Recently there have been a wide variety of reports and opinions regarding where the stock market is heading next. Some analysts have predicted a severe market crash worse than the one that occurred during the Great Recession and others have predicted a completely opposite scenario resulting in a continued bull market that will take the Dow Jones Industrial Average (Dow) to over 20,000. I typically ignore these market predictions, because, while the market is nearly impossible to predict over the short term, over the long term, it always goes up.
Historically, there have been countless recessions and market crashes in the U.S. A prime example is the market crash during the recent Great Recession which resulted in the Dow dropping from its all time high of over 14,000 to below 6,500. I held on to all of my stocks during this crash. Why didn't I just sell everything at 14,000 and get back into the market at 6,500? Believe me, this is easier said than done! By the time that I realized that a market crash may be occuring, the Dow had already dropped quickly to below 12,000 and it was difficult to know for sure if this was a typical market correction or a major crash. In addition, it was difficult to know when the market would bottom. At the Dow 6,500 level, some analysts predicted that it would keep declining well below 5,000. The bottom line is that timing the market is extremely difficult and most investing professionals discourage it.
Positioning your portfolio for the next market crash
It has been four years since the Dow bottomed at 6500 and it recently broke through its all-time highs, closing at over 14,400 today. This is a reminder that the U.S. stock market has always recovered after a market crash. The recent recovery has been truly remarkable! However, I have been through two significant market crashes since I began investing in 2002 and I am positive that there will be many more. When will the next market crash happen? The truth is nobody knows. There could one next week or it could be many years or over a decade before the next one occurs. I have learned to manage my portfolio appropriately in anticipation of future market crashes and am providing the following suggestions:
1.) Allocate a portion of your portfolio to companies that provide products and/or services that consumers will need regardless of the state of the economy. Make sure that a majority of these companies pay a consistent, growing dividend. If a company has increased its dividend each year for decades even through tough times such as the Great Recession, it is worthy of consideration for your portfolio. Also, well-known, dividend paying companies typically hold up better than non-dividend paying growth companies during tough times.
2.) Invest in these companies regularly over time (such as monthly) regardless of whether the market is up or down. This will help you to keep from trying to time the market and will also ensure that you take advantage of periods when the market is down. For example, during the great recession there was a 9 month time period when the Dow traded between 6,500 and 9,000. If you were fully invested before this period without any available funds, you would have missed out on this opportunity.
3.) Reinvest the dividends. By reinvesting your dividends, you will automatically be purchasing shares at rock-bottom prices during market crashes. This strategy will allow your investments to compound significantly over time. After 11 years of investing, I am experiencing the benefits of dividend reinvestment first hand and highly recommend it, especially if you have a long period of time before the money will be needed.
Two stocks to own regardless of the state of the economy
The following two companies are among my favorite long term investment opportunities and will help you to position your portfolio for good times as well as the next market crash:
ohnson & Johnson (NYSE:JNJ) is the most diverse healthcare company in the world with 2011 sales of $65 billion. Net earnings grew impressively from 2003 to 2010, increasing from $6.3 billion to $13.3 billion. Net earnings in 2011 were adversely affected by acquisitions and litigation costs due to product recalls. I believe that Johnson & Johnson has taken the appropriate actions to minimize product recalls in the future.
Johnson & Johnson's business segments include pharmaceuticals, medical devices and consumer products. The following is a breakdown of each individual business segment:
Johnson & Johnson (NYSE:JNJ)'s pharmaceutical segment had sales of $24.4 billion in 2011, an 8.8% increase over 2010. The company's most successful pharmaceutical product is Remicade, which treats inflamatory diseases. Remicade's 2011 sales of $5.5 billion were 19% higher than those of the previous year. Additional products that experienced impressive growth recently include Velcade (multiple myeloma) and Prezista (HIV). A large number of recent approvals and an impressive pipeline will help this business segment perform well in upcoming years.
The medical device and diagnostics segment also performed well in 2011 with sales of $25.8 billion and a sales growth of 4.8%. JNJ's medical device business is the largest in the world and consists of orthopaedics, diabetes care, surgical products, vision care, and cardiovascular care products. JNJ's 2011 acquisition of Synthes created the largest and most comprehensive orthopaedics business in the world. Synthes is the largest acquisition in JNJ's history.