Tuesday, February 24, 2015

All Investing Involves Risk

If your goal is to accumulate wealth for a comfortable retirement, then there is no risk-free path. Throughout time every angle has been tried and failed. However, some approaches carry less risk than others. Let's consider some of the popular paths.

Cash/Money Markets/CDs - "Cash Investments"
I have always considered "Cash Investments" an oxymoron. Cash is where some investors park their money when they believe the investment risk is greater than the potential return - their sole focus is capital preservation. Unfortunately, some people consider Cash/Money Markets/CDs et.al. as investments. This is a dangerous assumption. Their slow and predictable growth is generally always below inflation, but since it is growing the "investors" often lulled into a false sense of security and do not notice that they are actually losing ground each year until it is too late.

Land/Real Estate - "They aren't making anymore land."
Many investors have discovered the hard way that bubbles can also occur in the real estate sector. What was once seen as a safe place to put your money and forget it, now needs to be monitored just like any other investment. During the 2008-2009 financial crisis, home prices fell more than 30 percent in some parts of the country. Recovery has been slow in some of the more hard hit areas.

Gold/Precious Metals
If you look at a historical chart of gold prices, you will see a pattern, gold spikes to a new level during a crisis, then comes down to a level above the previous steady state. It then trades sideways until the next crisis. It would be hard to time your retirement to coincide with a crisis/spike.

Professionally Managed Equity Mutual Funds
Every year several professionally managed mutual funds out-perform the market. Unfortunately, it is rarely the same funds each year. It has been well documented that over time, most professionally managed funds under-perform the market.

Treasuries and bonds tend to be less risky than equity investments, but have historically under-performed equities. It is important to note that there is risk associated with them. For corporate bonds, the companies could default and not pay them. For all bonds, including those issued by government, there is an interest rate risk - rising interest rates drive the price of bonds down.

Index Funds/ETFs/CEFs
For most people, indexed investments including mutual funds, exchange traded funds (ETFs) and closed end funds (CEFs) make up the core of their investment allocation. In effect, you are aligning your investment risk with the index that the fund tracks. If you believe that over time that certain index funds, such as the S&P 500, will outperform the various approaches listed above, you should have money invested in it. Index funds allow you to easily track any sector, market cap or index.

Individual Stocks
Inherently, individual stocks will carry higher risk due to the lack of diversification when evaluated on a stand-alone basis. You can mitigate this risk to a degree by selecting solid dividend growth stocks with a long track record of increasing their dividends each year. Some of my personal favorites in this category are:

Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products. The company has paid a cash dividend to shareholders every year since 1948 and has increased its dividend payments for 58 consecutive years. Yield: 2.4%

Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 52 consecutive years. Yield: 2.8%

The Coca-Cola Company (KO) is the world's largest soft drink company, KO also has a sizable fruit juice business. The company has paid a cash dividend to shareholders every year since 1893 and has increased its dividend payments for 52 consecutive years. Yield: 2.9%

The Procter & Gamble Company (PG) is a leading consumer products company that markets household and personal care products in more than 180 countries. The company has paid a cash dividend to shareholders every year since 1891 and has increased its dividend payments for 57 consecutive years. See full analysis here. Yield: 3.0%

Exxon Mobil Corp. (XOM) formed through the merger of Exxon and Mobil in late 1999, is the world's largest publicly owned integrated oil company. The company has paid a cash dividend to shareholders every year since 1882 and has increased its dividend payments for 32 consecutive years. Yield: 3.0%

When it comes to investing your money, there is no escaping risk. A good investor will determine the desired outcome and invest in a way to achieve their goal with minimal risk.

Full Disclosure: Long GPC, JNJ, KO, PG, XOM, in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.

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Tags: GPC, JNJ, KO, PG, XOM,