The start of a new year is the perfect time to adopt healthy new habits, in your investment portfolio as well as in the rest of your life. I’ll start by looking back at my last 12 months of trades for Cabot Dividend Investor. I’ll look for mistakes to avoid this year, as well as good decisions that I’d like to turn into good habits. This year I’ve found five money-making or money-saving investing resolutions to share with you.
You can also do the same exercise in your own portfolio—you might even come to some of the same conclusions.
Investing Resolution #1: Buy Stocks on the Way Up
As we like to say, the trend is your friend. Of the stocks we bought in 2017, the three top performers—Cummins (CMI), Broadridge (BR) and 3M (MMM)—were already trending up when we bought them. All three uptrends have continued, handing us gains of 20%, 21% and 26%.
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Our flagship letter—Cabot Growth Investor—focuses exclusively on stocks with good momentum. But even income investors will find it easier to make money—and harder to lose it—by buying stocks that are already in uptrends. It’s the difference between swimming with the current vs. against it.
Investing Resolution #2: Take Partial Profits
Particularly when you own volatile stocks, taking partial profits on the way up can help you hold your stocks longer. For example, we sold a third of our General Motors (GM) shares early last year for a 20% profit, which made it easier to hold the rest of the position through the year’s choppiness. The stock did finally break out of its trading range this September, and we’re sitting on a 39% profit in our remaining position, so we’re glad we still own most of the shares.
Another example is Wynn Resorts (WYNN), which we sold half of in August for a 36% profit. We now have a 77% gain on the remainder of the position, so the partial sale wasn’t the most profitable decision. But when a volatile (and cyclical) stock has run this far, some peace of mind can be more valuable than larger paper profits.
Investing Resolution #3: Park Your Cash Somewhere Rewarding
Most investors have some funds that they want to invest more conservatively, whether it’s your kid’s college fund or the core of your retirement savings. Keeping it in cash will see it eaten away by inflation, and there are better options. Even very conservative assets can still generate decent returns over time, if you choose them carefully. In the Cabot Dividend Investor portfolio, our Safe Income tier includes two rewarding but defensive choices for the lowest-risk portion of your portfolio.
The PowerShares Preferred Portfolio (PGX) is an ETF that owns preferred stocks, debt securities that usually pay higher distributions than bonds. The ETF has low volatility and yields 5.6%, making it a good choice for investors who want steady income without much risk. Over the past four years, our position in PGX has delivered a 27% total return, mostly from dividends, with minimal risk.
Another option for the most conservative portion of your portfolio is a bond ladder, using individual bonds or, as I do in Cabot Dividend Investor, defined-maturity ETFs.
Investing Resolution #4: Be Patient
In early September, financial stocks were slammed when the spread between short- and long-term interest rates hit a new low. BB&T Corp (BBT), a bank stock that we had added to our portfolio only a couple weeks earlier, declined over 5% in just three days. The selloff was sharp, but also short-lived, and the stock has risen 15% since, validating our decision not to react to the selloff.
Even though it was historically low in 2017, volatility is an inevitable part of life in the stock market. All stocks go through occasional shakeouts, selloffs and corrections during longer uptrends. Successful investors learn to sit through these rough patches without overreacting.
If you find yourself panicking when your stocks drop more than a couple percent, it may help to implement some sort of portfolio-wide rule. For example, you could limit yourself to only checking your stock prices once a day, preventing you from overreacting to intra-day moves.
My colleague Jacob Mintz, chief analyst of Cabot Options Trader, has a guideline called the Three-Day Rule that keeps him out of dangerous situations.
Investing Resolution #5: Reinvest Your Dividends
Finally, if you can, (i.e. you aren’t using them to pay for everyday expenses) reinvesting your dividends can make a huge impact on your returns long-term.
When you choose to reinvest your dividends, each stock’s dividend payment is used to buy new shares of the same stock at the market rate. You then start earning dividends on those new shares, and those dividends get turned into more shares, and so on and so forth. Over time, the number of shares you own and the size of the dividend checks you receive every quarter will both gradually increase, without you doing a thing. Just as with compound interest, you’ll be surprised how quickly those little additions can add up!
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