Getting Back to Even is Hard - So Limit Your Loss (from ICMA.org)

Recovering from a Decline
Chart of the Week for March 11 - March 17, 2011
When developing an investment strategy, it is important to consider the risk of a decline in a portfolio's value as well as the probability of an increase in its value. Perhaps, it is even more important.

The above graph illustrates the asymmetric relationship between various levels of investment gains and losses. For example, if a portfolio starts with a $100 value and it declines by 10% to $90, it requires an 11% increase to get back to its original $100 value. The disparity gets more pronounced as the magnitude of the decline rises. From the stock market high in October 2007 to its low in March 2009, the stock market, as represented by the S&P 500 Index, dropped 57%. To get back to its original value, it must rise 132%.

All investments involve some degree of risk and investors should focus on the possibility of loss as well as the possibility of gains. As illustrated, the percentage gains required to offset losses are greater than the percentage losses involved. Care should be taken before risky investments are added to a portfolio to ensure they are consistent with one's personal goals, risk tolerance, and time horizon.

© Copyright 2011 ICMA Retirement Corporation, All Rights Reserved

What Companies Do Well In A Recession (Investopedia.com)

Industries That Thrive On Recession
by Andrew Beattie
from investopedia.com




Recessions are hard on everyone - aren't they? Actually, just as wars have their war babies (companies that perform well during war and suffer during peace), recessions have their tough offspring as well. In this article we'll take a look at the industries that flourish in the adversity of a recession and why they do so well when everyone else is struggling to make ends meet.

Discount Retailers
It makes sense that, as budgets feel the strain of an economic downturn, people turn to the stores that offer the most for the least. Discount retailers like Wal-Mart (NYSE:WMT) do well at any time, but this is not entirely true. They often suffer in good times as people flush with money buy higher-quality goods at competing outlets. To remain competitive, they are forced to upgrade their product lines and change the focus of their business from thrift to quality. Their profits suffer from either lost sales or less margin on the goods they sell.

In hard times, however, these retailers excel by going back to core products and using vast economies of scale to give cheap goods to consumers. Designers and producers of lower-end products also see an upswing as more people jump from brand names to make their paychecks go further. People may not like discount retailers, but in a recession most people end up shopping there.

Sin Industries
In bad times, the bad do well. Although it seems a little counterintuitive, people patronize the sin industry more during a recession. In good times, these same people might have bought new shoes, a new stereo or other, bigger-ticket items. In bad times, however, the desire for comforts doesn't leave, it simply scales down. People will pass on the stereo, but a nightly glass of wine, a pack of cigarettes or a chocolate bar are small expenditures that help hold back the general malaise that comes with being tight on cash.

Be warned, though - not all sin businesses prosper in a recession. Gambling, with the exception of the truly troubled gamblers, becomes an extravagance and generally declines during recessions. In fact, casinos do their best trade when the economy is roaring and everyone feels lucky. The most prosperous businesses in this industry are the purveyors of small pleasures that can be bought at a gas station or convenience store.

Selected Services
Expect a downturn in the service industry as a whole, as companies and families are willing to do more themselves to save money. A certain class of service providers will see an upswing during hard times though. Companies that specialize in upgrading and maintaining existing equipment and products see their business increase as more clients focus on working with what they have now rather than buying a newer model.

In the real estate industry, they say renovators hire as builders fire, and this holds true for many other industries as well.

The Statics
In a recession, simply carrying on with business as usual can be an achievement. Pharmaceuticals, healthcare companies, tax service companies, gravediggers, waste disposal companies and many others are in a category that, while not jumping ahead during a recession, can plod along while other companies suffer. This is simply because people get sick, get taxed and die (not always in that order) no matter what the economy is like. Sometimes the most boring businesses offer the most consistent and, in context, exciting returns.

The Benefits Of Recession
The biggest benefit of hard times is that companies get hurt for inefficiencies that they laughed off in better times. A recession means general fat trimming for companies, from which they should emerge stronger, and that's good news for investors.

One of the best signs is a company in a hard-hit industry that is expanding anyway. For example, McDonald's (NYSE:MCD) continued to grow in the 1970s downturn even though restaurants generally suffered as people cooked rather than going out to eat. Similarly, Toyota (NYSE:TM) was opening new American plants in the 1990s downturn when the Big Three were closing theirs due to falling sales for new cars.

A recession can be a blessing for investors, as it is much easier to spot a strong company without the white noise of a strong economy.

Waiting It Out
Although it is good to know which companies excel in a recession, investing according to economic cycles can be difficult. If you do invest in these industries during a recession, you have pay careful attention to your investment so you can readjust your portfolio before the economy rebounds, stemming the advances the recession-proof industries have made.

Some of the companies performing well in a recession will also perform well in a recovery, and more will change their business to take advantage of it, but many will be passed by their toughened-up brethren that race ahead in bull markets - financials, technology firms and other faster-moving industries. With the proper timing, however, these industries can provide a buffer within your portfolio while you wait for your high fliers to take off again.

Dividend Stocks - Motley Fool's High Yield Portfolio

--------------------------------------------------------------------------------


Build a High-Yield Portfolio
http://www.fool.com/investing/dividends-income/2008/08/19/build-a-high-yield-portfolio.aspx

Todd Wenning
August 19, 2008


Buy 10 to 15 high-yielding large-cap stocks today and hold them -- forever.

Yes, you read that right
This is the basic philosophy of the High-Yield Portfolio (HYP) strategy put forth by our friends at Motley Fool UK back in 2000.

At first glance, the whole idea sounds a bit crazy. I mean, buying stocks with the intention of never selling them comes off as, well, perhaps a bit naive.

After a closer look, though, there are some distinct advantages to the HYP strategy.

But first, let's take that closer look
So how does the HYP strategy choose its 10 to 15 stocks? It chooses only:

Large-cap stocks,
With a history of increasing dividends,
Relatively low debt levels, and
Sufficient dividend coverage,
That hail from diverse industries.
The original UK HYP, for example, picked fifteen stocks from the FTSE 100 index, including Rio Tinto (NYSE: RTP), Lloyds TSB, and Scottish & Newcastle.

The only permissible reasons to sell or remove a stock from the HYP portfolio are (1) the dividend is halted or cut, or (2) the company is acquired.

All about growth
Like other dividend-focused investing, the HYP strategy relies on the power of dividends to strengthen overall returns. Dividends, after all, have made up more than a third of the S&P 500's return since 1926.

But what sets the HYP strategy apart is its focus on growing dividends. By buying companies with a history of raising their dividend payouts, you're betting that they're going to continue raising those payouts -- providing you with an ever-increasing income stream.

The point of the HYP isn't capital appreciation, although that's usually an added bonus. Rather, the point is that growing dividend income -- providing an annual income that exceeds that of the current ten-year Treasury note (currently yielding 3.95%).

And that income is itself flexible. Investors far away from retirement can reinvest the dividends to increase their holdings and thus increase their payouts. Investors close to or in retirement can use the payouts as income that supports their standard of living. But because the income grows, it has the potential to beat inflation. And when you add that to the capital appreciation, you can end up sitting on a pretty penny.

OK, but do you really mean "never sell"?
Now, this idea of intentionally not selling seems counterintuitive. At some point, perhaps when the stock has reached our price target, doesn't it make sense to sell and take the capital gain?

According to the HYP's original author, Stephen Bland, the strategy demands a different perspective:

High yield portfolio (HYP) shares are not bought with the intention of selling. Quite the reverse. They are bought to hold for income and continue to be held until such time as it might very occasionally suit the investor to sell, perhaps never. Selling is not the reason for buying, unlike value trading, where selling is the only reason for buying.

It takes some getting used to, but this passive approach prevents you from overtrading and making poor valuation decisions -- while simultaneously providing you with a growing income. Best of all? You don't have to worry about daily market fluctuations.

Between November 2000, when the original HYP was started near the height of the UK market, and December 2007, it returned 68% capital appreciation without dividend reinvestment (while the FTSE 100 lost 8.3%), and included a 5.9% annual dividend yield to boot. Not only that, in just seven years the dividends grew 29%.

Now for the U.S. version
So what would a current U.S. version of the HYP portfolio look like? To come up with the list below, I followed the HYP methodology and selected a diverse group of ten S&P 500 stocks:

Capitalized above $10 billion,
With a strong history of increasing dividends,
An above-market dividend yield,
And sufficient ability to service current debt.
Company
Dividend Yield (ttm)

Pfizer (NYSE: PFE)
6.4%

AT&T (NYSE: T)
5.1%

General Electric
4.2%

Carnival
4.1%

DuPont (NYSE: DD)
3.6%

Altria (NYSE: MO)
5.4%

Chevron (NYSE: CVX)
3.1%

Bank of America (NYSE: BAC)
8.3%

ProLogis
4.4%

Southern Co.
4.5%

Average Yield
4.9%


*Source: Yahoo! Finance as of Aug. 19, 2008.

For every $10,000 invested in this portfolio, an investor could expect around $480 a year in dividends -- now. Because each of these stocks has a history of increasing their payouts every year or so, that dividend figure should continue to grow, providing the HYP investor with an ever-growing income to reinvest or live off of.

Foolish final thought
The High-Yield Portfolio strategy isn't the Dogs of the Dow, nor is it a magical formula or technical trading tool. It's simply buying strong companies with proven dividend track records and holding them for the long run -- and remaining patient to allow the dividends time to do their job.




--------------------------------------------------------------------------------
Legal Information. © 1995-2008 The Motley Fool. All rights reserved.

Previous Page