Conservative Investing - 2008 / 2009 - Stocks

Do the principles of investing your money conservatively change with the economic climate? I don't think so. Certainly there are factors that you need to weigh a bit differently, but the foundational principles should remain the same.

Myth: There are safe stocks you can buy

Sure, tell that to the people that owned Woolworth's, TWA, Washington Mutual, and Lehman Brothers. I am sitting with a lot of Ford stock. I have been buying it over the past six years. My thinking was if Ford goes "in the tank" we will probably be in some pretty dire economic times and Ford will be the least of my worries. Famous last words. At the time I was buying for they were still paying a dividend. They stopped doing that.

Bottom line, buying a stock, any stock involves some risk. So should you sit on the side lines when it comes to stock? Not at all. If you have the cash to buy into the market (like Warren Buffet) now is an okay time.

What types of stocks should you be looking at buying?

Companies that are conservative and have good balance sheets that pay dividends like GE, Pfizer, DOW Chemical, US Bancorp, Duke Energy, Eli Lilly, Merck, Allete, Kraft Foods, Heintz, Coca Cola, Hershey, GATX, Clorox, 3M, Johnson and Johnson, United Technologies. Each of these companies have a history of profitability and paying dividends. Each are currently paying at least a 3% dividend, most higher. Many of these companies adjust their dividend percentage higher as their price per share drops. This may seem strange but really is not. Their dividend is tied to a percentage of their profits. This dividend is calulated based upon their stock price and the number of outstanding share that have been distributed. As such the dividend percentage will typically go down when the stock is trading high and go up when the stock is trading low (assuming their profit stays the same).

These are companies who are fiscally conservative and whose goal is to make a profit. They are very good at prediciting their revenue and will contract their businesses in order to keep profitable. Unfortunately this oftentimes leads to jobs being lost. Of course when they are growing they are adding new jobs.

So what are the risks?

The company could go out of business
The stock price could continue to fall

The first risk is certainly catastrophic. The second is only a problem if you cannot afford to remain in the stock through these hard economic times. In other words, do you believe GE is going to make it through these harrowing times? They made it through the great depression, paying dividends the whole way. If you believe a strong conservative company like GE will survive then your biggest risk is potentially being upside down on the equity of the purchase. While you are riding out this economic storm you will be getting a dividend and buying into a great company at a great price. Think long term. Warren bought 3 billion in GE with warrants to buy another 3 billion.

TIP: Buy over time

Do not buy all of your stock at one time. Buy over time. This is referred to as dollar cost averaging. This way if the stock continues to fall your average cost per share will average out less. Buy the dips irrespective of which way the market is headed..

TIP: Do not put all your eggs in one basket

Diversify your investments. Do not put all your money in one stock no matter how good you think the company is. If your can afford 100 shares of GE it would be better to diversify and buy four quality stocks using the money you have. Spread your risk as well across different industries. You can also buy into an "income" type mutual fund. These are funds that buy stocks that pay dividends and also will have a percentage of theior portfolio in Bonds and other types of equities that are income producing.

TIP: Buy Low Sell High

This is so simple and yet what is the advice we are getting. Stay out of the market. There are many good companies selling at fire sale prices. Why are we getting the advice not to buy? Because more investment gurus have a hard time thinking past six months. Think long term. Even a good companys stock may continue to fall in these hard times. As long as they are financally sound it is okay to keep buying them on the ride down.

TIP: Stay away from sectors that are in trouble right now

This advice is coming from someone who has 15% of his portfolio in stocks pertaining to the transportation sector (the auto industry making a big portion of this percentage). GM or Ford can look real attractive right now but this is a big gamble. If they declare bankruptcy your investment just became worthless. Right now auto stocks are not a good bet for this reason alone. Never buy a stock that is rumored to be headed for bankruptcy.

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