The stock market had the worst plunge in two years, Standard & Poor’s downgraded US credit rating from AAA to AA+, the first time in seventy years, and Europe is battling a credit crisis of its own.
According to Standard & Poor’s, your money is more safer with Liechtenstein than with the US!
The impact of US losing its steller credit rating was brutal. All three indexes were down by more than 5% and Dow sank 11,000.
The President’s address to the nation did little to assuage the woes of investors.
What should the individual investor do?
Let’s explore some options.
When there is panic all around, it is difficult to stay still. Selling now when everyone’s selling is a bad bargain. Sell if a company’s fundamentals change, not on market fluctuations. Keep your investment horizon in sight.
Or called the path of least resistance. Bury your head in sand and hope this will die down soon.
If you have a structured portfolio and if it is time to re-balance, don’t hold off on that.
Dollar Cost Averaging
If you are into dollar cost averaging, continue to invest. Not investing now would mean missing out on some nice gains when the markets do bounce back.
Buffett famously said: Be greedy when others are fearful and fearful when others are greedy. It can be a very tough thing to, to stand against the panicking crowd. And there are no guarantees. This could be a start of a long drawn out recession or the markets could jump right back, catching up with the previous highs.
It is in times like these you should keep your horizon in perspective. Invest for the long haul. People aren’t going to stop brushing their teeth (PG) or stop going to McDonald’s (MCD) because the markets are down! Coke (KO) is still the king of colas and even folks with Prius need gas (XOM) to get around. Profits for Walmart (WMT) may be down, but it still remains the undisputed leader among retailers.
Benjamin Graham’s rule #1 was to invest in companies with a PE ratio of less than 16. And in those days, most companies paid dividends. Here are some top notch, dividend paying companies with a forward PE of less than 16.
Proctor & Gamble PG
Dividend Yield: 3.54
Exxon Mobil XOM
Dividend Yield: 2.68
Dividend Yield: 2.89
Johnson & Johnson JNJ
Dividend Yield: 3.73
Kimberly Clark KMB
Dividend Yield: 4.45
Dividend Yield: 6.21
Dividend Yield: 6.19
Dividend Yield: 3.46
Lockheed Martin LMT
Dividend Yield: 4.35
Dividend Yield: 2.98
Dividend Yield: 2.897
All are low beta, defensive stocks and market swings don’t affect them as much as say, technology stocks. Now would be a great time to add positions to these stocks.
Most of these stocks would’ve made you money even during the lost decade, and I believe they have the potential to get us through this and future market turbulences.
I maintain my aversion to domestic financial stocks. BofA fell by a whopping 20% on news that AIG is suing Bank of America for its role in mortgage securities fraud.
Citi fell by more than 16% and JP Morgan Chase by more than 9% and all three banks have heavy exposure to bad European debt.
The folks who perpetuated the mortgage crisis are still at the helm and the cleanup act has been slow to say the least. AIG’s lawsuit won’t be the last. I will stay away from this sector for now but continue adding positions to low PE dividend paying stocks mentioned above.
I share Buffett’s resistance to tech stocks as well. My exposure to technology stocks is mostly limited to Apple which too, I’m sure, will take a beating. But I should still remain above water since I bought the majority of AAPL when it was known mostly as a maker of a music player.
If this period of uncertainty continues, one asset will continue to hit new heights – Gold. Gold feeds on fear. Very little exposure to precious metals as I’m still evaluating this asset class.
The rest are ETFs and defensive stocks. I have no intention of selling any.
DISCLOSURE Long on all the stocks mentioned in this post except BAC, C, JPM. I’m not a qualified financial professional, this is not investment advice.: