We all suffered through the trials and tribulations of 2011. Anxiety and panic attacks were common as the stock market gyrated without regard to anyone's psyche, turning even the most avid buy and hold investor into a doubting Thomas. Expect more of the same in 2012. Emotions will run the market, and the main emotion right now is fear. So here are a few things you can do to keep yours in check while others are losing sleep.
Take a balanced approach, to your portfolio and your life. First, keep a well diversified portfolio. That means owning stocks and bonds and ETF's and mutual funds. Don't have too much of any one of them. Keep more cash than normal. What's the right amount? The amount that makes you comfortable. There will be days when the market drops precipitously, and you'll want to take advantage.
Keep a core portfolio, one that has the most conservative investments. Have another, smaller portfolio that allows you to buy riskier stocks and bonds, one that you'll trade more often. It's not a buy and hold strategy for this group. You'll look to take profits on the days when the market rockets on the slightest bit of good news, as we saw last week when Spain had a good bond auction and the market took off. Yes, in retrospect, we all wonder how that could be, but it happened. It will happen again. When it does, take some profits and wait for reality to come back, showing up in lower prices.
Keep your life balanced. If you're obsessed with the market, spending too much time focused on each tick of your stocks (you know who you are), then you're not investing right. For the longest time Warren Buffett, the most successful stock investor ever, didn't have a computer in his office. He didn't care about the day to day price of his stocks. He bought them when they were a bargain and waited for the rest of the world to figure out what he already knew. He may have a computer now, but he most likely spends most of his time on it playing bridge. The hours you lose constantly watching stocks is much better used doing research on more stocks or investments. Minute to minute fluctuations are meaningless, unless you're trading, which most investors can't do successfully.
There's no need to monitor hourly movements in your investments. Once a day is fine, mostly to check if there's any news on your particular stocks. If the news is profound enough, you may want to buy or sell a particular stock. If it's a rather routine update or small hiccup in performance, there's no need to panic. Just wait for another quarter and see how it affects the bottom line. Moving too quickly in and out of stocks only makes you more anxious and raises your costs.
Collect some dividends. A quarterly stipend is very comforting when the market moves dramatically or not at all. 2011 saw (most likely) only a small gain in the markets. If the last day of trading is terrible, they will break even or go negative. Hard to make money in markets like those. But if you own stocks that pay dividends, regulary quarterly payments, they can make all the difference in your performance and your temperament, to say nothing of your increased cash position. Dividends now run between 1% and 20%, and almost all sectors have some stocks that pay them. The REIT's have some of the highest rates. They also have some of the highest risk. Utilities have decent rates, as do gas and/or oil limited partnerships. (For specific stocks, see the Dividend column at www.theonlineinvestor.com)
2012 will look a lot like 2011. But one piece of information we know now that we didn't at the start of last year: interest rates aren't going up. The Fed stated it will not raise rates until 2013 at the earliest, and lately, speculation is that it will be more like 2014 the way the economy is. With low rates as a constant, it makes investing in certain utility, real estate investment trusts and other interest sensitive sectors good places to look. Of course, if the economy starts to heat up, be prepared to shift out of interest sensitive stocks and into growth.
- Ted Allrich
December 27, 2011