Where You Want to Be Investing if the Market Turns South

In a little over six weeks, US investors will be putting on their party hats and popping champagne corks to celebrate another anniversary. Come March, the raging US bull market will have reached its ninth year.

From the utter despair that saw the market halve throughout 2008 and into early 2009, the US market spun on a dime in March 2009 and has been heading higher ever since.

By any measure, it has been meteoric run. While news stories last week gushed about the market hitting yet another all-time high — this time the Dow Jones index breaking the 26,000-point level — the week also marked another milestone.

Since the low in March 2009, the Dow Jones has rallied 400%.

You can see the rally in the chart below. Here, each bar represents a one-month move. Over the last two years, the market has accelerated, jumping 60% higher.

Dow Jones monthly price chart

 Dow Jones monthly price chart

Source: eSignal
[Click to enlarge]

Other markets have followed suit. The Hong Kong and Japanese markets are on a tear. Even the European markets are chugging along.

Such strong markets have investors rubbing their hands together. Who would pass up on gains like this? At first glance, you could accidentally mistake the chart above for any of the myriad of cryptos.

However, as cryptocurrencies have reminded us this year, markets don’t always go in a straight line.

When the market runs away to massive gains, income investors can feel as though the market has left them behind.

They look at stocks that have increased dramatically and chastise themselves for missing out.

Typically, bull markets bid up growth stocks. Investors pile on board as they buy into the ‘story’. But these can be the first stock investors abandon if the market comes back to Earth.

All of a sudden, the growth story evaporates as everyone heads for the exit. Investors once again rediscover their love for companies that actually make money. 

Smart investing

It’s this end of the market where the professionals invest. They invest in companies that actually generate surplus cash — and can share that with their shareholders via dividends.

These companies have a sustainable business and can ride out a downturn in the markets.

If you were buying a business yourself, one of the first things you would check to see is if it’s making any money.

To flip that around, why would you buy a business that is losing money? You might if you’re some kind of business doctor or turnaround specialist. For the rest of us, though, we are much better off leaving it alone.

But every day people in the markets buy into businesses that don’t make money. Maybe they buy a stock because they see that the particular sector is running hot.

Nevertheless, nobody wants to be holding a dud stock next time the markets head south.

So what is an investor to do?

Well, sitting on the sidelines might feel like you’re playing it safe. However, the chart above shows you how that’s played out. Over the last two years, even the most boring old index ETF in the US generated a 60%-plus return.

And here’s the thing about sitting on the sideline: You still have inflation nipping at your heels. Had you sat out the market over the last couple of years and missed the rally, you would have lost 5–6% of your purchasing power due to inflation.

Don’t get me wrong; if you are new to the market, I’m not saying to rush out right now and buy everything in sight. After this massive run up, many companies are trading well above their true value.

What I am saying is to make sure you are not too lopsided in growth stocks.

One of the myths of investing is that you are either a growth or income investor. That is, you either want steady and reliable income payers…or you want to punt on stocks that could shoot the lights out.

Typically, you need a bit of both. Too much income might mean too little capital growth. And too many growth stocks means that you could take a big hit should the market turn south.

When this market eventually turns — as all markets do — I know which stocks I would rather be holding.

For some, income stocks might be a bit of a yawn. Investors have heard all about the same-old income stocks a million times before. You might even own a swag of them yourself.

But here’s the thing about income stocks.: There are over 500 stocks on the ASX that pay a dividend. Sure, some are miniscule. Others barely match what you get on a term deposit.

But, of the hundreds of others that do pay a regular dividend, with how many are you familiar?

This is the grist of income investing. Hunting out income stocks that the rest of the market has missed. Stocks that — unlike many of the regular income favourites — have the potential to truly grow.

And even more importantly for investors, companies that can enable you to sit back and collect regular dividends even when the market eventually takes a turn.

All the best,

Matt Hibbard,
Editor, Total Income

While many investors chase quick fire gains, Matt takes a different view. He is focused on two very clear goals. First: How to generate reliable and consistent income in a low-interest rate world. And second, how you can invest today to build wealth over the next 10–15 years. Matt researches income investments. You can find more of Matt’s work over at Total Income, where he is hunting down the next generation of dividend-paying companies for the future. He is also the editor of Options Trader, where he uses basic options strategies to generate additional streams of income beyond the regular dividend payments. Having worked for himself and with global firms for almost three decades, Matt has traded nearly every asset in existence. But now he is on a very different mission — to help investors generate income irrespective of what the market is doing. It’s about getting companies to pay you a steady, stable income, with minimal stress and the least risk possible. Matt doesn’t believe you have the luxury of being a bull or a bear in the market right now. You have to earn an income from it, regardless of whether stocks are going up or down. By getting the financial markets to pay you an income, you can get to focus on more important things than just money.

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