The slight gains that the markets saw Friday hardly overshadowed the week’s 6.5% drop. In markets like this, we want to constantly remind investors that your investment time horizon matters. We suggest that only money you do not need within the next 10 years should ever be invested in the stock market. With an investment time horizon of 10 years or more, you should not be forced to sell in a down market. Additionally, with a long time horizon, you should be less likely to buy as stock prices are rising.
In a market where every sector is taking a beating, where can an investor hide? We feel the place to put long-term money is in dividend paying stocks. High quality, dividend paying companies like PepsiCo (NYSE: PEP), Church & Dwight Co. Inc (NYSE: CHD) and Costco Wholesale Corp. (NASDAQ: COST) are down, but by cents on the dollar. Each of these stocks pays a healthy dividend. High quality companies will be the place to be, because we feel they will be poised to soar as the market rebounds from the downturn. Additionally, the Federal Reserve’s Operation Twist should help high quality companies, as the dividend should be easier to pay the companies refinance debt.
Understanding your Liquidity and Cash Flow
When we develop a financial plan for clients, we provide for 10 years of liquidity. We assume a 4.6% rate of inflation—which we have not had—and we assume a 5% return on a fixed investment—which we’re not getting—that would net a 0.4% return. That, we have been getting. Lately, as we have been providing the desired money to clients, they are saying, “Well, maybe I don’t need to be spending this right now,” and they are saving that money.
Investors have “safe” money, and then they have a stash of “super safe” money. Sometimes they even have a stash of “super-duper safe” money. As a result of all the money they are saving in checking accounts or money market accounts paying 0.02%, they end up with perhaps 14 or 15 years of liquidity.
In an environment where the market drops 400 points in a day, we feel you have to hold your nose and know that you are investing for the long run. We feel you can find high quality companies that produce income. We buy McDonalds Corporation (NYSE: MCD), because they continue to sell Big Macs and continue to pay a dividend. When the market is rolling up and down, you should not be concerned about the price appreciation.
For example, a real estate investor buys a property. The investor puts several thousand dollars of improvement into the property, knowing he cannot turn around and sell that property for a profit. However, he knows he can rent the property to generate income and cash flow. Yet stock investors do not view their stock portfolio in the same way. Why? Because real estate is not being priced every five minutes. The real estate investor is happy to receive the $700 rental check each month, and is happy with his cash flow, regardless of what the property is worth.
When we invest, we aim to hold for the long term, so why should we care today what McDonalds sells for on the New York Stock Exchange? We feel investors should be happy that they are a strong company that will continue to pay a dividend. If it is truly money you do not need within the next 10 years, enjoy your life and take care of the day-to-day. Sound investment decisions should be made on sound academic principles and good business decisions, including understanding cash flow, not a knee-jerk reaction to a 400 point drop.
At Henssler Financial, we believe you should Live Ready, and planning is part of being ready. You know you will likely retire around 65, and you know your children will likely go to college. We feel your investments should reflect your goals, and that you should maintain realistic expectations, as we go along. You may call our experts at 770-429-9166 or e-mail at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
