Monday, January 21, 2008

How I outperformed the market and how you can outperform S&P 500 in 2008

After I graduated from college in May 2007, I started interviewing and finally got a real job in July. I never had any credit card debt or any student loans since I worked 20-30 hours/week during school, 70-80 hours/week during breaks, kept good GPA’s, campus involvement, won some scholarships (I didn’t have a full ride though) but most importantly lived frugally.

My current employer pays me well, and I have all sorts of benefits. The problem for me was that I didn’t spend all the money that I earn, since I learned in college to live frugally. I wanted to buy index ETF’s like SPY, VEU, CWI or EEM. However, that involved risk, and after 4 years of rising stock prices, financial markets looked toppy. In addition the news always talked about how the housing market is crashing. Thus I started putting all my money in 9 Month Certificates of Deposit, yielding 5 – 5.3% annually. I also put 5 % of my income in 401k, since my employer provides me with a 100% match on that amount. I bought my first CD on July 27, and I bought my last CD on January 14. In the meantime the S&P 500 has started falling a lot. It’s currently trading at 15 month lows. It’s also down 9.7% since the start of the year. So once my CD’s start maturing in April and beyond, and the market being pushed down by news about recession, housing bubble etc, I would be in a good position to buy good dividend paying stocks which have a history if consistently increasing their payments. I would write more on my watch list later on.
The funniest thing is that if were a fund manager/ stock investor who didn’t invest his/her money until now ( instead of doing his/her purchases at year-end 2007) you have a risk-free way of OUTPERFORMING S&P 500 in 2008 by a whopping 10% just by putting your whole portfolio in SPY and forgetting about it. In addition to that, you would still be able to outperform the market on average by 1 % point over the next 10 years!

Unfortunately though, waiting for the market to fall below its year-end close at the beginning of a new year is not a good long-term strategy. If you participated in this sort of market timing, you would have missed some big moves in the market like the one in 1995. Fixed Income securities like CD’s, bonds and money market also have lower long-term returns, compared to stocks. Even if you buy SPY at current prices, you would outperform the market in 2008, but there’s no guarantee that you will make money. The market could still go lower. So what should an investor do? Maybe you could start building positions in companies which would not suffer significant blows in their financial position from a recession. Furthermore the management of these companies should reward its shareholders by consistently distributing increased dividend payments year after year, supported by increase in earnings. If you get a good yield on your stocks and you are confident that the payment will increase over time, then you should put money consistently into those names. Through the power of dollar-cost averaging and compounding, you will come out ahead of the game in the end with a pretty decent passive dividend income.

Relevant Articles:

- Dividend Aristocrats List for 2009
- Dividend Aristocrats
- Best Dividends Stocks for the Long Run
- Best High Yield Dividend Stocks for 2009
- Best CD Rates

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