Written by Mark Burnam
Question? My Stock Portfolio — Can I Lose All My Money?
That is a question we are getting right now from clients and prospective clients who have money with us or at other places. I’ll stick to “with us” right now so I can narrow down what people own.
The short answer is this — do you think Microsoft, Johnson & Johnson, Apple, Verizon, Medtronic, Marathon Oil, AT&T, and all these types of companies are going to go out of business? If not, then there is your answer and you needn’t read any further.
If you are bored due to the quarantine, need something to do, are having trouble falling asleep at night, or are genuinely interested in learning more, read on…
Whether it is the Corona Virus or other bad news of the day, markets can be cruising along hitting new highs and BAM! Here we are in the middle of a quick and nasty bear market correction like we are in now.
There is an old saying that rings very true particularly in this Corona Virus Market, “The market takes the staircase up and the elevator down.” Boy, doesn’t that ring true right now?
So, back to our original question. People tend to project the most recent market performance (good or bad) into a never-ending straight line in whatever direction they emotionally wish to project it – to the moon or into an abyss.
It doesn’t work that way, but some people are understandably a tad frazzled with the COVID-19 pandemic, toilet paper mania, and the markets dropping -35% from high to low. The news media tugging on our emotions 24/7 doesn’t help either.
Whether it be a bounce back or a slow climb back, there will be some companies, both public and private, that don’t make it through this. Maybe it’s a cruise line, a hotel, an airline, a retailer, or mom & pop restaurant down the street, or other? Thoughts, prayers, and fingers crossed…
We obviously don’t want to own financially fragile companies that could go under. So all that and the markets aside, let’s calmly take a deep breath, step back for a moment, and ask ourselves these questions:
A) what do we own?
B) why do we own it?
C) is it a better value today than it was 1-2 months ago?
D) should we own more
E) or is there a reason we should strategically trim this, sell that, etc.
Let’s first review the ABC’s of our hallmark “Wealth With Dividends” Strategy. *
What are “Dividends’? Dividends are essentially a piece of the profits of a company that they pay out to shareholders as a reward for owning shares of their company.
Just like not all real estate properties pay you rental income. Not all companies pay dividends.
On average, we own a diversified portfolio of roughly 30 of the highest quality “blue-chip” companies which not only pay dividends (collectively in the 3-4% area), but have a history of growing those dividends (collectively at 10%+). Why? Costs go up, hence your income needs to go up as well.
Bonds, CD’s and money market type accounts don’t pay much of anything and nor do you want to have to count on the market being up every year. Our clients use their dividends to generate a nice supplemental (or primary) income in their retirement (now or in the future), regardless of the market being up, and without touching their principal (unless they need or want to).
On top of that, companies which consistently increase their dividends are typically confident in their ability to generate higher cash flow, revenues, and profitability so they can:
a) pay that dividend
b) maintain that dividend and
c) consistently grow that dividend
Companies that generate higher revenues, cash flows, and profitability tend to be worth more over time as well i.e. we are looking for growth of your principal in addition to just growth of your dividend income.
Again, not all companies pay dividends. Not all companies that pay dividends consistently increase their dividends. Hence, we do not wish to own every company out there. Index funds have been popular, but that is also why we don’t want to just own the S&P 500 Index – we want to own the best 25-30 companies(on average) that meet our criteria — not all 500. Let’s go to Publix…
When you go to Publix, do you blindly just put every item on every shelf into your basket? No. Do you blindly buy every product in the store? No, and we don’t either.
Our team screens through tons of research to determine which companies we wish to own, how much of each, and we also will prudently diversify by owning 1-5 of the best companies in each of the 11 sectors of the S&P 500 — not the whole S&P 500 index.
Back to Publix, we wish to selectively own 2-3 of the best products on most every aisle that meets our needs (research criteria). Even better if and when we can pick them up at a better price or value.
Let’s say you love Honey Nut Cheerios and you see it is “2 for 1” this week (50% off). Would you grab 2 boxes or maybe even more? Or would you run from the store screaming “OMG, Cheerios is going out of business! Sell! Sell!” ?
Well, I see a few Cheerios boxes in your shopping cart so I know the answer to that question.
It’s the same thing right now. We own great high quality companies which are simply cheaper and more attractively valued today than they were one month or so ago. We are not running away from them – we are running to the ones we feel are the best of the best.
We own companies we feel will produce rising supplemental income streams so our clients can retire comfortably and can enjoy their retirement for years to come. Maybe you?
In sum, we will all get through this together. Maybe it takes longer than we hoped, but we’ll get through it. Like, Warren Buffet, we hope to own great companies for a very long time – and we want to get paid while we own them (dividends). Costs go up – just look at healthcare. Your income in retirement needs to go up as well.
The Second Half Team may be able to help you do just that. Call us anytime.
Director of Client Services — The Second Half Team