Is The Bear About To Maul The Bull? Here's How We're Investing

by: Mike Nadel


The market has reached all-time highs, leading to debates about when the bear will arrive.

It still makes sense to invest in stocks, especially high-quality companies that have grown dividends for decades.

Bonds aren't a priority now, but cash can come in handy.

The market is advancing relentlessly, with the Dow Jones and S&P 500 indexes reaching all-time highs... only to set new records a day or two later. Many blue-chip companies -- including those in the Dividend Growth Investing universe -- are priced at or near multiple-year peaks.

Everybody knows a correction or crash (or even a 2008-09 style meltdown) is inevitable because, well, a bear market always follows a bull run eventually.

When will it "eventually" arrive? How best to prepare for the inevitable?

At one end of the spectrum are those who say, "Of course it will happen, but we have no idea when. 'Experts' have been calling for a major correction for at least two years, yet the market just keeps moving up. Those who have been out of the market have denied themselves potential gains that even a 30% crash won't erase. Stay invested."

Prolific Seeking Alpha contributor Chuck Carnevale emphatically urges his readers only to buy attractively valued companies but believes in being fully invested. A recent article is titled: "I Have No Fear Of A Market Crash Or A Significant Correction, Here's Why."

At the other end of the spectrum are those who are sure the bear will maul the bull sooner than later. They advise investors to build cash reserves to protect their portfolios and to position themselves for buying opportunities when "The Next Big One" arrives.

In The Worst Bear Market Is Yet To Come, Seeking Alpha contributor Eric Parnell opined that as bad as the Great Recession was, it will have been a mere thunderstorm compared to the financial tsunami about to strike.

The comment streams of these and similar articles are lively and sometimes heated. They often stray from the main topics, wandering into U.S. politics, international affairs and potentially tragic "black swan" events. The comments following Carnevale's article included "what if" doomsday scenarios that included asteroids striking the earth. (Okay, that one was mine, and it was meant to be a snarky counter to the many black swans that seemed unlikely to fly.)

Those who invest in high-quality dividend-growing companies contend their strategy will mitigate damage from a crash. Most companies popular with DGI proponents had considerably lower drawdowns from 2007-09 than the S&P 500 did. And even as DG investors experience "paper losses," their income streams will continue to rise -- as happened during the Great Recession.

Meanwhile, those certain a market Apocalypse is near are advocating bonds, maybe a little gold and, of course, cash. If one must invest in stocks, they say, do it through index funds.

One Investor's Stock Portfolio

Although I am a Seeking Alpha contributor, I am no expert. When I write, I do so from a personal perspective, hoping that by showing how I actually manage our "family fortune" others will benefit -- either by saying, "Hmm, that's interesting; maybe I'll look into that," or "That guy's wacko; I'll do the exact opposite!"

With that in mind, here is where our portfolio stands in Year 6 of this bull market.

About 65% of it is in 42 individual stocks. The vast majority of those companies are very highly rated by Value Line and have long track records of dividend growth. They've done A-OK in the capital gains department, too, even though that isn't our primary focus.

Breaking it down further, our 20 largest holdings make up about three-quarters of our stock portfolio: ExxonMobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), General Mills (NYSE:GIS), Chevron (NYSE:CVX), Coca-Cola (NYSE:KO), General Electric (NYSE:GE), Procter & Gamble (NYSE:PG), McDonald's (NYSE:MCD), Philip Morris (NYSE:PM), Wisconsin Electric (NYSE:WEC), 3M (NYSE:MMM), Baxter (NYSE:BAX), ConocoPhillips (NYSE:COP), Walgreen's (WAG), Altria (NYSE:MO), Realty Income (NYSE:O), Target (NYSE:TGT), Wal-Mart (NYSE:WMT), PepsiCo (NYSE:PEP) and Kinder Morgan (NYSE:KMI).

Twelve of those 20 are Dividend Champions, meaning they have grown shareholder payouts every year for at least a quarter-century. Only three lack an active dividend-growth streak of at least eight years: PM, which was spun off from Altria in 2008; KMI, the general partner for long-time dividend grower Kinder Morgan Partners (NYSE:KMP); and GE, which was my first income play six years ago and has become kind of "grandfathered" into our portfolio despite its infamous 2009 dividend cut.

Can I guarantee that none of those companies will cut dividends in the next recession? Of course not. Aside from GE, however, none did from 2007-09. Most have grown divvies through tech and housing bubbles, one-day crashes, long recessions, gas shortages, fiscal-cliff debates, government shutdowns and the horrors of reality TV.

In other words, when it comes to doing the job we hired these companies to do, they have an astounding track record.

Yeah, but maybe The Next Big One will expose a few of our companies as the next Kodak (NYSE:KODK), General Motors (NYSE:GM) or Sears (NASDAQ:SHLD).

Perhaps, but as investors, we need not be perfect. Forty years ago, if you had invested $10,000 in JNJ, $10,000 in MO and $80,000 in Kodak, you'd be a multimillionaire today... even though your Kodak investment would be worth bupkis.

Investors cannot eliminate risk. Even burying cash in the yard is a risk. I happen to believe (and history has shown) that if we invest primarily in high-quality, proven, reliable dividend growers, we tilt the odds dramatically in our favor.

Cash Has A Purpose

Our next highest portfolio allocation is cash, about 14%. About a third of that is our emergency fund, while the other two-thirds is "investable." So why don't we just invest it?

I am willing to buy, but the company would have to be both extremely high quality and a compelling value -- and that combination isn't easy to find these days. As much as I respect my DGI colleagues who remain fully invested at all times, I believe it's prudent to keep some cash as dry powder, especially in Year 6 of a bull market.

Besides, it comforts me, and that's important. Too often, investors don't understand their own personalities, risk profiles and comfort levels. I know because I've been guilty of that myself.

Whither Bonds?

About 12% of our portfolio is in a 401(k) stable-value fund guaranteed to pay at least 3% annually; it is at 4% this year. With this not being the best time to buy bonds or CDs, I rest easy knowing that a good chunk of our portfolio not only will retain its value but will grow no matter what's going on in the market. Several years ago, a certified financial planner reviewed our portfolio and called this fund "a legitimate bond substitute." I agree.

Another 8% is in the one mutual fund we still own, Vanguard Wellington. This venerable, low-cost, balanced fund invests about two-thirds of its holdings in large-cap companies and the other third in bonds. It offers our only significant bond exposure, as well as a 2.2% yield. The remaining sliver of our portfolio is in an I-bond we bought about 15 years ago.

All in all, we're close to a 70/15/15 stock/bond/cash allocation (if the stable-value fund is counted as "bond-like"). Add in our future Social Security benefits and a modest pension, and I would label our portfolio fairly middle of the road on the conservative-to-aggressive scale for a working couple in their 50s.

Oh, we also own our home free and clear, we have zero debt, our kids are grown and independent, and we are relatively healthy. Roberta and I enjoy life, but we think before we spend money.


So that is how we have chosen to brace for The Next Big One.

As you can see, we're not bracing much at all. We're investors, not market timers. We aren't afraid to keep a stock-centric portfolio, but we balance that with cash and other safe holdings.

With the bull in Year 6 and the bear lurking out there somewhere, I'd be curious to hear how others have set up their portfolios.

Disclosure: The author is long BAX, COP, CVX, GE, GIS, JNJ, KMI, KO, MCD, MMM, MO, O, PEP, PG, PM, TGT, WAG, WEC, WMT, XOM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.