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How I am preparing myself for a potential price drop

We are still facing problems with “fiscall cliff” and nervous investors dumping their dividend paying stocks. The selling isn’t overly dramatic. Yet. But it can all come.

Since the presidential election, dividend paying stocks dropped in value. Even REITs and MLPs which are not affected by a potential tax hike were driven down by panicking investors.

Media are feeding us with scary tax hikes from current 15% up to 43.4 percent which may cause drop in stock value by 34 percent to make up for a lost yield. It looks scary, but in my opinion it will not be that bad as we are hearing and reading. Many long term investors have their assets in deferred accounts, so they do not have to worry at all. And since the dividends will be taxed as an ordinary income many investors (and even retirees) will end up in a lot lower tax bracket anyway (possibly 15 – 20% bracket) and after all deductions their effective tax rate would probably be even lower. So the impact will not be that large.

However, high earners will see some impact. All that will possibly cause a panic and horrendous selling. Maybe just to adjust the price of the stocks down by that 34 percent so the high earners dumping stocks at current prices will be buying them back again to get better yield on cost.

In my opinion this will cause the price rising back up. Not that dramatically as it will go down for sure, but prices will go back up.

Do you want to sell your stocks and buy them back later too or do you want to wait?

My strategy will be waiting, holding tight and buying more shares at better price as others will be selling in panic. Will that come?

I am browsing internet what others say about potential issues we may be facing and overall you can see a lot of pessimism out there. That makes me believe that investors will overreact, as is typical these days, and send stocks even lower if Congress won’t act and prevent tax hike in January 2013. Everybody is expecting it. A common opinion on the web is that dividend stocks prices are still in all-time highs which creates a potential bubble which may burst. I think it is nonsense but there will be enough people out there who would overreact.

That makes me thinking about my next plans and strategy for next few months. I am a believer in a strategy called Lifecycle Investing. The point of this strategy is using leverage when investing in early (accumulation) phase of portfolio building and start delevering down in second phase and be completely unleveraged by retirement.

This strategy then allows me using margin and other means to boost my investments now in early phases. Thus my portfolio is highly leveraged these days. For those who are skeptical about this strategy I can say I have been practicing this strategy for three years so far and I was able to manage all drops and panic selling without being hit with margin calls.

However this strategy isn’t for everybody, because during sell offs you need iron guts to sustain rapidly declining margin equity to maintenance requirement ratio. To survive I have to maintain healthy cash reserves and that is exactly what I am doing right now. When the markets and my holdings are growing, I save as much money as I can, but keep it in cash. Many times earlier in my “investing learning period” I wanted to be always fully invested. I learned that this wasn’t a great idea.

With free cash available I can sustain a potential drop in value of my portfolio and be ready for buying more shares when the sell off ends. Recently I learned, that value investors shall wait with free cash for great opportunities so they will be ready when the opportunities present themselves. Being fully invested is a foolish idea.

So how I am preparing myself? Saving, saving and saving. Sitting with cash and not buying more shares at this point and wait for the next drop in value.

Happy Trading!





2 responses to “How I am preparing myself for a potential price drop”

  1. admin says:

    Marvin,

    looks like market is pushing higher. We will be seeing a new long term rally, so I am waiting for the next pullback too shoveling free cash to my account.

  2. […] How I Am Preparing Myself For A Potential Price Drop by Hello Suckers […]

  3. Great post and strategy! I too am waiting on a market drop to purchase more shares of great businesses.

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