BTO - Boost Your Recurrent Income Now!

2023-04-03 07:35:00 ET

Summary

• Occasionally, the entire market sells off due to some news.
• Investors who make knee-jerk trades often make bad decisions.
• You can't predict what will happen in the future, but you can create a plan for how you will manage it.
• Creating a plan before the market falls will help you make reasoned decisions instead of emotional ones.
• Yes, you can boost your retirement income now!

Co-produced with Beyond Saving

You wake up in the morning, grab a cup of coffee, let the dog out, and it is a beautiful, peaceful morning. Then you make the mistake of looking at your favorite financial news.

Banks are failing! The recession is around the corner! No, the recession is NOW! Losses are HUGE! War! Taxes! Instability! The end of the economy! The worst since 19xx! Fear for your retirement!

You've seen the headlines. They might cause you to be filled with fear, uncertainty, and doubt - aka FUD. Then you look at your brokerage account and see a sea of red. Sometimes, not even a single ticker will be green. Now what?

Do you sell everything "before it gets worse"? Do you sell some things that are down the most? Or do you start buying? Taking the contrarian view and loading up while stocks are "cheap". If you buy, what do you buy?

Recently, we saw an event that moved the market red and created a lot of FUD. The failure of Silicon Valley Bank quickly created fear throughout the markets, centered on regional banks but creating a wave that spread through any company that lends or borrows.

Today, I want to talk about strategies for dealing with widescale news-induced sell-offs.

Know Your Emotions

The first step is to know your emotions.

Do you have cool, calm ice running through your veins, making you capable of calculating an event's ramifications and making profitable decisions in seconds? Yeah, me neither. The reality is that such calm and instant calculations are myths that are best left to Hollywood.

The reality is that every single one of us is managing an amount of money that is "a lot" to us. Whether you have a portfolio in the thousands or the millions, the amount you have invested is likely a life-changing amount.

Managing a large amount of money is stressful. You will feel fear, uncertainty, and doubt when your big number gets smaller. It's not only ok, those emotions are perfectly natural.

Fortunately, you don't have to be an emotionless robot to manage your portfolio effectively. What you do need to do is have an honest assessment of your abilities to set aside those emotions and prevent them from clouding your judgment.

Are you a person who can take a minute, calm down and get your emotions under control? Or are you the type of person who will keep getting more hyped up the longer you watch and then lose control? Are you patient or impulsive?

You must have an honest assessment of your own strengths and weaknesses.

Have A Plan - Don't 'Wing It'

It is very difficult to make wise decisions when you are under pressure. It is even more difficult to create a plan from scratch when under pressure. Professional sports teams don't go out on the field and just "wing it". They have a series of plans and strategies that they will choose between depending on the conditions. These plans are created far from the stress of a championship game in an environment where the plans can be practiced, adjusted, and modified.

• To Trade, or Not To Trade

The first step of your plan should be to determine whether or not you will trade at all. For most investors, the best thing to do is close the news site, pour another cup of coffee, and fry some bacon. That's right; the best plan is often to do absolutely nothing with your portfolio and go on with your life.

This is often the best plan for a few reasons:

1. When news first breaks, the facts are rarely known. There is a lot of speculation and "what ifs", but few concrete details. You can lose a lot of money reacting to things that might not happen.
2. Your emotions will be fresh and, therefore, the most powerful. Giving yourself some cooling off time and coming back will help you think more clearly.
3. The market will be exceptionally volatile, encouraging you to do excessive trading.

Remember, investing is a marathon, not a sprint. You don't have to do anything today. Waiting will allow you to read more about the event, provide yourself time to cool off, and avoid getting wrapped up in the rapid price movements of the market. There is little that is more discouraging than selling a stock, and it rebounds 10% immediately after you sell, or buying a stock and it falls another 30% after you buy.

• Don't Rush To Buy or Sell Stocks That Are Directly Impacted

Often, there is no hurry. Consider John Hancock Financial Opportunities Fund ( BTO ), a closed-end fund that invests almost entirely in banks. This was clearly, a very unpleasant sector to hold when the news is obsessed with bank failures. As you might guess, BTO sold off rapidly.

Yet notice the price action on BTO; it sold off Thursday and into Monday the 13th.

Then it bounced on the 14th and back to similar lows on the 17th. This means that if you were inclined to decide that the right decision was to sell BTO, wait for the bounce. Similarly, if you were inclined to "buy the dip" you could have waited as late as the 17th, a full week after the triggering event, to buy it near lows.

This is a very common behavior for stocks. Stock prices rarely go anywhere in a straight line. After the initial drop, there is likely to be at least one bounce and there is also likely to be a retesting of lows.

These types of price movements happen often enough that you should rarely feel the need to trade instantly on news events. Take time to analyze the situation more, read about it from experts you trust, and take your time coming to a well-reasoned decision.

There will be times when share prices just run in one direction or the other, and waiting will result in buying at higher prices or selling at lower ones. Despite that, it is much better, in the long run, to take the appropriate amount of time to come to a good decision than to make a bad decision with a knee-jerk reaction. You should only react quickly when the "right" decision is so overwhelmingly clear that you don't need time to think about it.

• Create A 'Wish List'

Often, news events like failing banks can cause everything in the market to turn red. If you have decided that you want to take a contrarian "buy the dip" approach to a sell-off, it can be overwhelming trying to decide what to buy. Many investors will default to just buying what they already hold.

The great thing about everything selling is that everything sells off. During uncertain times, it is often best to buy investments that you don't already hold.

• In turbulent times, diversification is even more important.
• There are many great companies you might want to own but are usually too expensive.
• Some of the best opportunities might be outside what you already own.

The problem is that doing due diligence takes time, and when the market is falling isn't the best time to be trying to do due diligence on numerous companies.

As you are looking for investment opportunities, you will frequently come across companies that interest you but are just a bit too expensive. You like the business model, you like the management, and you believe the company has a good future, but the yield was just too low to suit your needs. Or maybe you even held a stock and it got so expensive that you were forced to sell it for a gain. It is always a good idea to keep your eyes on these potential investments, and when the whole market sells off, it is a great time to buy. Create a watchlist of stocks you would like to buy, but aren't quite the right price. When the market sells off, use that list to start your shopping, buying up investments that during more "normal" times, were too expensive. Those investments that were great deals before a sell-off, are likely to remain attractive even after the market starts recovering.

• Focus On Your Allocations

A frequent question I receive when everything is selling is "what looks like the best deal?". When you walk into a store that is having a sale on a few items, you might wander over to the sale rack and just peruse those items. That's what we are doing at HDO every day, digging through the market and looking for the tickers that are on sale.

When you walk into a store that has a sign that says "CLEARANCE: EVERYTHING MUST GO!", you don't go digging around looking for what's on sale because everything is on sale. Instead, you might decide what items from the store you really want and try to find those. Knowing that when you find them, they will be on sale. It doesn't matter that the items you want might only be 50% off, while other items that you don't really want are 60% off. You're going to buy what you want.

When everything in the market is red, that is a clearance sale. The deals are everywhere. So instead of digging through the market, randomly looking, look at what you have and decide what your portfolio needs. Does your portfolio have less preferred equities than you would like? Great, those are on sale. Looking to add more bonds? Those are on sale too! Have you been dreaming about owning more monthly dividend payers? They are on sale.

Buy the areas of your portfolio that you have less exposure than you want. When everything sells off, the best deal in the market is the stock that improves your diversification, gets you closer to your allocation goals, and meets your income goals. Since everyone has a different portfolio, the answer will be different for each person.

In my opinion, you can't go wrong consulting the HDO Model Portfolio, and perusing the holdings that you don't own, or have the smallest positions in.

• Sell When You Must

I've talked about what to buy, but what should you sell?

Selling a stock is as great a decision as buying one. Like buying, you should make sure you put a lot of thought into selling it. Don't let price movements alone influence your decision. A lot of great stocks have swung down 60%, 70%, or even 80% and then fully recovered. Many investors get the feeling of dread that the market "knows something", or that they missed something when a holding sells off.

In most cases, nobody in the market knows anything more than you do. They are basing their decisions off of the same public SEC filings you are. They might come to a different conclusion, have a different time horizon, they might have different goals, and a lot of investors don't even bother having goals. They just buy and sell, with no real direction.

When considering selling, take a good hard look at what changed. Sometimes, some events happen that materially change a company and completely destroy the whole reason you invested. For me, the primary focus is the income. When events happen, I take a look and try to determine what impact it might have on the dividend and whether that is something I am willing to hold through or if I'd rather move on. Often, panics over share price have no relation to a company's ability to pay its dividend.

• Don't Panic!

The worst thing you can do in any situation is panic. Investors who react without thinking will find themselves selling at low prices and buying at high prices.

If you find yourself in a mental state where you are making knee-jerk trades, take a break. Walk away. Your portfolio will still be there.

I created the Income Method specifically for environments where market prices are volatile. Over the years, the volatility of dividends is far lower than the volatility of prices. By focusing on the income that your portfolio is producing, you can separate yourself from the emotions and focus on what is truly important. Instead of focusing on what happened to the price of a stock, focus on asking yourself whether the events occurring increase the risk to your dividend. Often, you will find that there is no real increase in risk to your dividends. When there is, you can quantify it, and then decide if your capital is better invested elsewhere.

Conclusion

I'm a big believer in always being a net buyer of stocks. In the long run, the stock market is one of the greatest generators of passive wealth to ever exist. I want to own more stocks, not less. As a buyer, lower prices benefit me. Even if I do decide to sell a stock where I am concerned about its dividend, I will be reinvesting that capital.

When the whole market is crashing, my strategy is to buy more stocks. Now, you don't want to "back up the truck" and invest all your available cash immediately. Frequently, prices will go lower in the days and even weeks following the initial sell-off. So what does my plan look like?

1. Step one: Check how much cash I have. Then I review when my next major dividends are coming. I like to more or less buy a similar amount each day. So I will divide my cash on hand by the number of days before I get paid again, and that is my daily allowance.
2. Step two: Read the news. See what other investors are saying and ensure that I have a good grasp of what is happening.
3. Step three: Take a break. I like to take my dog for a walk. The exercise clears my head and puts me in a better state of mind to make decisions.
4. Step four: Consult my wish list. I always have a pool of stocks that I've been doing due diligence on and have considered buying but just didn't pull the trigger. I check to see if these stocks are selling off.
5. Step five: Sort my portfolio by allocation size. I like to look at my smallest allocations, as sometimes I buy small starter positions in companies I really want to own.
6. Step six: Use those lists to determine which stocks I want to buy most.
7. Step seven: Decide if there are any stocks I want to exit. By now, I have put a lot of thought into what is happening and will have come to some conclusions about whether any of my holdings are at elevated risk.
8. Step eight: Start buying and selling within my allotted budget.

Your plan doesn't have to match mine exactly, but you should have a plan. Force yourself to follow a process that promotes thinking about your actions, as opposed to being reactive.

You can't predict what will happen in the future, but you can create a plan of what you will do when something happens. This will help you approach the market with a rational, thought-out approach, and you will make far better decisions than those who react with emotions.

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