My 5 Points For Managing My Retirement Investing Behavior

by: Eddie Herring

Many if not all of us can remember where we were when certain events took place. I still remember exactly where I was in 1963 when President Kennedy was shot, when the space shuttle Challenger exploded shortly after takeoff, and what I was doing when I found out we were being attacked on September 11, 2001. Certain things happening can indelibly imprint themselves into our unconscious minds. And it doesn't necessarily have to be significant events. Whenever I hear the song "Midnight Train to Georgia" by Gladys Knight and The Pips I immediately flash back to Keesler Air Force Base in Biloxi, Mississippi, and when Carly Simon sings "You're So Vain" I actually picture the inside of the club I frequented at Tyndall AFB in Panama City, Florida, even though it was 40 years ago. I don't consciously think about it, it just automatically happens.

For whatever reason some things not only stick with us but impact how we act and respond to certain stimuli, almost as if it's a Pavlovian response. Investing is no different. A significant loss on a given investment may forever make us leery of investing again in that particular stock. The 2008-2009 Great Recession was one of those events for many. There is no telling how many investors will be forever impacted because of the events that took place in the stock market during that time. Hundreds of thousands of people saw their retirement plans put on hold after the S&P dropped from a high of 1576.09 in October of 2007 to a low of 666.79 in March 2009. Coincidentally, I chose to retire in April 2008 just as the market was beginning its swoon.

Repeating The Behavior

One of the things that I've observed during my lifetime is how large corporations as well as the government responds to significant accidents, incidents or even events such as those I mentioned above. They will typically cover the incident up with people or teams, issue all kinds of findings, new regulations, procedures or policies, and create additional layers of bureaucracy or paperwork requirements, and then over a period of time begin slacking off and getting back to doing the same or similar things that created the problem or incident to begin with. In other words, over-react and then become complacent and go back to the same behavior.

I've seen similar reactions from investors. Numerous investors made decisions to get out of the stock market after their mutual funds or investment holdings dropped in 08 & 09. Unfortunately many of those who got out sold at the lows and were still out when the market went back up later in 2009 and 2010. And now with the market at all time highs investors are piling back into the stock market as this chart from EPFR Global shows.

EPFR Global
(Click to enlarge)

This is not the first time this has happened and in all likelihood it won't be the last. The problem with this type of behavior is that it typically leads to a repeat performance of the same actions that brought significant losses to investors in all of the previous recessions. Buy at highs and sell at lows. As someone once said the definition of insanity is doing the same thing and expecting different results. The fear that drove investors to sell at lows is being followed by the greed that drives investors to buy at highs. Then again it could be fear that they will miss potential gains in the bull market. The market was hitting all time highs in 2007 and many wanted to get in on the money to be made. Now we're seeing the same thing in 2013.

One of the things I remember reading on a forum I was frequenting in 2008 was about a particular hedge fund that was selling during this time period. It was happening every day for about a week or so at the same time each day and appeared to be panic driven with huge numbers of selling taking place. Apparently professionals can panic just as well as individual investors.

Managing the Behavior

But not everyone responded the same way to the Great Recession. Many investors decided to take their financial future out of the professional fund manager's hands and manage their own investment portfolio. Some were already doing this before the Great Recession and so they just continued doing what they already were. To those individual investors the past recession just as the recessions before that were simply buying opportunities to get great companies at great prices. In essence, they just kept doing their thing.

What separated these investors from those who were panicking and selling? In my opinion it's a matter of how they responded to the stimuli that the market represented driven by the mindset they had established beforehand. Because of that mindset their response to the market dropping was an automatic behavioral response. As a retiree I want to make sure I have the right mindset that ensures my investments are not negatively affected by my own inappropriate behavioral responses. I want to react in a manner to what the market is doing that will ensure long term investing success. So how do you establish a mindset that will pre-determine your behavior in those instances? There may be multiple ways but the following 5 points are what I use.

1 - Investment Focus: Those who were selling in the 2008 panic, including the professional hedge funds, were trying to preserve capital or preserve current returns/profits on their existing investments. I understand this and there's credence to this when your focus is on the stock price. It's pretty easy to get caught up in this price driven focus. My broker's platform, as most others do, shows the total account value, the overall P/L for the year, the P/L on each individual position, along with the current price at any given second of the "trading" day. Everything is oriented around the price and whether it's going up or down in value. I'm not knocking those MPT folks who seek to replicate or exceed the "market" and who focus on the return on their money. I simply choose a different focus.

With a dividend growth mindset I focus on the income that I'm getting from my investments. By focusing on the income I want to make sure it is growing each month or quarter depending on the particular companies I own. This allows me to take my eyes off the price and put them more appropriately on the dividends, and the earnings from which they are derived, and making sure they're consistently growing and remaining safe. To be clear here, I'm not some stoic or Zen master that is never affected by markets tanking. I have emotions just like everyone else, and I stay aware of what's happening with prices. But by focusing on the income I acquired the habit of viewing those drops as opportunities to increase my income. When the market starts dropping the first thing I usually think of is what is on my watch list that I might buy?

One thing I do that aids me in focusing on income is using an excel spreadsheet to track my income. At the end of each month (actually 2 or 3 days into the new month) when I receive my electronic statement from my broker I sit down and update the spreadsheet. It's a very simple spreadsheet but it allows me to track my income relatively easy and paints a clear picture of how much income I should expect to receive each month. Here's an example of the spreadsheet:

Dividend Chart
(Click to enlarge)

I've modified the shares simply to protect my privacy but the stocks I own and the dividends in Column C are accurate. Starting with Column E it shows the amount (based on shares multiplied by dividend) I expect to receive in the account that month. Column Q is the amount I expect to receive from an individual company on an annual basis and Row 20 shows what I expect to receive each month. To the right of column Q I have frozen the columns as well as the top row so that I can view the latest information. When I receive the monthly statement I simply punch in the actuals for the month and have formulas in place to total the amounts for me. Row 21 at the bottom of Columns CF through CJ shows the growth compared to the same month a year earlier. Moving the scroll bar at the bottom allows me to see those earlier columns if necessary. When a dividend changes, for example Clorox (NYSE:CLX) just announced an 11% increase to $0.71 per quarter, I simply punch in the new dividend in column C and the formulas recalculate all the entries in the applicable row for each month. I'll wait to do that though until after the ex-dividend date because I'll also be receiving a dividend this month from CLX but at the prior rate.

The point here is that this is a tool that simply helps me focus on income as opposed to whether each individual stock is going up or down in price. Focusing on income also means I may take profits on stocks at appropriate times that will allow me to increase my income. Because I had become overweight in Microsoft (NASDAQ:MSFT) and Waste Management (NYSE:WM) I recently sold a portion of each and used a portion of the proceeds to increase my income while reserving a larger portion as cash for future purchases.

2 - Investment Selections: It should be a given that at some point the market is going to drop significantly. It has happened in the past and it will happen again in the future. But my core stocks, or foundation holdings as I call them, I don't like to sell. It usually takes a change in the company itself, such as a dividend cut, for me to sell unless as I mentioned above, I get overweight and rebalance the position size. But no matter whom you are, a 25% or 50% decline in a stock you're holding is not easy to stomach. But I've held stocks through those drops simply because I believed the companies were still quality companies. Companies such as those listed in my spreadsheet above have for the most part proven to me that they're reliable and strong companies. When I look for companies to add as foundation holdings I want companies that not only have good dividend policies and history, but I also want companies that are recession resistant. A low beta is a plus as well. Excellent earnings history along with appropriate cash flows should also be a given. And when I sell partial positions as I mentioned earlier, I seek to replace those with quality companies that will not only increase the income but improve the overall quality of the portfolio. You don't trade for a weaker player.

By selecting companies that are financially strong, have a low beta, and are recession resistant, they will typically not have those sharp peaks and valleys in their price charts that many other stocks will. As a result, when a huge swing does happen it will usually be because of a mass market swing, a systemic swing if you will, that affects all stocks. This is what happened in 2008 and even though the prices of Coca Cola (NYSE:KO) and McDonald's (NYSE:MCD) dropped along with others, they continued paying and increasing their dividends. By selecting companies like these, I can remain confident that drops are temporary and over the long term it is safe to ride out those systemic swings. You might call these companies necessity stocks. Even during a recession people are still going to buy Coke, eat at McDonald's, buy gasoline (Royal Dutch Shell (NYSE:RDS.B)], use toiletries [Procter & Gamble (NYSE:PG) Kimberly-Clark (NYSE:KMB)], use electricity [Southern (NYSE:SO)], and buy pharmacy items [Walgreen (WAG)] as well as continue to create garbage which will require pickup by WM. Consequently I'm better able to handle the anxiety that comes with systemic price declines and to view these as opportunities to improve my income. I try to select companies I can hold forever without trying to time the market on buying and selling. Due diligence in selecting these companies is a must.

Another thing pertinent to investment selections especially for dividend growth investing that I want to avoid is getting sucked into a dividend yield trap, which is akin to a value trap as in trying to catch a falling knife. To me unusually high yields should be a warning signal that something might be wrong and requires further investigation before investing. Pitney-Bowes (NYSE:PBI) might be a recent example of this. While yield is important to an income investor in my opinion the safety of the dividend is much more important. 10% yield on zilch is not as much as 3% yield on MCD.

3 - Margin of Safety: Better investors than I have written more about margin of safety and in greater detail than I ever could. Suffice it to say that I strongly believe it's a necessary component to successful investing. If you're going to have to deal with market swings as part of a long term holding strategy then it simply makes sense to buy when a company is undervalued as opposed to when it's overvalued. Buying at a price that is a discount to fair value means that even if it drops after you buy it won't be as large a swing to endure while you're holding.

CVX Chart
(Click to enlarge)

MCD Chart
(Click to enlarge)

Comparing the two Fast Graphs charts above between MCD and Chevron (NYSE:CVX) should instantly indicate which is the better entry based on the current prices. Buying CVX would provide a better margin of safety than buying MCD here. Of course evaluating all the other pertinent criteria would be required. There are a number of other ways that one may choose to determine intrinsic value and establish a margin of safety at which to buy but the point is it should always be a requirement. As I said earlier I don't try to time the market, I try to buy quality companies at a discount to their value. If the market decides to put quality companies on sale, I try to take advantage of that opportunity. I also include an economic moat as part of my margin of safety, a two part margin of safety as I have previously written in another article. To me it just makes sense that even if a company is on sale you shouldn't want to buy it unless it is also a company that has a sustainable competitive advantage, i.e. an economic moat.

4 - Diversification: A lot can be said about diversification. People get into all kinds of different sector diversification, asset allocation, industry selection, position size, etc. I try to keep it simple. I don't want what happens with any one position to make me react in a manner that affects my portfolio negatively as a whole. With that in mind I try to keep at least 25 positions in my portfolio. Some are there as foundation holdings, some are there for growth and some are there for income only. I will let foundation holdings build larger positions than the others but I prefer that none of them get too out of balance with the overall portfolio. I then manage the portfolio to that regard, which is why I sold some MSFT and WM that I mentioned earlier. If a position size gets so large that it could affect my behavior then I need to adjust it. That's my rule of thumb. I try to spread over multiple sectors and industries but I'm more concerned with having quality companies than I am with what sector they're in.

5 - It's A Business: To be quite candid I acted differently in business than I did at home during my working years. Not that I changed my ways or personality but at work I was expected to be more professional, to behave in a certain manner required by the business. I approach my investing the same way. By having a business plan, setting goals and tracking/measuring to those goals, having established criteria for buying and selling and making sure I comply with that criteria, I react differently to market stimuli. Although it's my own portfolio I'm managing, I still consider it as managing a business portfolio and treat it accordingly. In my personal life I may be spontaneous in reacting to many things but in my investing life I try to be orderly and make rational business decisions.


Entire books have been written on investor behavior. If you would like to read more on investor behavior there is an interesting SEC article here entitled Behavioral Patterns and Pitfalls Of U.S. Investors and a more brief article here on Understanding Investor Behavior published by Forbes. Both articles were published in 2010. They cover such topics and manias and panics, familiarity bias, noise trading, under-diversification, etc.

Just as the songs I mentioned at the beginning trigger certain reactions in me, so does the market doing certain things. And just as I mentioned I have seen corporations and individuals become complacent and fall back into bad habits I want to avoid doing that. I want those market triggers to create a specific positive response and I want to maintain good habits. When the market triggers emotions, emotional responses drive behavior. I want to have a mindset that helps me manage my responses. By focusing on an increasing income, and knowing that I have quality companies that are recession resistant, have a sustainable competitive advantage and that I bought with a margin of safety, and understanding that no one position will do irreparable harm to my business, I don't have to become alarmed when stock prices start going down.

As a retiree income is important to me. When you're no longer employed but solely living off fixed income, whether it's pension, social security, or investments, that income is a life requirement. That means it's even more important that I make proper investment decisions and avoid repeating mistakes that are so common. I'm at that age where I have less and less time to correct mistakes, which means I have to minimize the potential for mistakes. And to do that, I have to make sure the stimuli the market generates doesn't make me behave incorrectly. These 5 points may seem very basic, very simple, and they are. But often the simple things are the best things.

Disclosure: I am long CLX, CVX, KMB, KO, MCD, MSFT, PG, RDS.B, SO, WAG, WM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am not a professional investment advisor, just an individual handling his own account with his own money. You should do your own due diligence before investing your own funds.

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