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Every once in a while an investment tenet that we thought was common knowledge is brought to our attention that perhaps this assumption was premature. The one that we’ll address within the body of this column is don’t put all of your eggs in one basket. We believe that many investors don’t realize that there are many different types of baskets or perhaps that the same basket has cleverly disguised itself as different baskets. For instance, there is the Widows and Orphans Basket, defined simply as a basket filled with stocks or mutual funds of supposedly “bullet-proof, or “blue chip” companies, that over time, regardless of the economic climate, will ultimately prove profitable. Generally speaking, historically, these companies have also paid attractive dividends.
Many of the widows and orphans companies are found in the financial services industry and include the likes of KeyCorp, Bank of America, and Citigroup. Outside of this sector, some other companies that fit this definition are General Electric, Honeywell and Exxon Mobil.
The problem with this basket is that the bear market, that at least for the time, being concluded in early March, has dug its claws deepest into these types of companies. For example, KeyCorp, Bank of America and Citigroup have shed more than 85%, 75% and 94% of their value, respectively. In addition, all three of these securities have slashed their dividends, income that many counted on to supplement their pensions and Social Security, to $0.01 per quarter from $0.36, $0.64 and $0.54. What this means is that if an investor held 100 shares of each of these three financial service companies their annual dividend income would have declined to a total of $12.00 for all three combined, from $616.00, a 98% decrease. Furthermore, those 100 shares of each that would have amounted to about $14,500 are now valued at approximately $2,135. Unfortunately, the prospect for recouping this type of loss over the foreseeable future is slim to none.
Many investors placed all of their assets into the banking sector for the perceived safety of principal as well as the dividend income. From the example above, it is apparent that this choice was a near fatal one.
THE BOTTOM LINE – Diversify by sector as well as by objective. Also, don’t be so arrogant as to believe you know in which direction the stock market is headed over the short-haul and what sectors will do best. Include both dividend and non-dividend paying growth oriented stocks such as Apple Computer, Research In Motion, Google, and Schlumberger into your portfolio. If the above investor had, then the overall damage would have been much less as these four have soared over the past couple of years. Finally, never buy and hold forever. Always, buy and do your homework on a periodic basis!