Thursday, July 24, 2008

Tracking Stocks In A Bear Market

Yes, the Earnings per Share (EPS) on some stock have been going down. However, if you have been paying attention, in this market decline, as in all market declines, the Price/Earnings (P/E) ratio has also been going down. This is what happens to even good stocks in a market decline. And, lower levels of P/Es can persist for sometime.

You can still do fine in a Bear Market if you have invested in good dividend paying stocks. By good dividend paying stocks, I mean stocks that have a history of increasing their dividends on a regular basis. In a down market, the way to see if you are making progress is to track your dividend payments rather than the total value of your stocks using the stock price.

You can survive a Bear Market by first making sure that you have good stocks. You really only lose money if the companies you invested in get into financial difficulties. Stocks that have high debt can be problematic in Bear Markets. So review your companies and make sure that they are in good shape. Make sure that there are no alarms concerning debt. If EPS or Revenues fall a bit, do not worry, this often happens in Bear Markets. What you want to worry about is big drops in EPS or Revenues that the companies do not explain to your satisfaction.

If you have done the above, now all you need to do is hold on. With your dividends that are coming in, hold them as cash in case some good buys come up.

I have a stock portfolio rich in good dividend paying stocks and it has survived very well in declining markets. In the last market slow down in 2000, 2001, my portfolio value (that is the total of the stock prices) declined, but my dividend income continued to increase. When the market recovered, my portfolio value recovered very nicely also. The same is happening now. The value of my portfolio is declining, but my dividend income continues to increase.

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