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Market inflated artificially by FED and how to defend your portfolio

Money machineToday the stock market proved to be artificially inflated by FEDs policy. It was apparent how weird it works when the central bank influences market and economy and how dangerous such interventions can be to the free market.

It looks like we no longer enjoy the free market and although I tend to say there has been nothing new in the markets FED’s bad influence might be a new normal.

I wonder how FED wants to get out of this mess they started themselves.

What is going on?

To taper, or not to taper, that is the question. FED trapped in a vicious circle.

Since Ben Bernanke started his infamous QE interventions markets enjoyed the run up. We recovered the losses from 2008 and exceeded the peak of S&P 500 from 2007.

(MORE: Why You Shouldn’t Follow The Trend When You Invest)

One would say great, well done.

But the picture behind is more dark and frightening.

What happened today? We enjoyed new employment data coming out today. The economy gained 204,000 new jobs and at first the markets turn red! Asian markets even lost value the day before!

The reason? Renewed fears that FED would taper its QE stimulus.


Later during the morning markets turned back up and ended significantly high. Not the REIT sector however.

REITs continued its slump down and many REIT stocks were losing more than 3%.

What a backwards, weird behavior! The markets posted good results (and I do not want to speculate here how bad or good the added jobs were) showing some improvement and markets freak out that FED may stop QE which would send stocks from their inflated levels.

(MORE: U.S. rates futures fall after strong payrolls data)

There is nothing to envy the new FED chairman Janet Yellen. If she stops QE, the entire phony artificially inflated economy will collapse along with the stock market. If she continues QE it will worsen the FED balance sheet, inflate the bubble even more and potentially send the US into another recession.

Use dividend growth investing strategy to outperform sideways and dropping markets

How can an investor protect her portfolio against this potential threat?

The way how you can protect your investment is to be defensive. You want your portfolio be independent on such mess and fluctuations. The best strategy to reach this independence is dividend growth strategy. Investing in dividend stocks your primary task would be dividend income. You want everlasting, sustainable and growing stream of income.

Once you build an account based on this strategy then your primary task will be dividends and not account value. You will no longer have sleepless nights or be frustrated seeing your retirement account shrinking during market decline.

If during retirement you will be relying on 4% rule such market volatility will brings butterflies to your stomach and many times you will have a headache wondering whether your account would survive any coming crisis.

(MORE: Dividend Investors Should Ignore Market Fluctuations)

With dividend income your stream of income will stay intact (in most cases) and as Dividend Growth Investor says, if the market closes now, your portfolio still will be generating income.

My investing plan is not dependent on market fluctuations. In fact, even if they closed the market tomorrow, I would not care. That is because most my stocks would keep sending me quarterly dividend checks (some do monthly and a few do it annually), with the only issue being that I won’t be able to reinvest distributions into more shares.

My account is quite exposed to REIT stocks, so it declined significantly today. Am I afraid or concerned about my stocks falling? Yes I am concerned, but only in a manner of seeing another great opportunity to add more shares to my portfolio.

Use cost averaging to squeeze more profit and lower your cost basis

BuyI still see great value in those stocks. Everybody is dumping them on fears of FED tapering its QE. No one looks at ending the QE as a good thing anymore. But they look only into the near future, short term impact. I am looking on a 20 year investment time horizon. From this perspective, today’s push down is yet another opportunity to take advantage from the FED’s mess.

What else can you do to protect your investments besides choosing the right strategy such as dividend investing? As Ben from A Wealth of Common Sense says, divide you available investing cash into equal pieces and invest in smaller fraction in a longer period of time.

I do that. I never invest all available money at once. I always invest a 1,000 dollar increments (I cannot afford more right now) in a stock in a longer time span. After the first purchase I wait. When the stock is rapidly growing up I choose a different stock which is not moving up or wait when the movement stops and the stock reverses for correction. Then I add another $1,000 increment and so on.

(MORE: Wait for a Crash or Put My Money Back to Work?)

There is no rush in buying stocks right now. You can wait. And the dollar cost averaging will help you mitigate fluctuations and loses in your portfolio.

If you trade or invest in other than dividend growth stocks or large cap blue chips, the dollar cost averaging strategy can become a very dangerous endeavor. It would be as the old adage says: trying to catch the falling knife. With dividend paying stocks however, the price fluctuations are your friend and not enemy. Use it and average your cost basis down to improve your investing results.

Stick to your plan

Once you create a strategy stick to it. But make the plan. It is surprising how many investors have no plan, no strategy and no clue what to invest, when to invest and when to stay out, and what money management to use when investing.

But there are also many investors who passed thru this and created their own plan or strategy, but after a first drop in prices they run away and start searching for another, better strategy out there. If you have a strategy, trust it and follow it.


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