my nerve (although I certainly was scared; who wasn't back then?) and of some good decisions combined with some good luck, my portfolio came roaring back much stronger than ever over the past three years.
Since then I've defined and articulated more clearly the investment philosophy that I have dubbed somewhat tongue-in-cheekily in other articles the "savvy senior" approach to investing (Hey, headlines attract readers, so why not be a little cute, eh?) In essence, my approach is to:
- Pick stocks and funds for their ability to generate cash income, both currently and in the future
- Realize that the "currently and future" part of that can be contradictory, which I recognize by dividing my portfolio into what I call "growth income" and "fixed income"
"Growth income" assets must generate a minimum current yield of 4% or 5% plus have steady prospects for future income growth [Examples: Kinder Morgan Inc. (NYSE:KMI), Conoco Phillips (NYSE:COP), Reaves Utility Income (NYSEMKT:UTG), Cohen & Steers Infrastructure Fund (NYSE:UTF), etc.].
"Fixed income" must generate a higher current yield (7 to 10%) that I am happy to receive permanently, even if there is no future growth potential [Examples: Consolidated Communications (NASDAQ:CNSL), Windstream (NASDAQ:WIN), Eaton Vance Limited Duration Fund (NYSEMKT:EVV), Pimco Income Opportunity Fund (NYSE:PKO), etc.].
Having selected such a portfolio, which I continually monitor and adjust, I then - to the extent humanly possible - try to ignore market gyrations in the day-to-day value of the portfolio.
In fact, since I have not yet started withdrawing the income from the portfolio (it's an IRA), and all of its current income (yielding plus or minus 7% on average) is being re-invested into the portfolio, then market downdrafts are actually welcome because they allow me to re-invest at lower asset prices and therefore high re-investment yields.
Weeks like we're having like this one test a strategy like mine. I see many investors are cutting and running, especially from high yielding investments like closed end funds and utilities, in part because they fear taxes on capital gains and dividends going up if Congress and the President don't avoid the so-called fiscal cliff.
Everyone must make their own decisions and determine their own comfort level, but I have decided to (1) stay in, and (2) rebalance into some of what I regard as my most solid holdings that have been hit the hardest. Here are some key points that have influenced my decision.
This is nothing like 2008. Our economy and financial institutions are not teetering on the brink like they were then. Corporate America and Wall Street, having been propped up both by (1) artificially low interest rates and (2) a slowly improving economy, are stronger than ever.
The underlying cash flow from my portfolio - the 7% yield it is pumping out continually - is as strong as it ever was. Nothing has changed from a week ago to make me think the underlying companies in my funds won't keep paying their interest and dividends.
So my portfolio's income stream is solid. The assets generating it are just worth less on paper than they were a week ago. That means the yield on the portfolio which had been just below 7%, is now over 7.5%. I can reinvest the dividends and interest I receive regularly at a higher rate today than I could last month. That extra half to 1% will mean thousands of dollars a year more in my pocket five, ten and fifteen years from now when I am living on the income from this portfolio.
In the short term, if we do go over the fiscal cliff (which I don't believe will happen, but the politicians will make it a wilder ride for all of us than it should be or needs to be), that will trigger slower growth or even a potential recession, which means the Fed will have to keep interest rates lower even longer. As I mentioned in a previous article, that policy particularly helps leveraged closed end funds of the type I prefer, which are one of the only ways I know of for individual investors (especially IRA investors) to get the benefit of cheap leverage in their portfolios (and ride the yield curve the way Wall Street banks and hedge funds do)
If we don't go over the cliff, and Washington does its job and reaches a compromise solution, then the market will shoot back up and we'll all be glad we stayed on board and didn't abandon ship
So unless you believe this is Armageddon (and I know from past comments that some of our readers do), this is a time to hunker down, turn off CNBC, clip your coupons, and re-invest them at the higher rates currently available courtesy of the downturn.
If this provides you with additional spare time, you might use it emailing your representatives in Washington and telling them to get to work, stop the posturing and do their jobs.