With the stock market on the higher end of things, it is good to have some "safety" stocks as holdings.
A few years back when utilities were down significantly, I bought a few names - PPL, D, NEE (FPL at the time). The market has risen quite a bit since and I still hold a significant amount of them. I sold some and I could kick myself for doing so! Utility dividends provide some degree of protection from a market downdraft. While higher interest rates can cause some pain, holding them long-term at half the current market price provides a margin of safety in conjunction with a steady dividend. That is why buying at "cheap" prices is critical.
Many investors have been dumping utilities fearing rate rises. A rising yield curve is a valid concern, but utilities are regulated in such a way that they are able to charge sufficiently high rates to achieve a decent rate on their asset base. So what if you don't "shoot the moon", it is more important to be able to play another day.
The utilities provide the ballast for the tech hardware companies I also hold - MU, AMAT, NVDA, INTC and WDC. Like all market cycles, these names will eventually drop down to much lower levels (Can you say Yahoo!). When the music will stop, nobody knows and very, very few investors (really speculators) are successful timing the market. Again, I bought cheap when no one was interested in those companies.
Here are the points:
- A portfolio can have some riskier and some defensive holdings. Many individual market participants either have all risky or all defensive. I like the middle position - the straddle. Invest in the market. Don't speculate.
- Buy securities when others can't see the value. Like those home buyer shows, you have to see what can be done. "Does the company have good bones?" PPL, GIS and SKT are actually in a low spot now.
- Hold long term ( 4 or 5 or more years). Don't get eaten up by taxes, commissions, and market gyrations. I made that error with TXN which I sold in the 20's and I sure wish I hadn't.
- Finally, keep your wits about you. Control your emotions and understand your behavioral biases. There are articles produced every day that will scare the sh_t out of you. Usually, they are written by those who don't have real money on the line.
Having a ballast will reduce my short term returns and I am happy to see others do better. But, when the market turns South, like it always does, I'll be in a much better position.
As Buffett says, "Only when the tide goes out do you discover who has been swimming naked". I am no skinny dipper!
