Market Meltdown, What Should You Do?

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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.

Sell

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.

Hold

Or called the path of least resistance. Bury your head in sand and hope this will die down soon.

Rebalance

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.

Buy

Investor panic
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.

photo

Proctor & Gamble PG
Dividend Yield: 3.54
PE: 12.6

Exxon Mobil XOM
Dividend Yield: 2.68
PE: 7.5

Coca-Cola KO
Dividend Yield: 2.89
PE: 14.8

Johnson & Johnson JNJ
Dividend Yield: 3.73
PE: 11.2

Kimberly Clark KMB
Dividend Yield: 4.45
PE: 11.7

AT&T T
Dividend Yield: 6.21
PE: 10.4

Altria MO
Dividend Yield: 6.19
PE: 10.6

Chevron CVX
Dividend Yield: 3.46
PE: 6.3

Lockheed Martin LMT
Dividend Yield: 4.35
PE: 7.4

Walmart WMT
Dividend Yield: 2.98
PE: 9.6

McDonald’s MCD
Dividend Yield: 2.897
PE: 13.8

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.

Or you could put your faith in a money manager who’s managed a whopping 20.2% return annualized, for his ‘clients‘ from 1965-2010!

My Thoughts

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.

Staying invested.

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.:

24 thoughts on “Market Meltdown, What Should You Do?

  1. I tried jumping out of the window yesterday, but I was on the ground floor so I didn’t achieve the desired result. When that didn’t work, I tried something different and bought the world stock markets.

  2. I’m sticking with my dollar cost averaging. I’ll just keep plugging along.

  3. Depends on where you are. If you are retired or on the verge of retiring you should be able to withstand the downturn we have experienced. This means having set up an account from which to take payments etc. You don’t want to have to sell at depressed levels.
    If you are younger and have 20 to 30% in bonds you may want to increase the allocation to equities – especially at these yield levels.
    In any event don’t let emotions take over. Very easy to get whipsawed in these kinds of markets.
    What you are interested in is where the market is 10 years from now – not tomorrow or next week etc.

  4. Great post. I only hope that the markets continue to drop and the DOW falls below 10k. I’d probably sell my couch for capital and sleep on the floor at that point!

    J/K.

    I continue to buy as capital passes my hands. Some wonderful buys available, and you nailed a lot of them with solid companies with outstanding balance sheets.

  5. Moneycone- Excellent and comprehensive article. I like how you discussed the individual options. Whatever you do, do not sell. The long term trend of equities is UP. Stay the course!!! (I’m blogging on this topic tomorrow :) )

  6. “Don’t sell on market fluctuations” I completely agree. Emotion is the worst reason to get in or out of a trade. I am definitely buying into this selloff and lowering my average dollar cost.

  7. I did not even want to look my portfolio yesterday when I heard about the 600 points drop. However, I’m not as worried since I consistently invest towards my retirement (dollar cost averaging). It’s a long way to go towards retirement so I think I can whether the storm for now.

  8. I’m staying put on everything I’ve got in there. I’m 25 years old, so I have some time for things to rebound before retirement. I actually wish I had more funds to invest now, as I think Buffett’s advice is great in these situations. I was already able to take advantage by buying in 2008-2009 when things dropped pretty far.

  9. With the volatility, I am primarily standing pat but will be looking for a general trend in the next few months. I think it will be downward, but I could be wrong.

  10. Very good post, MC. We are staying put for the time being (we are retired). Our 401K is in a fund geared to a person’s age & stage in life, so it’s heavier on the bonds side.

    Our inflation hedge is a stock in commodities. It’s taken a bit of a beating, but if it falls a lot we’ll buy more of it. We don’t buy gold because it seems so volatile. We could be wrong, but I don’t see a way to buy gold without paying a big premium. I wonder how the Swiss franc would be for an inflation hedge.

    All of your stock picks are solid. People will always need oil, food, & basic personal care products. I’d like to buy Canadian govt. bonds, but dh is reluctant.

  11. I’ve increased my fixed income exposure and have managed to resist selling any stocks. I try not to watch the markets too much so I don’t get tempted to sell! -Sydney

  12. I’m sticking with my dollar cost averaging and will put a bit extra in this month. I’ll pick up some more T, the yield is pretty nice.

  13. I tend to like dollar cost averaging. On the bright side, stocks are on sale :)

  14. Mostly, I ignored it (I was on vacation…).

    Now that I’m back, I bought and sold some BIDU in my Roth IRA, just to play around a bit (made 10%). It’s just for fun though, mostly I left everything alone (although I did buy some MRK today).

  15. I’m just riding it out. I’m sure we’ll bounce back. It hurts to see the numbers on my stocks, but it should all even out in my favor in the end.

  16. Everyday Tips says:

    I did not sell a thing, and am tempted to buy a little…

  17. Great advice MC! Have to keep a cool head and not panic during these turbulent times.

  18. I’m definitely a buyer on the lows. The sell-off on Monday allowed me to add some great positions at awesome prices!

  19. So far in this downturn, rebalancing is the only option I’ve considered. However, I haven’t acted on it because normally, I analyze my portfolio and rebalance 1 x per month. Since that investigation/action isn’t due until the 5th of September, I’m going to hold on until then per my normal plan. Nothing changes.

  20. Long term? Hold.
    Short Term (trading account)? I had some great results over the past couple weeks. It’s not too hard to see what’s going on when there’s a credit crunch/liquidation going on, then S&P downgrade overreaction, etc. From here, markets will probably react primarily to Europe, not so much the S&P announcement. Next, we have the election guessing to look forward to.

  21. I’ve mostly ignored it… it wasn’t even a real meltdown when you look at the big picture. I will rebalance if it does go down lower.

  22. I’m looking at a couple of opportunities that I missed a couple years ago during the last downturn.

  23. It is highly advisable that investors dont panic and if they are taking any action it is recommended that they do in small lots and do averaging

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