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
- 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.
- 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.
- 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.
- 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."