Stock markets got you down?

Research shows that most investors are more depressed when they are loosing money, then happy when they are making money. Psychology plays a big part in investing and getting past your initial desire to get out, in a panic driven market, can go a long way over the long run. Many investors wind up buying high and selling low because they panicked and sold at or near the bottom. But what if they where buying in a correction instead of panic selling?

Many investors feel like they should have moved more money into cash before the markets started selling off and then repurchae their shares at a lower price, or that they should have held off on that investment a little longer until prices were even more attractive. It can be incredibly frustrating. But one cannot time the markets (at least not without a working time machine) and trying to do so will only loose you money. Instead we should all have a good strategy for dealing with market corrections, and taking advantage of hidden oportunities to build wealth.

There is no need to panic or be depressed in this market downturn. Markets will turn arownd in time as they always do. And if you make wise investment choices during the downturn you can make a nice profit.

Are we in a recession?

No! Even though many pundits on TV keep proclaiming a that we are in a recession, that is not true. At least not yet. The definition of a recession is two consecutive quarters of negative GDP growth. As of yet we have not even had one quarter of negative growth. Our ecconomy’s growth is slowing but we are not yet negative and I don’t believe we will see a recetion any time soon. Also, our exports are growing for the first time in a very long time and I most definately see this as a continuing trend.

What is the health of world markets?

Many countries economies are currently growing at amazing rates. Just take a look at China, Brazil, India and Russia. Do you really think that a slight U.S. economic slowdown will have a huge effect on these fast growing economies? Their people are startig to flowrish and demand a higher standard of living. They want better food, nice cars, air conditioneres, flat screen TV’s and much more, and this demand will only increrase as their per capita incomes keeps growing.

We live in a changing world and as time passes the U.S. is less and less of a factor to the worlds economy. Less growth in the US may slow down Chineese exports somewhat but in a miniscule way (we are not their only customer) and it certainly will not slow their infrastructure buildup nor quench their hunger for oil and raw materials. Even if China’s growth slowes from 11% annually to 10% it is a drop in the bucket. And by the way, the Chineese have been actively trying to slow their growth with no success. There is simply way too much growth in international markets for a world wide economic slowdown. The future looks bright.

Is that sky falling?

Obviously the world is not coming to an end and if it where your net worth would be the last thing on your mind.

Granted that if you sell before the major market losses and buy back near the bottom you’ll be ahead of the game, but it is very difficult if not nearly impossible to time the markets and nine times out of ten you’ll lose money trying. So I woud say that it is not worth trying to time the market since chances are that you will lose. Instead see any temporary market downturn as an opportunity to buy stocks on sale.

Recognizing opportunities when we see them

As income investors we are not as concerned about the value of the original investment but with the income it is generating. Additionally at a lower NAV your dividends buy you more shares when reinvested, thereby growing your income stream faster.

Many good stocks, etf’s, cef’s and mutual funds that where previously a good investment paying a high dividend have been beaten into the ground by this panic in the markets. This sudden drop in NAV has caused these good investments to become great investments with exceptionally high dividend yields.

I have recently been adding to my holdings in ADVDX (15% yield), NRI (17% yield), AFN (38% yield) and others thereby locking in the very high dividend yields.

Buying such securities now which are on sale in a big kind of way is a rare opportunity and will pay off for years to come. This is how smart money is made, buying low and collecting a huge dividend while you wait for your shares to appreciate. You are basically getting paid for waiting.  It is a great way to build wealth — everything that was a good investment before becomes a better investment now.

Dollar Cost Averaging

Don’t just jump into it and invest all your money in one shot. We don’t know when this market correction will end nor whether the markets will go any lower. So our best bet is to slowily start adding to our passive income stock portfolios bit by bit. If you want to invest $10,000 in ABCD, Inc. stock, instead of bying all $10K worth of stock in one shot, it is wiser to buy in smaller increments over several months. This is called dollar cost averaging. Buing $2K worth of ABCD, Inc every 4 weeks for 5 months will dollar cost average you into this investment. So if you make an initial purchase of $2K worth of ABXD stock at $15 per share and after one month the stock goes down to $10 per share and you buy another $2K worth your actual average cost per share is about $12.50 instead of $15. If you bought all your shares in the begining at $15 per share your money would have actually bought you less shares. Over a period of time this can make a big difference.

Final thoughts

Keep in mind that one has to pick investments very carefully. If you buy a stock that pays a very high dividend and then the company cuts its dividend you may not finish ahead. So do your due diligence! A good market opportunity does not mean that you can forget about doing research and being a wise investor.

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