Tuesday, October 13, 2015

What Goes Down ...

Late August the stock market dropped significantly. The usual reaction ensued. People panicked, sold stock at now lowered prices, and the market dropped for a few more days before stabilizing. After a few small bounced up and down, the past week we've seen a bigger climb back. Two investment strategies should be high-lighted.

First, investment discipline. If you panic and get out of the market during a drop, you'll probably miss out on the bounce back. In fact, if you buy during a down time, you follow the old principle of 'buy low, sell high'. Many emotional investors to the opposite. If you have a set schedule then a drop in the market presents an opportunity to buy up some great stocks at bargain prices. Dividend growth investors love it when quality stocks go on sale. I buy stocks every month, with income from the prior month and fresh capital. Over time this results in dollar cost averaging, and you isolate your portfolio from timing the market. It takes some discipline though, to buy into a falling market.

Second is diversification. Looking at dividend yields and long term dividend growth, you'll find lots of public utilities and energy stocks. It's tempting to have large positions in these sectors. But when oil prices dropped energy stocks were hit hard. It's good to look at your allocation and buy into other sectors as well. While the August drop affected the larger market, we now see oil stocks come back faster than the rest of the market. So overall, when one sector is weak, other sectors pick up the slack, and when some sector bounce back slower from a drop, again other sectors can make up the difference.

My portfolio is not as diversified as I'd like. I'm still too heavy in energy and utilities. But my recent purchases are in new sectors which help balance out my portfolio. Here's my sector allocation, and my portfolio performance since the last August drop. This includes my September purchase. As you can see, I'm almost back to where I started August. While some individual stocks are still at lower levels, others bounced back faster, helping the overall portfolio performance.

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