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Watching my daughter get older, I often think back to my own childhood. One of my fondest memories is playing Little League baseball. Although I wasn't a natural athlete, I hit my stride in Little League, playing above my teammates and generally feeling like an 11-year-old superstar.
Then, though, the inevitable happened: I got promoted to the next level. There, the kids were better, and I didn't look much like a superstar anymore. Some of those kids kept going -- I know at least one who had a decent career in college ball -- but I wasn't one of them.
The next level
During the bull market, a lot of investors got complacent with their portfolios. You didn't have to check in on your stocks very much to make money -- pretty much all you had to do was buy whatever stock struck your fancy and wait for the profits to start rolling in.
As a result, a lot of people got lazy with their investing discipline. Maybe you heard that commodities were a popular play, so you just jumped into a company like Mosaic (NYSE: MOS ) based solely on fertilizer stocks looking like the next big growth play. Or you loved your satellite radio so much that you figured, last year, that the then-proposed merger that eventually created Sirius XM Radio (Nasdaq: SIRI ) would come to dominate the commercial radio industry.
For a while, stabs in the dark like that may have hit home runs. But then, the bear market came -- and suddenly, you found yourself striking out.
How to get back on track
If you've gone through something like this with your own investments, don't be embarrassed. It's only natural to get cocky during easy times, when everyone's making money seemingly without any effort at all. In fact, more disciplined investors often look silly during bull markets, as their natural caution and fundamentals-driven approach leads them to avoid some of the strongest winners in the market.
In the end, though, bear markets show the value of having a strong investment philosophy underlying the decisions you make. Without a plan, you can easily end up floundering around, unsure of what to buy and whether to hold onto stocks you already own. With a plan, however, evaluating your positions is easy -- second nature, in fact, because you've been doing it all along.
The right philosophy
So, what stocks are the right ones to own? That's the great thing about investing: There's no one right answer. Different investors can find success with a wide variety of methods:
- Value investing is popular today, and for good reason -- the beaten-down markets have a lot of stocks looking like bargains. But a cheap stock isn't a good value stock without a margin of safety -- meaning that if your stocks don't have strong businesses underlying their value, such as chip champ Intel (Nasdaq: INTC ) , then they simply don't belong in your portfolio.
- Growth investing, on the other hand, has fallen out of favor. That's largely because when the economy suffers, growth is a luxury few stocks enjoy -- instead, most companies focus more on survival. But even in a slowdown, there are always some promising stocks in growth industries. Look at biotech, for example, where even big stocks like Amgen (Nasdaq: AMGN ) and Genentech (NYSE: DNA ) look to maintain double-digit growth rates going forward, even while fighting through the economy's headwinds.
- Increasingly, investors want tangible proof that their stocks are performing well. That's led many to go after companies that pay healthy dividends, since a business that generates cash to pay shareholders has a big advantage over cash-starved competitors. Whether it's the ever-increasing payouts from dividend stocks like Johnson & Johnson (NYSE: JNJ ) or the steady cash flow that businesses like ExxonMobil (NYSE: XOM ) sustain year in and year out, shareholders appreciate the reassurance that comes with every dividend check.
Whatever method you use, there are great opportunities right now. So if your portfolio has gotten clogged up with also-rans that no longer fit your investment philosophy, it's time to get them off your team -- and call up some replacements that will do the heavy-lifting for you through hard times.
For more on coming up with a winning strategy, read about: