Tuesday, August 25, 2015

My Strategy for A Market Correction

Welcome back!  Stock market investors, were you able to stomach Monday's 588 (Dow) point bloodbath?  Did you feel like you were riding a roller coaster seeing the incredible market swing that ended the day looking like an inverted "U" on the charts?  And just how did you, my friend, react?  Did you sell some or part of your holdings in panic?  Did you buy more of your holdings seeing them on sale?  Or did you ignore the action and go about your day?  Lots of questions, I know.

That's what the market is all about, questioning you at every turn.  But the market becomes more like an interrogator during turbulent times, placing you in a dark room with a single light aimed at the top of your head.

Let's face it, we all saw it coming.  China's stock market was sputtering along before the gas tank finally hit empty last week.  Here in the U.S., earning reports last quarter were about as exciting as watching paint dry.  Sure, a few companies had their day.  And the market finally began to favor stock pickers over indexers.  Until days like Friday and yesterday, of course, where the descent was broad based.  Expect more of this in the days and months ahead.

The financial literacy topic today is on stock market strategy.  What type of strategy should you have at the tail end of a multiple year bull market that is sensitive to both domestic and international events?

In this exact scenario, I like opportunities like today to buy solid companies that have been beat up, that is, are closer to a floor than a ceiling, and that also pay a nice dividend.  I've read and heard people recommend buying strict dividend plays, but unlike good companies that have fallen on hard times, i.e., they're inexpensive for a reason, near high, dividend plays have more downside range during market corrections.

Take the case of Kimberly-Clark, KMB.  Between August 14th-18th, just a few days ago, the stock hovered at $116, near its 52-week high of $119.  The yield on the stock is around 3.2%.  The stock had climbed 10%, a run that began on the last of June, giving investors conviction to get in.  As of the end of trading day Monday, the stock was less than 50 cents from where it started way back in June.  The entire 10% shaved off in just four trading days.  I don't think it's even close to hitting a floor yet, where the only remaining investors will be die hard, long-term holders of the stock.

Beat-up, Value/Contrarian, Dividend Plays

This is the time to do one of two things, either you, 1) Buy more of your "hold" stocks when there is blood in the water, lowering your cost basis opportunistically or 2) Start positions in value or contrarian stocks, buying in blocks every time the Dow falls more than 300 points, and your stocks are below your cost basis.  It's like a successful college football team that has had all of its best players leave for the NFL.  As the coach, you'll need to rebuild your team, starting your players as freshman when you first get them on the field (your portfolio) and bulking them up each summer (at every major sell-off) until you have a bunch of studs ready for the Rose Bowl three or four years later.

Here are some stocks that pay a healthy dividend and are also considered value or contrarian plays.  Note, I recommend these for investors willing to hold for at least one year or more.

1.  Ford (F), $13.19 close on Monday.  Yield, 4.3% and it has basically been crawling on all fours like a baby for a long time.

2.  Caterpillar (CAT), $72.82.  Yield, 4.1%.  The stock has been hurt big time by the global slowdown.

3.  Potash Corporation (POT), $24.35.  Yield, 6.1%.  The stock lost a mere 2.68% on Monday.  That's saying a lot!

4.  Johnson & Johnson (JNJ), $92.82.  Yield, 3.1%.  It fell to as low as $81.79 on Monday before rallying to within only 2.87% from last Friday's close.  If you bought in the low $80s...lucky!

5.  Chevron (CVX), $72.12.  Yield, 5.6%.  Don't want to get into an oil stock?  Why not?  How much further can energy fall?

I think you get the pattern here.  Why not just buy exchange traded or mutual funds that track the market, you may be asking.  Index funds have more investors in them now than any other asset class.  If you're in an index fund today, you will certainly not harm yourself buying more at these dips.  However, selling now is a mistake.  There is still plenty of downside or correction left in this market, and it will take all index fund holders along for the ride.  That's why I prefer individual stocks in this scenario, and especially those that pay a dividend and are value or contrarian plays.

Good luck out there!  Thanks for reading.

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