More and more financial columnists I follow are pounding the table for some sort of equity market pullback in what has been a relentless climb higher. As an individual investor proactively managing your portfolio, are you preparing yourself to use even the shallowest inevitable correction as an opportunity? My core investment philosophy is grounded in its ability to adapt to changes in the market. The timing of change isn't something we can't always predict, but it is something we can prepare for. Portfolio changes should be planned, so that purchases or sales are dynamic, and enhance the way your portfolio performs. A practice that has served me well in situations like were in right now is to keep perspective - markets always seek equilibrium, but that doesn't mean they can't stay over or under valued for long periods of time. Exercise patience, and routinely evaluate the opportunities you believe in, and the opportunities you wish you might have had in your portfolio during the current up cycle.
Create a list, but more importantly, drill down to the top five funds you would like to buy, and next to the symbol write your desired size and price. For many readers on this site, this might sound boring and elementary, but I've witnessed time and time again professional investors miss opportunities because they were focused and didn't envision the future design of their portfolio. Also keep in mind that corrections can occur quickly, and drilling down to those top five positions you want to buy will keep it simple. For the average investor, juggling a list of 50 securities you would like to purchase and expecting to get a hold of each and every one at your desired price is a pipe dream. The five funds on my dividend equity buy list are:
- iShares Emerging Market Dividend Index Fund (DVYE)
- Powershares S&P 500 Low Volatility Index ETF (SPLV)
- iShares High Dividend Equity Fund (HDV)
- iShares S&P Preffered Stock Fund (PFF)
- Powershares S&P 500 High Dividend Portfolio (SPHD)
My favorite fund on this list has to be the Powershares Low Volatility ETF. For investors seeking a steady income stream paid on a monthly basis, low volatility, and potential for upside opportunity in equities, it's a perfect fit. In the case of the emerging markets dividend ETF, I've been continuing to add into weakness, and recently wrote an article outlining my strategy entitled Relative Value Is Emerging In This Market.
Two funds on my list are geared more significantly towards income and yield rather than diversification or capital appreciation. A recent newcomer to this group is the Powershares High Dividend ETF. This fund is unique since it's comprised of the 50 highest yielding, lowest volatility stocks in the S&P 500. A fund like this can be very attractive to those investors who are simply looking for large dividends from an all equity portfolio. Finally, preferred stocks can be a great yield enhancer to any income portfolio, as they offer both the qualities of stocks and bonds. However, investors should be mindful that preferred stocks can react to both changes in interest rates, and volatility in the stock market. I typically like to buy preferred stocks in the midst of a deeper correction and hold the position into the ensuing recovery phase.
Many investors have been underweight equities for quite some time, so plan for your desired allocation and you will have a much better chance of reaching it. Spending the time now, researching, and creating a vision for the right mix of assets will be rewarding when that next inevitable correction strikes. Emerging from it with a portfolio that is firing on all cylinders will considerably increase your potential for superior investment results. I can not stress enough that maximum opportunity is offered to those with patience. The plan you formulate should also never forgo the basics of risk management so that even if your timing is slightly off, you will succeed in the end.