During the depth of the 2008/2009 stock market crash a money manager called asking me to invest money with his firm. I declined at the time, but a year or two later I pondered returns of nearly 1,000 percent from the bottom of 2008/2009-returns, as well as near double digit dividend payouts on regularly "stable" blue chip stocks currently paying three to four percent dividends at today's "normal" levels. I began waiting for a second ("double") dip in the stock market based on a rudimentary interpretation of the recurrence of numbers by the Italian mathematician Fibonacci (Leonardo of Pisa).
This is not for the faint of heart. I waited for macro economic failures such as the US credit rating downgrade and the Greece fiasco. When everyone is cashing in their chips you pull out your pocketbook and go "all in" (not literally). Purchasing a stock and seeing it drop ferociously the next day makes you feel as though you are throwing your cash into a furnace-stoking a fire while you are already wet with sweat (it is quit the opposite as long as you don't give in to fear and sell prematurely).
Personally, I am making something of a retirement fund. I have a base of high dividend stocks I plan to keep for most of my life and lower dividend stocks I plan to sell (or sell the majority of my position) as the macro economy improves. I believe the Fed has intelligently propped up the stock market (dividend paying blue-chip stocks) by making interest returns low-forcing many into equities despite fear and uncertainty. A lack of return on my finances was a driving force behind my own investments in the stock market.
I have found it best to focus on 10-20 stocks [exp. General Electric (NYSE:GE) you will make one or two purchases of and essentially leave for life]. Most of my stocks are for a long position, but I take advantage of volatility by grooming and short-term profit taking, all while keeping my overall positions (following two different methodologies can be cause a lot of internal turmoil). Through this method I have captured great long-term positions and made 10%+ realized gain on my portfolio the last 52 weeks through dividends and short term selling. The majority of my positions will cost me less than $50 dollars (with free trades) to get in and out of-and I can hold them for life. This is refreshing compared to large fees, often with little flexibility, through investment firms (exp. 5% front-end load fees on mutual funds with little flexibility during market dips).
In theory you should be willing to put up to 15% of your portfolio in the majority of the stocks you purchase -in case things take a severe turn for the worse. I focused on commodity-backed stocks because of the commodity consumption of China and because these stocks are not tied to specific brands that go in and out of style over the course of my life or have one consumer base. I view commodities, and specifically metals, as an indirect investment in China, as well as an investment in the forwarding of our civilization. Even if we were to go into a major depression commodity backed stocks would "theoretically" rebound due to population growth or the company would be sold for its assets-for this reason I try to focus on large companies with many assets [exp. Chesapeake Energy (NYSE:CHK)], even though they are likely to be entrenched in financial hardship due to the contraction in commodity demand during times of economic duress. Having a majority of dividend paying stocks allows you to reap returns even if you are in the red. A great analogy is a rental unit with consistent renters. The real estate unit may go down in value, but the real estate is still "paying dividends" until the rebound. It is important to use money you do not need and to plan your financing for a worse case scenario.
Research your stocks (I use text alerts to give me an idea of the movements of the stocks, as well as times to buy) and initiate positions at strong support levels (2008-2009 gave us a great support and resistance template). The more volatile the stock the greater the gap in stock purchases should be (many reports give summaries of stock volatility). Lower dividend, cyclical stocks and emerging market stocks are often more volatile. I recommend you initiate less than 20% of your portfolio in volatile low-dividend stocks because you will have to put more money into these the lower the market swings. Volatile stocks do, however; allow you to take fast short-term gains during these violent swings. This will allow you to outperform larger institutions that do not take part in short term buying and selling.
Buy at the strongest support levels because of the likelihood of a bounce. Take three to fifteen percent profits on your lowest buys [exp. Selling Southern Copper (NYSE:SCCO) at $22 though you are down on your overall investment]. I would not look to do short term buying and selling with less volatile stocks such as Pfizer (NYSE:PFE), GE, etc. If they get to a low level you will likely regret the sale in the future. Low Cost is the best selling method as it allows you to take your immediate profits and reinvest your profits the next time a stock hits a support level. You will not utilize the "bottom" purchases as a long investment, but will reap short-term realized gains.
Hypothetical example of SCCO (Cyclical)
Buying points based on support levels:
$30: $2k 70 shares
$28: $3k 110 shares
$25: $4k 160 shares
$22: N/A sold for short-term gain
COST BASIS $26.47 ($1,260.72 in dividends per year-over 10% return on investment price).
Decrease your overall cost basis by increasing the amount you invest incrementally as the stock goes down. Doubling down would be ideal, but this may require a lot of liquid cash depending on how low each stock drops. Make up your mind what you want to hold long term and short term ahead of time so you will not be filled with regret in 5 years. Holding a core of long positions will save you a lot of future trading time and give you a greater return on your money.
Implementation involves finding a stock you know and trust at a price you are happy with in the long run-even if the stock drops lower. If the stock plummets you are afforded the opportunity of buying more of the stock at a lower rate and decreasing your cost basis. Dividends allow you to weather the storm and even if your stock goes down for an extended period of time you will be getting a greater annual return through the dividend than with your local banker. You must be ready to let the money sit indefinitely and exercise great discipline and resolve in your purchasing and planning. Over the course of your lifetime you will see great increases without having to dedicate a lot of time to these stocks or spending a lot of money through investment managers or trading fees. If you can stomach it-it is a great buying opportunity.
Initiate positions at: (Stop/Loss notations apply only after the market/stock has rebounded)
GE $15 (Lifetime Stop/Loss on profits-not position)
Pfizer $19 (Lifetime Stop/Loss on profits-not position)
Wal-Mart (NYSE:WMT) $49 (Lifetime Stop/Loss on profits-not position)
Procter & Gamble (NYSE:PG) $59 (Lifetime Stop/Loss on position) Prone to a loss in market share
Verizon (NYSE:VZ) $35 (Lifetime Stop/Loss on position) Tech based stock very susceptible to a long-term loss in market share.
Brookfield Infrastructure (NYSE:BIP) $26
Alcoa (NYSE:AA) $11-10 (Cyclical-Long)
Chesapeake $20 (Utilizing natural gas resources and transfer from coal, etc.)
Bank of America (NYSE:BAC) $7 (Depressed financial)
Wells Fargo (NYSE:WF) $25 (Depressed financial)