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Is it better to have invested, and lost, than never to have invested at all?

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Well …

It certainly helps you achieve your investment goals if you own investments that have a chance of getting you to your destination.

Take a look at the following charts and ask yourself two questions:

  • If you had bought during the major dips, would it have benefited you?

and

  • How would you have done with your money in low interest instruments according to the charts below? *

Example fund vs. 1-year GIC

Example fund vs. 5-year GIC

It’s clear that the most conservative investments wouldn’t have served you as well since the inception of this fund. What investors would do well to remember is that GICs lock your money in until maturity while mutual funds, ETFs and stocks are more liquid, generally.

Not to mention:

  • If you had bought during the dips

and

  • If you had rebalanced regularly

… you’d have done better than the chart shows since you would have lowered your cost or ACB and generally bought lower and sold higher.

So …

Do you have a plan, a strategy?

What is it?

Remember a few weeks ago when the news about Europe was so bad that optimism seemed naive?

I’m paraphrasing myself from a previous post. I talked about learning to harness your fear. There are always reasons you can find for Armageddon if you look hard enough.

People want stability. At times, markets and the business cycle are anything but stable. Above, you can see that during the worst stock market correction in most of our lives, an example of a balanced, dividend-based portfolio outperforming the most conservative of investments, GICs, by  four times or more.

When the doom and the gloom gets really thick, many investors feel paralyzed. But that’s exactly when great investors look for opportunity.

During the doom and gloom, markets often decide to have a good bounce.

Isn’t that counter-intuitive?

Actually, it’s pretty normal. If there were no walls of worry to climb, there’d be no bull markets. In “Wait a minute. There’s some good news re the markets?” I blogged about how investors often miss the opportunity in the end-of-the-world-as-we-know-it scenarios.

I posted some stark stats in “Why you should consider new investments now”.

Since we’re supposed to be strategic about long-term investing, let’s ask ourselves a question again:

When the market takes a substantial dip, is there more chance that it’ll rise or keep falling on average?

In “Don’t Panic”, I also talked about managing fear while investing. Learning to harness your fear is important in sports. Imagine you’re taking a penalty. It isn’t easy to stand there and score in front of 70,000 people.

Why should it be any different when you invest?

What’s the market going to do?

No one knows. There are a lot of educated guesses, research, charting, but no one knows.

Accept it.

Just as, if you decide to start a business or enter into any kind of relationship, there’s no 100 per cent satisfaction guarantee.

Business, economic news, the process of investing, continues to flow. It’s a river. There are rapids. There are waterfalls.

There may even be a couple of Niagaras out there.

But if you look at history, you’ll see that there were always those who pushed and went further. For every time you encounter end-of-the-world-scenarios, you’re going to see that someone steps up, looks at the recent correction in the market and says:

Hey, there may be some value here.

Accept the psychology of the market. But get a plan.

Is the bad news over?

Here’s what I said in that previous post:

We’ve come through a tough time. We’re not out of the woods yet, but if you’ve been sticking to a sound investing plan, you’ve taken advantage of the weakness in the market.

The bad news about being an inactive investor in 2011

If you had been sitting in cash only:

  • You missed a very nice rise in the bond markets

and

  • A great opportunity to reallocate investments to stocks

You might have taken advantage of a great time to buy equities at lower prices and participated in the rise of the bond markets.

Or, you might have asked the more unlucky question:

What happens if the world ends?

It might be better to ask:

What happens if I think strategically about my investments?

What happens if the world doesn’t end?

Want more information?

Click here for more about bonds and fixed income investments.

Click below for more about asset allocation and reallocation strategies:

Get the balance right

A simple way to arrive at the right asset allocation for your portfolio

Plan like a pension fund manager when it comes to your investment portfolio

Let’s think about assets

Asset allocation: Diversification is king

Click here for articles about dividends/dividend-payers.

* Example fund chosen out of large bank balanced funds with a dividend bias. Fund used purely for illustrative purposes with a time period of less than ten years since the effect of the financial crisis should have been greater during this period.

Chart source: Globeinvestor.com

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Part Two: You don’t need to listen to Warren Buffett* (if you’ve allocated your investment portfolio properly)

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In Part One of this post, I left off saying I’d discuss why having a plan benefits you when it comes to asset allocation within your portfolio.

Markets keep on moving

Investors have to be conscious of the fact that the markets are never static. No one knows exactly what’s going to happen in the markets.

Since markets change, and taking into consideration recent events, here are three points we should consider:

  • Are investors now overweight bonds?
  • Do investors miss out by trying to time the markets?
  • Can you achieve your investment/retirement goals by holding (supposedly) low-risk investments?

The bond blackhole 

It’s highly probable that some investors are overweight bonds. If this movement to bonds is related to short-term fear rather than long-term planning, it’s a mistake.

Consider an older retiree who’s heavy in bonds. That same retiree holding a large fixed income component in his portfolio is going to suffer in a bond correction.

Still, these older retirees need the safety fixed income investments provide them. But retired investors need to weigh the potential in equities long-term over the safety in bonds or GICs and allocate accordingly.

Equities, inflation and long-term hedges

Here’s an interesting article from The Economist discussing Canada’s pension plans.

Ask yourself: Why do professional pension fund managers include equities in their investments? Are they about to abandon stocks?

Without growth an investor’s going to be in trouble when they begin withdrawing investments in retirement. Equities have done best over the very long-term against inflation, even during recent superb bond outperformance.

So, what’s happened to stocks? Why all the noise?

Of course, it’s generated by abuses leading up to the financial crisis, and investors who’ve been spooked by the big correction of 2008-2009. But here’s the thing:

Stocks have undergone a period that will go down in history as one of the largest corrections most investors have seen. Equities then had a larger than average correction last year.

Since that time, if you’d focused on the opportunity presented, you’d have had some nice returns. Stocks may correct again since they’ve had a march upwards. Companies have increased dividends focusing on what looks like better times with strong balance sheets.

Are stocks a better value than bonds?

In Part One, you can find solid reasoning on why they are.

Don’t want to be glued to your portfolio?

What’s the easiest way to take advantage of market swings that favour different investments at different times — without becoming a burden on your personal time resources?

Proper asset allocation.

Despite the volatility, stocks have done pretty well

As the chart above shows, stocks and bonds have still done pretty well over the long-term. Amidst all the volatility, stocks and bonds have performed. U.S. stocks may not have done as well for Canadian investors, but they picked up enormously in 2011.

Avoiding equities? It’s going to cost you in the long-term

The S&P/TSX 60 is made up of sixty of the largest companies in Canada. These dividend-paying stocks have done well over the ten years above despite the correction during the financial crisis.

Since equities have had a couple of major corrections in the last five years, they continue to show value especially in the face of historically low interest rates. U.S. equities are showing even more value relative to those in Canada. But they’ve also had a nice increase lately.

Believe in your plan

The stock and bond markets have shown an amazing ability to outwit retail investors. It’s hard to know what the markets will do. Don’t worry about it.

The secret is focusing your energy in a pro-active plan:

That long-term plan will help keep you focused.

Do you still believe in your plan? Are you comfortable with the amount of risk your taking?

If you believe in your plan and you are comfortable with the amount of risk you’re exposed to, make sure you apply the following to your investment portfolio:

  • A well-balanced mix of suitable assets
  • Evaluate your portfolio regularly
  • Stick to your plan
  • Rebalance your portfolio
  • Diversify with respect to the assets you hold, as well as the geographies you hold them in
  • Contribute regularly to your plan in order to take advantage of market volatility

Stocks have a lot going for them at the moment, but they’ve had a great run over the last few months. Will they correct?

Bonds have performed very well since the financial crisis. Will they correct?

Whether there’s a market correction or not in either asset category isn’t important. What is important is that you have a long-term plan that takes advantage of outperformance at different times in both stocks and bonds.

A good manager will make use of market volatility.

So can you.

Need more information?

Click below for more about asset allocation and reallocation strategies:

Get the balance right

A simple way to arrive at the right asset allocation for your portfolio

Plan like a pension fund manager when it comes to your investment portfolio

Let’s think about assets

Asset allocation: Diversification is king

How’s Warren Buffett’s long-term stock-picking record?

Chart source: Globe Investor

 

*While using proper asset allocation may reduce your need to listen to Warren Buffett about the stock markets, listen to him, anyway. Few have been as successful as Buffett in stocks.

The title of my blog post is a poke at his critics. Even fewer of them have had the same long-term track record as Buffett!

The grand parade of future dividends

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“Increases dividend”: a sound byte that should be but isn’t cutting through the leaden bad news we’re surrounded by. Companies are raising their dividends, still, headlines are full of bad news coming out of Europe.

What should the average investor focus on? The parade of companies increasing their dividends, or the end of the world scenarios that continue to make headlines?

Here are some of the names increasing their dividends:

Disney, Chevron, GE, BCE, Ford (resumes paying dividend), Agrium, Enbridge, Iamgold (by 25 per cent), National Bank of Canada, Laurentian Bank … the list goes on.

Does this return of shareholder cash signal a more optimistic future? Shouldn’t we reward these companies with positive press for doing something that will contribute to shareholders and the economy ultimately?

Income-lovers jump on dividend-payers. Why?

When a company’s increasing dividends, and some have increased more than once this year, management’s saying, “Hey, our operations are strong enough to keep this dividend going for a long time.” Companies are careful about cutting dividends, and so, this makes them cautious about raising them.

When a company cuts its dividend, it becomes kind of a corporate leper. Confidence is lost. Reputation takes a whack. Investors run for the hills.

Because of this, most companies don’t trifle with raising their dividends. They do some hard forecasting before making increases.

The dividend parade continues

While people focus on bad news, opportunity sits there. Why do investors focus on daily bytes that create a horrorshow of headlines?

The bottom line is:

  • Corporations continue to pay shareholders
  • The news is what it is

Investors may have some suspicion regarding the business intelligence they get, but, are they to believe that the managements of all these corporations raising their dividends are so out-of-touch with the world economy that the opportunity these same managements see is misguided?

Fact over fiction

  • The U.S. economic news is improving
  • The S&P 500 is a bargain
  • So, too, is the S&P TSX 60
  • Historically-speaking, the markets look full of potential if you’re focused on dividend-payers that consistently grow their dividends
  • Dividend-payers allow you a margin of safety regarding a recession in Europe and what it might do to the markets while allowing the average investor the opportunity to participate in good news

While the future’s unwritten and it’s difficult to predict markets or economic activity consistently, following a diversified strategy brimming with dividend splashes is one that you can have some long-term confidence in.

Brian Wesbury of First Trust Advisors says, stocks are “the cheapest we’ve seen since early 2009 or the early 1980s … equities have priced in the end of the world.”

What happens if the world doesn’t end?

Share the wealth

Since I blogged about this back in December, there’s been a steady increase in dividends. Here are a few of the notable increases as companies continue to decide that their financial footing’s more than steady enough to give back to shareholders.

Surprise, surprise: BMO Scotiabank increase dividends

BCE profit climbs on strength in wireless, media (not to mention the dividend increase)

CN is the latest to increase dividend with management sounding confident about the Canadian economy

TD and RBC continue the grand parade of dividend hiking

JPMorgan raises dividend and buys back $15 billion in shares

Wells Fargo raises dividend and plans share buybacks over next two years

Apple finally issues dividend, but it’s puny

Goldman Sachs hikes dividend

Intel increases dividend, third time in last 18 months

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Written by johnrondina

December 16, 2011 at 1:34 pm

Part Two: Cash, corrections, the end and feeling fine

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It`s the end of the world as we know it -- or is it?

In my last post, I discussed cash on corporate balance sheets, whether all that cash on balance sheets is the best use of corporate funds, and what companies will do with that cash (hopefully, sooner than later).
 
Onward …
 

Squabble, squabble, squabble: What happened to collaboration?

We’ve watched U.S. and European politicians do little. Squabbling doesn’t really count as a productive activity these days. Playing politics looks pretty selfish. Procrastinating looks plain stupid. The crisis in Europe is a serious issue that requires a serious response. Most probably, one that involves world-wide collaboration.

The markets are going to force politicians to get their acts together. This isn’t the time to think regionally. The global economy is here, like it or not. It’s time to act for the greater good rather than protecting one’s own backside.

We live in a global world. Interconnected, with dependencies that aren’t always transparent on the surface of things, a large event in any one country or region has far-reaching consequences. Yet too many politicians are shouting, “Mine!” Toddlers in daycare show more skill in sharing and thinking about their larger community.

iShare

Warren Buffett’s belief that increasing taxes on high income-earners is the way to go has become popular with many people. There seems to be a growing feeling of community amongst some individuals. A feeling that it’s time to share the wealth, and that tax cuts for the wealthy have gone too far.

Agree or disagree with Buffett’s belief on taxes, he`s a man that’s been, to understate the obvious, fairly successful at what he does. No wonder he has something like superhero status amongst Berkshire Hathaway’s shareholders and the followers of what’s become the “cult of Warren”. Not to mention that he’s one of the biggest philanthropists in history. He also advocates that the wealthy should follow his example. He counts Bill Gates amongst his admirers and a fellow in philanthropic efforts.

Project Band-Aid: (It’s [not] just a flesh wound)

Solutions in Europe have been largely plastic. But Band-Aid’s are short-term. Germany is coming under increasing pressure to be a leader in Europe rather than dwelling on its own self-interests. Take a look at the share prices of German banks or the MCSI Germany Index down 28 per cent year-to-date.

The market’s telling us you can’t have your cake and eat it, too. You can’t create markets, sell to them and leave them, according to investors. Not without paying for the engagement ring, at least. And the price tag is more than three months’ salary.

What investors would really like to see is a unified Euro bond. Perhaps leadership in Germany (and Europe broadly) needs to think more about the greater good (including Germany) rather than more national self-interests.

After all, why create a broader community in Europe if when crises appear leadership is going to become nationalistic? Marriages are for better or worse. If any one nation in Europe thinks it’s going to skate away from the Europen crisis, it’s sadly mistaken. The fact is the interconnectedness of financial instituitons, financial transactions and myriad moving parts is not going to ignore Germany. It’s punishing its stock market along with those of other European countries. And inaction and lack of adequate response will make this situation worse.

President Obama’s under pressure as well. American politicians have looked just as ridiculous as their European counterparts. The inability to collaborate, to forge solutions and move forward is getting a lot of press. Markets gave the Operation Twist strategy a big thumbs-down within moments, and today’s activity in the markets reinforces that.

So, wait a minute … Where’s opportunity?

Here:

  • Corporate profits are near record levels
  • Corporations are in better shape than some governments
  • Corporate bonds look better than some nations’ bonds
  • Global housing bubbles have burst already (largely)

In Canada, we are fortunate to have a strong bond market, but in the U.S. and Europe, there are more than a few questions regarding bonds. However, during the last few days’ extreme market volatility, investors still threw their money into the U.S. dollar and Treasuries – liquidity foremost in their minds.

Bonds and dividend yields

Bonds have done exactly what they were supposed to do in this correction. They have provided income and have risen dramatically as investors ran for cover. With bonds yielding very low rates of return (despite functioning as insurance in portfolios) in both the U.S. and Canada, the situation seems better and better for strong dividend-paying stocks long-term. Recently, we saw the S&P dividend yield rise above the 10-year Treasury.  In Canada, dividend yields have also risen dramatically. Your dividend yield is paying you to wait. Not bad.

The economic situation may be deteriorating; still, it’s hard to imagine that GICs are going to be worthwhile as an investment for anything other than short-term concerns in the current environment of low interest rates.

Hopefully, many investors have been following a strategic protocol of rebalancing their portfolios.  If they have, they don’t need to worry as much about the volatility in today’s markets. They may have to wait for better returns, but at the same time, they’ll get paid to wait knowing they own solid companies with a history of dividend payments.

Holding dividend-paying equities is really important because it’s the end of the world as we know it. But it’s been the end of the world as we knew it so many times before. Past is prologue. Perspective is very persuasive.

In the end, dividends provide what more speculative investments can’t:

  • A solid income stream

While the pain created by the Financial Crisis, and the current crisis in Europe is serious, investors who’ve followed prudent rebalancing strategies will be able to:

  • Count bond and dividend payments as they sleep

And that’s probably the best measure of whether your portfolio accurately measures your ability to tolerate risk … being able to sleep at night.

It’s the end of the world as we know it (like so many times before), but from an investor`s perspective, a solid income stream might help us feel fine.

Related:

As if on cue, Warren Buffett announced today that Berkshire Hathaway would buy back its own shares.

Warren Buffett bought $4 billion worth of stock in the third quarter as markets slid, investors worried and pessimism gathered steam.

Cash, corrections, the end and feeling fine

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 It’s all about the cash (and being able to sleep at night) when it comes to the stock market correction: Finding optimism in the insomnia of the moment

Didn’t the Twist go out a long time ago?

Somebody should tell the U.S. government that half-measures hardly ever satisfy anyone. Doing the Twist may be the middle ground, but now is the time for leadership and focusing on one’s convictions.

Is the glass still half-full?

Cash on Corporate Balance Sheets

In “Too much cash on corporate balance sheets: So, does this mean we can expect higher payouts?”, I wrote about the Everest of cash sitting on balance sheets. Today, Thursday, September 22, as I write, markets are moving down aggressively suggesting the Fed’s doing the Twist wasn’t what the markets wanted. There’s still one overwhelming fact that we shouldn’t overlook:

• Corporations are sitting on mountains of cash

What are they going to do?

Since they’re not in the business of becoming money market funds, (though some companies are starting to look like balanced funds by the mounds of cash they’re hording [more on this in a moment], these corporations need to do something with all this cash. After all, just like investors sitting on GICs, corporations sitting on cash aren’t going to get much of a return on it.

Now, let’s Think Apple, for example.

Seems the apple’s full of cash. But Apple’s not a balanced fund. It’s a company. Not everyone’s enamoured of Apple’s strategy.

While a lot of this cash hording relates directly to our current economic times, it still raises the ire of many people. High unemployment, especially amongst students, doesn’t make people rejoice when they hear you’re sitting on $76 billion.

With that amount of cash on the balance sheet, it seems management at Apple’s got the Mayan calendar out and are waiting for the end of the world. If that’s their forward-looking scenario, an iPhone or iPad won’t be much use …

“Hi … Mom, dad, I just thought I’d say bye … The end is coming …”

Perhaps investors in Apple have more confidence in Apple’s future than Apple management does?

But let’s revisit what’s most important to remember:

• Corporations have to do something with all this cash
• And some are

Microsoft recently raised its dividend: One of many companies to do this. It’s about sharing the wealth.

The fact that Apple hasn’t issued a dividend seems like a strategic mistake. It will be interesting to see how long investors will tolerate so much cash on Apple’s books.

Since opportunity appears in times of crisis, it’d be foolish to forget that all this cash has to go somewhere eventually.

Where?

  • Dividends
  • Mergers, acquisitions
  • Buying back shares
  • Towards hiring the most important resource, people, as the economy improves

Part Two is here.

Too much cash on corporate balance sheets: So, does this mean we can expect higher payouts?

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Corporate balance sheets are overflowing with cash, says David Bianco, Merrill Lynch’s chief U.S. equity strategist in a report.

Ready for a stunner? S&P 500’s constituents are sitting on a record $1.1-trillion (U.S.). $1.1-trillion. Just sitting there. That’s about 11 per cent of their total market cap.

Holding cash is hurting companies, says Bianco. Dividend payouts on the S&P 500 are near historical lows. Bianco suggests high dividend-payers are consistently rewarded with higher share growth.

Stocks with dividends that are growing are outperforming their peers

Update: CIBC says, “Yes, you can,” and increases dividend to share the wealth

TD gives back to investors with second dividend payout increase in one year

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Smiling through your dividends

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Seeds that grow

(Please see update on U.S. dividend stocks at end of article.)

I recently blogged about why dividend-paying stocks deserve their place in your portfolio. If you enjoy high speculation, these may not be the stocks for you. You may get more of a kick out of the potential plunges that could affect your portfolio, however, since the financial crisis, the stomach for significant ups and downs doesn’t appear to be as high for the average investor.

If you’re looking to have a portfolio with:

  • More protection against corrections
  • Solid earnings that are shared with investors

and

  • A history of outperformance during difficult economic periods

then dividend-payers are for you.

But let’s see if we can walk the talk regarding these investments. A quick look at the performance of dividend-payers over the last six months:

  • The Dow Jones Canada Select Dividend Index is up over 15 per cent
  • Over the same period of time, the DEX Universe Bond Index is down about 1 per cent

While there’s definitely a place for bonds in your portfolio, it’s hard to argue against the numbers above.

Dividend-payers have been kicking butt.

Interested in what dividend-payers can do for you portfolio?

Looking for a historical understanding of dividends in tough times?

Then go through the rabbit hole.

Follow up:

How about U.S. dividend-payers?

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