Focus On Income, Not Capital Value

We may be close to getting a lesson on the wisdom of buying and holding. Just picture a period coming up where stock prices swoon and bond prices drop in value. Stocks could drop for two reasons: First, the rise in corporate profits is starting to slow down. Notice that they are still rising, but the speed of that rise is decreasing. In some economic models, this signals an economic slowdown within six months. Second, there has generally been a seasonal impact on stock prices -- not always, of course, but more often than not. Summer can be tough on the stock market because the market is a "voting machine" as opposed to the "weighing machine" of corporate balance sheets.

Fortunately, the buy-and-hold investor can avoid the headache of trying to second guess the future of stock and bond markets. The brother of Charles Revson, the Revlon founder, summarized his investment philosophy by saying, "I bought a broom and I just keep sweeping it in." He was referring to his dividend income from Revlon, but on a smaller scale the same applies to anyone with some invested assets. When confronted with uncertainty, the key is to focus on income -- not capital value. Stocks known for increasing dividends on an annual basis have increased in value by 40 percent since August 2011.

Source: Contra Costa Times

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