Tend to Your Garden

Tomorrow’s the first day of May.  You know what that means…  If you follow the old adage, ‘sell in May and go away,’ you should sell your stocks.  It may be hard to believe, but this is more than just a catchy rhyme.  This advice actually has a good track record.

In fact, most years this has turned out to be a successful strategy.  According to the Stock Trader’s Almanac, if you invested $10,000 in the Dow in 1950 and held the money in stocks from November through April each year, you’d have had $684,073 by the end of 2011.  But if you’d invested that same $10,000 in the Dow in 1950 and held it from May through October each year, by the end of 2011, you’d have lost $1,024.

That’s quite a dramatic difference, wouldn’t you say?  Yet if you’re still not ready to sell, there are several other reasons for easing up on stocks you may want to consider…

Consumer sentiment, as measured by the Thomson Reuters/University of Michigan index, fell in April to a three-month low.  Remember, consumer spending accounts for 70 percent of the economy.  When consumers cut back on spending the GDP takes a hit.

Plus, American corporations are struggling to make earnings estimates.  The way things are going less than 50 percent of companies currently reporting earnings will report revenue above estimates for the third time in the last four quarters.  This is but one more sign business is slowing.

The Opportunities We are Waiting For

In short, it appears the economy’s rolling over at a time when stocks are near their all-time high.  A simple correction of 10 percent or more at this time is very possible.  Here at the Economic Prism we look forward to this…

We like to buy good businesses when they’re trading at attractive prices.  We also recognize that when a stock’s price drops, its yield automatically rises…even if there’s no change in the dividend.  It’s simple arithmetic.

We take this knowledge and use it to tilt the stock market in our favor.  We remain patient.  We know that when the market corrects good companies will be unfairly punished.  These are the opportunities we’re waiting for.

We also believe that Ben Bernanke’s easy monetary policies will continue to inflate the stock market.  But we also understand that nothing goes up in a perfectly straight line.  There are times to buy and times to sell.  Now is probably the later.

However, over the coming months, following a summer swoon, there will be plenty of attractively priced stocks with above average dividend yields.  These will be the stocks to buy and hold and compound reinvested dividends in.  These stocks will also benefit as Bernanke’s rising asset tide floats up all boats.

Tend to Your Garden

When it comes down to it, building wealth takes times, patience, and perseverance.  Opportunities to get rich quick are highly risky and are largely failures.  Gambling from stock to stock trying to double your money each month is a sure way to lose it.

We prefer following the boring, time-tested ways of getting rich.  These are the ways that have worked in the past.  We are generally confident they will work today and into the future.

Moreover, building wealth has never been more imperative.  It may sound crazy, but if you plan to retire 30-years from now, you’ll need to have socked away several million dollars or more.  Today it takes $1,000,000 to buy what $350,000 bought in 1980.

At that rate of inflation, it will take $2.85 million in 2040 to match what $1 million will buy today.  On top of that, considering increasing life expectancy rates, the money will have to last 25 years or more in the face of evermore inflation…and ever increasing healthcare costs.

For now, given the obvious disconnect between the stock market and the economy, it’s likely better to build your hoard of cash and prepare a short, but targeted shopping list of high quality dividend paying stocks.  The time will come over the next several months when the stock market will break and extraordinary values will surface for those with the cash and wherewithal to buy them.

In the meantime, tend to your garden, hand squeeze a fresh glass of lemonade, and be happy.  Before long, hard granite bedrock will be exposed providing the solid foundation for which a new generation of wealth will be built upon.  Make sure you get your share of it.

Sincerely,

MN Gordon
for Economic Prism

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