Wednesday, December 19, 2018

Time to Be Defensive

With the increase in interests by the Fed, there is a high probability there will be a recession soon. In 12 of the last 13 Post WWII times the Fed raised interests rates to cool the economy,  a recession followed.   So history says the is a 92% chance the Fed has gone or will go too far raising interest rates and cause a recession.

Knowing this, there are three actions I could take:

  1. Sell everthing and go to cash.   This would completely protect principal, but the challenge will the deciding when to get back into the market.
  2. Reduce equity exposure.  This keeps me invested if the market makes a sharp advance, but reduces the impact of a decline.  Also, cash is raised that can be reinvested when the market declines.
  3. Increase allocation in defensive stocks.   Find good dividend paying stocks or defensive sectors such as consumer staples or utilities.  The investments will go down, but not as much.  In addition, the dividends will create a stream of income if needed
For us, I will be using approach number 3.   Due to the recent market decline, there are a number of very good dividend paying stocks that experience signficant price declines.   Some of these stocks are paying 4, 5 or even 6% dividends.   

Here are some exmaples of the defensive stocks we own and are buying more:  AT&T (T), Williams Company (WMB),  Phillip Morris (PM),  Altria (MO), Exxon (XOM),  Coty (COTY), and Western Digital (WDC).

Disclosure:  At the time of posting, we own shares of T, WMB, PM, MO, XOM, COTY, and WDC.

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This is not financial or investment advice. Please consult a professional advisor.

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