Generally, stock price levels are fully priced not because of valuation due to interest rate(s) level(s), but policy stagnation freezing global income producing enterprises earnings levels, and to a lesser extent, poor choices for debt levels and enterprise investments.
A highly paid economic advisor and frequent television pundit described the second week of September’s 394 point Dow Jones Industrial average’s drop as “enormous” volatility. What is 394 divided by 18,500? I call that unchanged (daily auction price nuances).
It is important to view an income portfolio as a business earning income, no different from a payroll check for your services. You would not leave your employer or sell your business because daily marketplace prices may appear to naïve price watchers as “enormously” changed from yesterday.
We are passively allocating savings (this is not investing – for GDP or general accounting principles purposes – investing is what the companies we buy do and the absolute best we can do is select, outside of the speculative alternatives universe, the companies that will do the best for our future earnings with their investing choices with our retained earnings). Buying stocks with the objective for per share price appreciation is a growth, speculative and/or trading (marketplace liquidity) discipline.
We concentrate on prices of individual stocks (not the general market indices) relative to the sustainable income provided to maintain purchasing power (inflation protection) and future visibility of earnings (management and corporate governance effectiveness – ROE and retained earnings investment choices, e.g. – aligned with macroeconomic and secular trends.
Recommended allocation remains 100% U.S. Common stock. All savings needed within a 5-year period over and above earnings on savings (dividends) should be immediately liquidated into money-market funds. Not willing to place your future in a portfolio void of fixed income? Fine, plan and expect to hold for the duration (and to suffer price depreciation over that term) so the shorter the duration the better.
If your portfolio basis is relatively new for a large percentage of your savings and you’re too subject to panic during market dislocations, sell a chunk, not more than 20%, if Dow Jones Industrial average falls below 17,975 for peace of mind and future bargain purchasing opportunities should further price declines follow (this can back fire of course and cause you to buy at prices higher than those received at sale).
Long term base/target prices for popular index averages 18,350/24,750 (DJI) and 2100/2800 (SP500)
Portfolio: % of Portfolio : Yield:
Bank of America 6.3% 1.91%
Colgate-Palmolive 14.4 2.16
Hershey 11.5 2.6
IBM 12.5 3.6
Kraft Heinz 8.9 2.7
Time Warner Inc. 6 2.1
United Technologies 12.3 2.6
V.F. Corp. 13.5 2.6
Verizon Comm. 14.6 4.4
Portfolio yield 2.86%
Retained earnings 6.85%