The bull has been around far too long, since 2009 and is already too tired to power on. Obviously time for bull to rest. The bear is already out in force. There is also a lot of uncertainty that comes from the withdrawal of QE in the US. At this point of time there is limited up-side. The down-side is much greater so also the risks.
But investors should note two important developments. The first is that the market uptrend is not just under pressure. We are in the midst of a full-fledged correction.
Secondly, investor psychology has been scarred. The dominant emotion has quickly moved from greed to fear. That means it will take time for share prices to heal.
However, much of the economic backdrop remains positive. A strong dollar, lower energy prices and near-record-low interest rates are hardly the kinds of things that keep investors up at night.
As retail investors it's time to consolidate our porfolios. Hold stocks which are cash-rich and those business which are resilence to business cycle. Avoid highly leverage stocks. Increase cash holding as it will present buying opportunity for cherry-picks. You shouldn't fight the trend. But neither should you react emotionally to the latest market developments.
The key now is to follow through with your discipline. And keep a sharp eye out for new bargains and fresh opportunities. Because that's precisely what down markets like this one create.
Jeremy Grantham once remarked: “Volatility is a symptom that people have no idea of the underlying value”. Warren Buffett said about risk: “Risk comes from not knowing what you are doing”.
For many people, volatile market could be a time for worry and distress. After all, it can be heart-breaking to watch the value of our investments take a hit. If you're prepared, a stock market decline can't hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic”.
How do we go about differentiating between undervalued shares and rip-offs dressed up as bargains?
The value could be derived from the stream of dividends that we, as investors, enjoy by holding the stock. It could be the sum total of the company’s assets. It could also be the earnings that we, as investors, could reap over the long term, simply by owning the shares.
Trouble is, if you don’t understand the intrinsic value, then that could be tantamount to “playing poker without looking at the cards”. But by recognising the concept of intrinsic value, we should be able to appreciate when shares have been unfairly punished. That is the underlying message behind Warren Buffett’s sage advice: “Be greedy when the market is fearful and be fearful when the market is greedy”. He didn’t say buy any old rubbish and hope for the best. Buffett also said: “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
The period for market volatility has begun. America has exhausted its supply of cheap money; concerns over Eurozone growth have come to the fore and China’s ability to properly rebalance its economy hangs in the balance.
But remember this: If a business does well, the stock eventually follows. In the short term, there is no correlation between a company’s success and its stock. But in the long term, there is a 100% correlation.
So focus on the long term and the 100% correlation, rather than what might happen from day to day. The key to suscessful investment is able to focus on identifying outstanding businesses, build up a porfolio & have the patient to hold on to for the long haul.
The market can be ugly instilling fear in some investors that the bull market is over and they missed their chance at making money.
Additionally, interest rates are still so low, it's tough to generate any income from your nest egg.
However market slide is a perfect opportunity for investors who know how to pick up extra cash with a conservative strategy.
This method can easily generate a year or more worth of dividend income. Market volatility means we can actually make more today than we could have a few weeks ago on the same trades.
The market sell-off means we can now generate more income. Pullback doesn't signal an end but "Opportunity's Knocking". It's an opportunity for investors to snag some "should'ves..." and "if onlys..." at more reasonable prices. Because we have to keep thinking toward the future.
Trouble is, if you don’t understand the intrinsic value, then that could be tantamount to “playing poker without looking at the cards”. But by recognising the concept of intrinsic value, we should be able to appreciate when shares have been unfairly punished.
The value could be derived from the stream of dividends that we, as investors, enjoy by holding the stock. It could be the sum total of the company’s assets. It could also be the earnings that we, as investors, could reap over the long term, simply by owning the shares.
If you spread your investments across a wide range of shares, then that could help minimise the risks that affect specific companies or industries. The key is to buy stocks that are not correlated.
An often asked question is what should a perfectly-diversified portfolio look like? The answer is there probably isn’t one. However, a generally held view is that 10 to 15 unique stocks from different industries should provide us with enough diversification.
Building your stock portfolio can be great fun because we can blend our choice of stocks according to our individual tastes.
Income Investors - like more high-yielding stocks including REITs.
Growth Investors - Might want to pack a few more fast-growing companies into their portfolios.
Value Investors - Could lean more towards a bigger array of undervalued shares, especially properties.
Index Tracker - It might be a good idea to pop an index tracker into the mix too.
Having stocks of different attributes could produce a portfolio that is capable of delivering some income and some growth plus a hint of excitement.
Investing for dividends is vital. Long-term equity returns have historically come from dividends. And unlike share price appreciation which is affected by a myriad of non-fundamental factors such as sentiment, dividends represent actual cash that can only be paid out of earnings which are in turn driven by the economy.
Managers of companies have better information about their future prospects and loath cutting dividends, corporates often only pay high dividends if they have reasonable comfort that their future earnings are strong enough to sustain the dividends. This means that when one is investing for dividends one is in reality, also investing in companies with future earnings growth.
By returning excess cash to shareholders as dividends, companies avoid the temptation to squander that money away in value-destructive investments while subjecting themselves to more stringent levels of stakeholder scrutiny when they next tap the markets for funds. And because dividends can only be paid out of real earnings and real cash flows, focusing on dividends helps investors avoid companies with "fake" earnings as these companies are unlikely to have the actual cash required to make dividend payments.
I like to focus on companies with sustainable and growing future dividend streams when I pick stocks. Best of all are stocks that able to increase it's dividends pay-out yearly. These stocks I typically classify as 'Perputual Dividend Raisers'. Investors who are in for the long haul should use any correction over the few months as an opportunity to buy.
