The Barber Keeps Visiting My Portfolio

I visit my barber once a month. My portfolio seems to be getting a daily trim. Upon leaving the barbershop, I feel refreshed. But a glance at my holdings lately stings as if shampoo is splashing in my eyes. I have no control over how fast my hair grows, but I do have control of which stocks I buy, and one of them now sports a veritable crew cut.

A serious buzz
Back in January, I made what I thought was a very savvy move. Realizing that my portfolio was lacking exposure to financials, I added one of the world's largest banks -- Bank of America (NYSE: BAC  ) . How could I go wrong? The stock had already dropped more than 25% in 2007 from the housing bubble fears and, of course, the full extent of the credit crisis was unknown. Offering a dividend and international exposure, coupled with its mammoth size, it seemed like a safe play.

Six months later, there's still soap in my eyes. The investment has shaved half of its market value, and given the current economic environment from the collapsed housing market and the credit turmoil, I see little sign of better days in the near future.

One awful hairdo
I think of this experience as a bad hairstyle. As awful as things look now, eventually the hair will grow back and fundamentally strong stocks will rebound. And just as not all hairdos look good on me, not all stocks will complement my portfolio.

That's why it's important, particularly in times like these, to review why I've picked my current holdings and whether they really fit my investing style. And while it's certainly disconcerting to experience the losses encountered so far this year, running through my investing strategy provides comfort.

My key investing rules

  1. Don't invest the grocery money
    I never invest money I can't be without. My portfolio is for the long term, and the holdings are intended for five, 10, even 20 years out. In times like these, you can't count on any company to provide positive returns. Take for example strong and healthy companies like General Electric (NYSE: GE  ) , Google (Nasdaq: GOOG  ) , and Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) ; they've all dropped more than 20% this year. If you rely on these investments to fund daily necessities, you may just find yourself hungry with the lights out.
  2. Diversify your holdings
    As my portfolio holdings increase, I strive to have a wide mix of companies from a variety of sectors. While the financial sector is currently causing some pain, the losses can be hedged by adding stocks from better-performing industries, such as United States Steel (NYSE: X  ) and BHP Billiton (NYSE: BBL  ) in the basic-materials sector or Syneron (Nasdaq: ELOS  ) in the health-care sector.
  3. Get rid of consumer debt
    If you've got credit card bills, you've got the best investment option available. Pay it down. With interest rates at anywhere from 7% to more than a whopping 30%, knocking off that debt is a guaranteed return! As that balance decreases, you're increasing your wealth. That's a great investment! Remember, paying only a minimum on a balance can mean decades of debt.
  4. Nourish that emergency fund
    Some might consider their investments as emergency funds, but that's way too risky. That's why for my comfort (your mileage may vary), I need to have a liquid emergency fund that I can draw from should the need arise. I don't want to have to scramble to sell stocks if it starts raining in the living room. And selling in an emergency could well turn out to be even more costly if you're forced to sell in a downturn.

Time is on my side
I remember my investing time frame and keep in mind that markets go through cycles. I know my reasons for buying particular stocks, and since I still believe in those reasons, I'm patient.

With these points in mind, I'm able to ride out hairy times like these and accept that some of my stocks, like my haircut today, have had "a little off the top."

Berkshire Hathaway stock has been recommended by the Motley Fool Inside Value newsletter and the Stock Advisor newsletter. The Fool owns shares of Berkshire Hathaway. Google and Syneron are Rule Breakers selections. Bank of America is an Income Investor pick. Take a free 30-day trial to any of these investing services and you'll get an in-depth look at stocks that make the Foolish cut and a lifeline to fellow Fools learning how to survive and thrive in the market.

Tony Miller owns shares of Bank of America and General Electric. The Fool's disclosure policy still sports a mullet.


Read/Post Comments (5) | Recommend This Article (29)

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  • Report this Comment On July 16, 2008, at 10:50 AM, mdtopper wrote:

    I also bought BAC in 2008 (at a little better discount than the author) and intend to hold very long term. If the dividend is not cut the return is phenomenal (even though my implied return is less as my basis is above the current value).

  • Report this Comment On July 16, 2008, at 1:36 PM, vest0r2 wrote:

    I've been buying Citi and BoA thinking that someday, eventually, if I live long enough, the stock price will hit ******** bottom and may actually inch up again.

    But it hasn't happened yet.

    Like Monday... C @ $16.22? Sign me up! Of course, the stock price dropped ANOTHER full dollar the next day...

    Catching a falling knife = very stubby fingers

  • Report this Comment On July 18, 2008, at 4:24 AM, dividendgrowth wrote:

    Must wait until people start attacking others for recommending financial stocks.

    Still too many bottom fishers these days.

  • Report this Comment On July 18, 2008, at 7:49 PM, Usnzth wrote:

    Four very solid principles to get anyone through the tough times.

  • Report this Comment On July 21, 2008, at 9:39 PM, Ozcutty wrote:

    Well you've gotta jump in sometime. Those people waiting on the sidelines for things to improve will miss the first 50% of the gains.

    As evidenced by WFC's 30% rally in one day, things will move very fast when theres light at the end of the tunnel.

    Also people forget that stock market is a leading indicator, it will recover before the economy does.

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