One of the things that most confuses the individual investor is the difference between growth stocks and value stocks. The important distinction (besides a plethora of fundamental versus technical debates) is the time frame needed to profit. In the value world (established, dividend paying, large cap situations), at least two years is needed. This demands that investors who want the perceived safety of those names are willing to suffer the markets slings and arrows. Comfort should come from the markets cyclicality. The market basically goes up slow and comes down fast with the upside lasting a few years and the down side generally occurring within a 6 to 12 month time frame. All who recollect the precipitous decline of 2008 know that value stocks do no protect you from a violent market downturn. One only has to look at the big financials to understand that. So, when we read about the great rotation out of the growth area and into the dividend paying value area, we recognize that risk is not eliminated. Here is the great dilemma. Markets are governed by emotion. When your stocks go down hard, it is very, very difficult to remain on your chartered course. A two to three percent dividend yield is small comfort when a stock declines 20 percent. Diversification is key in a value portfolio and most small investors do not have enough capital to thoroughly and properly own enough names. The result is that most go into mutual funds and the argument there is that the individual investor usually does not recognize that he or she owns more than one equity and thus is subject to the gut check that happens when the market goes down. Our methodology factors the potential downside in everything that we do. Mitigating that risk; being out of the market during market declines, is key to our posture. That is why we spend so much time yinging and yanging over the overall direction of the market. For now, we are firmly invested in a market that remains in an uptrend. However, we maintain a vigilant discipline in order to move out when the time comes. The individual investor would do well to maintain a discipline that focuses on overall market direction in order to avoid calamity. This and/or the accompanying information was prepared by or obtained from sources which DFE believes to be reliable but does not guarantee its accuracy. Any opinions expressed or implied herein are not necessarily the same as those of DFE and are subject to change without notice. The material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy any security or instruments or to participate in any trading strategy. The investments or strategy discussed may not be suitable for all investors. Past performance does not guarantee future results. Sale of option contracts can be risky and may not be suitable for all investors.
Posted on: Wed, 31 Jul 2013 13:23:25 +0000
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