RISK – it’s such a scary word, especially right now.
We’d all like to remove risk, right? Nobody wants to think of their investments – their “nest egg”, whether they be in stocks, bonds, gold, real estate or fine art, ever going to $ZERO.
But we live with those fears everyday – some days more than others.
Wouldn’t it be fantastic to invest a dollar and know that you are GUARANTEED to not only to get your original dollar back, but also get a monster return of 12% interest with no chance of loss what so ever?
Of course there’s no such investment – no matter how large or small the rate of return is, because you can never remove RISK. Remember even CASH has a risk, as inflation eats away at your purchasing power on a daily basis.
A good friend of mine who audits banks for a living often reminds me, “You can never REMOVE risk, you can only MANAGE it.”
So since you can’t remove risk, how can you manage risk? Read on…
Back in 2008 when the financial crisis was coming to a head across the world, I was pulling my hair out almost daily thinking, “How much more of these losses can I take? I’m ready to throw in the towel!” For many investors it was a very stressful time.
After watching companies like General Motors, Lehman Brothers and Washington Mutual that were “too big to fail” go bankrupt, I decided that I could never invest again with any expectation of capital appreciation. That’s not to say you won’t ever see capital appreciation, just don’t plan on it.
History has shown that any given stock can go to $ZERO and if you aren’t willing to take that risk, then don’t buy equities – it really is that simple.
I starting thinking about methods that might offset the risk of investing in equities. That’s when I came up with the idea of building a widely diversified portfolio of income producing stocks that would pay out cash on an (almost) daily basis. I’m not suggesting that this is the only strategy that you can implement to manage your portfolio risk – it’s just the one I’ve chosen to focus on.
Three crazy days
- Monday, August 8: Dow is down 635 points – closes at 10,809
- Tuesday, August 9: Dow is up 430 points – closes at 11,239
- Wednesday, August 10: Dow is down 520 points – closes at 10,719
An interesting thing has happened with the Daily Dividend Investor portfolio over the last 3 days. Even though the market closed almost 100 points lower on Wednesay, than it did on Monday, the DDI porfolio is up a little over 3% from it’s closing low on Monday. It appears that some buyers have entered the market.
With the steep sell off over the last several days most every stock traded on the major exchanges has been pushed lower – enough so that some investors may start looking to buy stocks that are oversold.
I believe whether we go lower from here or not, this is a great opportunity to add to the “base” or quality positions in the DDI portfolio – names like Colgate (ticker: CL), IBM (ticker: IBM) and Proctor & Gamble (ticker: PG).
Obviously I’m not the only one who thinks this way – when looking over the portfolio today I found there were actually buyers in several stocks held by the DDI portfolio including Public Storage Preferred shares, shares of several high yield closed end funds and oil / energy stocks like Kinder Morgan Energy Partners (ticker: KMP).
I went ahead yesterday and added some additional cash to the portfolio so that I could add to some of the base or preferred positions during this market sell-off. If we get continued selling tomorrow, I’ll be looking to deploy this new cash….stay tuned as I look for strategic key buys.