The Danger of Fear and Panic During a Stock Market Crash

One story I hear again and again about investing in equities, is how easy it is to lose a lot of money. While this is true to a certain extent, there are ways to mitigate these risks.

In the late 1990’s many investors got caught up in highly speculative tech stocks, when high prices of many issues were unsupported by their profit levels – or in many cases unsupported by any profits at all. With the benefit of hindsight, it is obvious that this bubble had to eventually burst.  Engaging in this kind of speculative investing in hopes of rapid short term gains is somewhat of a gamble, and a very easy way to squander a lot of capital.

Investing in the latest ‘sure thing’ may pay for a while, but eventually you are going to get burned.  For those willing to settle for slower but surer returns, purchasing positions in solid companies with a long track record – and preferably a wide moat protecting their business – at a fair or discounted value is a lot more likely to provide satisfactory results.

Of course, even prudent investors can find the value of their holdings go down considerably at times. During the financial crisis the S&P 500 dropped from a high of over 1500+ in late 2008, down to less than 700+ in 2009. While some companies – especially those financial firms dependent on leverage and mortgage based securities – suffered dramatic falls in share price for good reason, other non-financial firms also fell drastically.

Stalwarts such as Coca Cola – little impacted by troubles in the financial sector – traded as much as 25% lower in the depths of the financial crisis bear market than it did beforehand.  Did the intrinsic value of KO really decrease that much?  I don’t think so.  Earnings continued to grow, dividend were still paid out – and continued to increase annually.

During this time many 401(k) investors – seeing their balances decline by so much – sold all of the equity positions in their retirement accounts.  Now that the markets have fully recovered and now exceeded their former 2008 highs, these people have missed the opportunity for huge gains and will suffer in retirement accordingly.

For investors who have purchased shares in a quality blue chip company – KO is only one example, others are JNJ, PG, NSRGY, MCD – at a reasonable price, a stock market crash is not a time to panic and sell.  These firms are – barring catastrophe – not going away.  They sell products that people will continue to buy in good times and bad.

If the economy is down for some reason – recession, war, famine – the market as a whole might punish these firms out of fear they will not perform as well in the near team.  However, looking out into the future we can see from history these basic, somewhat boring firms, will continue to prosper and thrive when times improve.  In fact, with proper management, the down times can provide a quality firm the change to take market share from less sound competitors.

Rather than panicking and selling when your investment in Johnson and Johnson drops 20% due to some temporary bad news, stop and consider what is happening.  Is there some specific event that will truly impair the long term prospects of this particular company?  If not, take advantage of those panic driven sellers pushing down the price and increase your holding.

Don’t let fear and panic mess with your mind in the next stock market crash.  Hold the positions you have in quality companies and look for bargains to deploy any available cash you have.  If you can pick up ‘best of the best’ firms at a P/E of 15 of less – particularly during temporary periods of depressed earnings – then you have excellent odds of great returns when the psychology of the markets turns bullish once more.

Portfolio Holding Pattern – Status as of November 2013

One reason I have made no new purchases of dividend stocks for my portfolio recently due to some unexpected expenses.  Between a brand new Air Conditioner and Furnace for my home, and catching up on some significant maintenance and repair work on my old Lexus, I had to payout roughly $10000.

Both these expenses were originally charged to my American Express Fidelity rewards card (that offers 2% cash back to my Fidelity brokerage account on all purchases).  This gave me in effect $200 towards future investments once I start making purchases again.

As for the $10000, I did a no fee balance transfer to my existing Pentagon Federal Credit Union card which periodically offers 4.9% for the life of balance.  As a compromise to avoid having the high balance on the card impact my credit I am in the process of paying $4000 of that additional debt, the other $6000 will remain on the card for now and be paid off slowly over time while incurring minimal interest expense.

I’m looking forward to redirecting my free cash flow to dividend yielding investments again next month, when I have completed paying off the 4000 dollars I mention.

As of today I have only funded my Fidelity ROTH for 2013 for $4500 (rather than $5500) as I’m not clear yet if my income will allow me to make the full contribution.  For now additional funding is funneled to my Taxable Brokerage account at Merrill Lynch.  Once I have completed my taxes early in 2014 I will determine if I can add the extra $1000 – or at least part of it – to my ROTH using the appropriate IRS worksheets.

Regardless of what the forms say, I will commence my 2014 ROTH contribution in January – adding at least a few thousand dollars to start with.  Overall this means that my Merrill Brokerage account will get any future contributions I make until December 31st, at which point activity will switch to Fidelity.

There is also a second reason for my lack of purchases of late.  My old Traditional IRA account still has a significant amount of cash equivalents that have yet to be deployed into dividend paying investments, I currently have GTC limit orders that would make use of a large chunk of this money if only prices of the targeted shares would drop low enough.

I have orders for roughly $2500 – my standard full position – of General Mills (GIS) at $40, Doctor Pepper Snapple (DPS) at $39.60, Proctor and Gamble (PG) at $66.35 and BP at $39.49.  While BP was getting close to triggering at one point, with the recent surge in the markets I don’t think any of these orders will fill anytime soon.

I guess this is the curse of the dividend investor purchasing for the long term.  When the market is bullish the stocks you want get too pricey!  For now I’ll keep renewing these orders (they are GTC but only for 30 days at a time).

 

Trading Requirement – Merrill Edge SafePass®

I finally decided to purchase a chunk of Nestlé S.A. ADR today (NSRGY), I signed into my brokerage to place the order and ran into a little bit of a roadblock.  To purchase Nestle in my brokerage account there are some additional security requirements.

Due to Nestle being a Pink Sheet ADR, my ML self-directed account prompted me to enroll in their SafePass program – the SafePass® card is required in order to trade Over-The-Counter and Pink Sheet securities.  This card is a physical card that produces a code authorizing a trade.

Merrill apparently considers Nestle to be a high risk security.  I do understand the thinking, as since NSRGY is not officially US listed they could in theory have all sorts of funny stuff going on in their accounting.  I am not at all worried however, as it doesn’t get much more blue chip than Nestlé!

I went ahead and enrolled for a SafePass®, now I have to wait for it to arrive before I can authorize the purchase of NSRGY. Hopefully the price will not go up in the interim!

UPDATE: The Safepass device arrived from Merrill roughly a week after ordering.  It is a small credit card sized/shaped gadget that has little touch sensitive panel you hold down to generate a 6 digit number in a small display. The envelope included instructions for activating the device – which walks you to the appropriate screen on your Merrill Edge account and has you generate and enter two random numbers using the card.

I have placed my Safepass with my sock drawered credit cards – I used it once to place my NSRGY limit order – as I won’t need to use it often but want to be sure I can find it when needed!

 

Moving My McDonalds Holdings to Make Space for Nestle

I have been doing some thinking about how best to split my portfolio amongst my Taxable brokerage account, my Traditional IRA (an old 401k rollover) and my Roth IRA account.

I have a surplus of uncommitted funds in my Traditional IRA, and a shortage of free cash in my Taxable account. This is proving a bit troublesome as some of the companies I have an interest in – namely RDSA (Shell) and NSRGY (Nestle) are best purchased in a non tax advantaged account.

Word on the interwebs is that the Nestle dividend is subject to partial withholding, but that those moneys can be recovered at tax time. To do this however, the ADR must be held in a taxable account. Is this accurate? I’m not sure – but I’m going to assume so for now,

To this end I have decided to liquidate my partial position in McDonalds from my regular brokerage account, to free up this cash for a possible Nestle purchase. At the same time I will use some of the uncommitted cash in my tIRA to establish a full MCD position in that account, taking advantage of the dip in price of Mcdonalds in the last week or two.

The net result of this change will be:

  • MCD moves from partial to full weighting in my portfolio.
  • Roughly $1000 will be freed up in my brokerage account for a possible future purchase of NESTLE – or another company that similarly benefits from placement in that account.
  • I no longer have to scrimp and save my ‘new’ investable capital to finish building out my MCD position.

I may end up doing something similar with my KO holdings one day, but for now I will leave them as is.

I have placed the orders for these two MCD trades to execute tomorrow. They will be fee free thanks to my brokerage firm – well, if I ignore the 2 cent sales fee from the SEC.  I will post a McDonalds positions update to reflect this once the trades have gone through.

For portfolio tracking purposes I will adjust my cost basis in MCD to whatever value Merrill Lynch shows me. This won’t reflect the fact I lost a bit of money since my initial purchase, but I can live with that slight discrepancy in the name of keeping things simple.

My Dividend Investing Goals

On this site I plan to document my investment in a selection of dividend growth stocks. While I’ll start of small, I hope to build a sizable portfolio over time.

The main criteria for my stock purchases will be:

a) Yield. Each purchase will have an initial yield of 2.5% or more, but I am willing to be flexible on this.

b) Dividend Growth. I would like to see reliable and consistent dividend increases – an average of at least 8% annual dividend growth over time. If the initial yield is higher I may accept a lower dividend growth rate.

c) Quality. I’m seeking what are generally considered ‘blue chip’ companies. I’ll do my best to avoid speculating on the ‘next sure thing’, something I have been guilty of in the past.

d) Value. Ideally I would purchase all these great stocks at a bargain price. Unfortunately it is no longer 2009, and many great dividend stocks are priced fairly – at best – or overvalued. I will endeavor to find the best values I can, but am willing to pay a moderate premium for the very best companies with the intent of keeping them forever.

In future posts I will identify the initial stocks on my wish list (at the right price), and document and discuss my purchases.
I also plan to layout an exit strategy for individual stocks. These purchases are planned to be for life, but sometimes a company’s future prospects turn bad (Kodak Eastman anyone?) and a sale is in order.