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.

December 2013 Dividend Earnings

My December 2013 dividend earnings are in. It has been a busy month!

HoldingDividend/Shr# SharesDividend TotalReinvestedNew SharesAccount
$159.8
RDSA$0.9038$34.20NO0Brokerage
KO$0.2864.6496$18.10YES0.4624Brokerage
XOM$0.6330.215$19.04YES0.202ROTH IRA
INTC$0.225106.058$23.86YES1.010ROTH IRA
ADM$0.1975.395$14.33YES0.352ROTH IRA
MCD$0.8127$21.87YES0.2295Trad IRA
IBM$0.9514$13.31YES0.0752Trad IRA
CSX$0.15100.5681$15.09YES0.5413Trad IRA

I got my first full dividend for MCD, after the piecemeal purchases I made earlier this year. My Shell investment returned one last ‘funny’ dividend – I received $34.20 in cash, but immediately has $5.13 clawed back as a foreign dividend tax.  Hopefully this should be resolved next quarter now that my RDSA has been liquidated from my brokerage account and I have purchased RDSB in my Traditional IRA.

$159 of dividend income is not too bad.  Unfortunately January and February will not be as lucrative, my dividend paying investments in those months are rather sparse at this time.

 

September 2013 Dividend Earnings

It is time to document my earnings from my dividend stock portfolio for September 2013.  The way my portfolio has been chosen a lot of payouts dates happen to fall in September, so I have quite a few items to report.

HoldingDividend/Shr# SharesDividend TotalReinvestedNew SharesAccount
$108.55
ADM$0.1975$14.25YES0.395ROTH IRA
XOM$0.6330$18.90YES0.215ROTH IRA
INTC$0.225105$23.63YES1.058ROTH IRA
RDSA$0.9038$34.20NO0Brokerage
CSX$0.15100$15YES0.5681Trad IRA
MCD$0.7710$7.70NO0Trad IRA

For several of my newer positions I received my first dividend payout ever. Intel, Shell, Clorox and McDonalds I purchased too late to received their earlier June 2013 payouts.  The ADM and Exxon payouts were a repeat of last quarter, but this time I had dividend reinvestment enabled as opposed to getting a cash deposit – so the money was invested in  fractions of additional shares.

McDonalds was an aberration this month.  I had several buys and sell of MCD while finalizing its position in my portfolio, the end result being I only received dividends on 10 shares and it was not reinvested.  This issue should be resolved now and I expect a full payment in December 3013.

I had a signficant issue with my investment with Royal Dutch Shell.  I was under the impression I would receive my dividends thru Shells’ Scrip program, where you are paid in shares – rather than in cash which needs to be reinvested into shares.  This is supposed to exempt you from paying a Foreign Dividend Tax.  Unfortunately this did not work out for me, I received $34.20 in dividends but then has $5.13 deducted for ‘Fgn Div Tax’.

I am going to monitor this issue if there is an easy way to get this back at tax time.  I may end up changing the location and type of Shell investment in the future to optimize the situation, but for now I I’m not too concerned – it is only $20 a year after all.

$108 of dividend income if my first triple digit month so far.  Here is  hoping it is the first of many!

Completion of MCD Position

MCD Logo

MCD Logo

As discussed yesterday, I had two trades for MCD scheduled for this morning.  I have replaced the 10 shares of McDonalds in my brokerage account with 27 shares in my traditional IRA.  Both trades were market trades that executed at $95.01 per share.

This trade completes the establishment of my full position in MCD, and allows me to direct future investment capital into different companies.  With the recent dip from $100/per share it lowers my entry point a little also.

While MCD faces some tougher competition from other fast food chains – such as YUM – than it has in the past, I’m fairly comfortable that due to its sheer size and international scale it will maintain a dominant position.

I am hoping for an ongoing annual dividend increase of 9% per year or more, which is a little less that it has given in recent years.  My starting yield is over 3%, so I can live without a double digit dividend growth rate, but would certainly welcome it!

The completion of this position in McDonalds takes care of diversification into the ‘dining out’ sector of the economy. I am enjoying see my portfolio grown in breadth, and seeing these great names slowly added.  These are not exciting investments I am making, but hopefully they will prove to be successful ones in the long term.

Purchase of 27 shares of MCD at $95.01, for a cost basis of 2,565.27. Dividend yield at time of purchase is 3.13%. Dividend Reinvestment enabled. Initial dividend income $83.16 annually.

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.

Purchase of KO – Coke Is It!

CLX Logo

KO Logo

I’ve finally made the decision to initiate a position in KO.  I have owned Coca Cola before via a DRIP about ten years ago, but had to liquidate the position.  This time I plan to hold it forever.

Funds in my taxable brokerage account (where I want to build this position) are tight, and since I am also purchasing some MCD I only have around a thousand dollars available for this initial purchase – thank god for free trades!

So, why am I purchasing Coke?  One big reason is that Buffet loves the company.  I know that just blindly following another investor isn’t considered particularly innovative, but I know my limitations.  I am not a good stock picker – I’ve learnt that by past bad experiences. I’m happy to steal the investing ideas of those who are smarter than me!

Morningstar – my go to analysis source – values KO at $45, so my purchase price of under $41 seems reasonable.  I don’t expect a screaming deal on quality firms like Coca Cola in this frothy market, I’m just happy not to seriously overpay.

The chief risk I see to Cokes future is consumers shifting away from the purchase of bubbly sugar (or fake sugar) filled soda as their beverage of choice.  This may turn out to be the long term direction in the US, but there is still plenty of room for overseas growth in my view. Plus, Coke also owns a variety of other beverage products (iced teas, energy drinks, juices, etc…) that should allow them to pick up domestic growth in those areas.

Dividend wise, I have solid hopes for the future.  While their current earnings payout is close to 60%, and I expect annual dividend increases in the neighborhood of 8%.  It’s not spectacular, but decent enough given my starting yield.

Purchase of 25 shares of KO at $40.88, for a partial position ($2500 desired, more purchases planned) with a cost basis of $1022. Dividend yield at time of purchase is 2.73%. Dividend Reinvestment enabled. Initial dividend income $28 annually.