The serenity prayer is used in the self-help circuit as a mantra for how to deal with life issues, and it's popular among groups dealing with substance abuse issues. I believe it should be repeated daily by stock investors as well (even those that are atheists). It goes roughly like this: Grant me the serenity to accept the things I can not change, the courage to change the things I can, and the wisdom to know the difference.
You can't change recessions, but you can change the investments you choose to prepare yourself for one. In the end, that mindset can help you live more comfortably with the inevitable ups and downs of the economy.
We are the economy
The most important thing to understand about economics is probably that the big picture is made up of all the small, daily things that we all do each and every day. You know full well how irrational people can be, and that ultimately aggregates up to economic trends. No matter how rational you think you are, there's no way for you to control everyone else or the big picture.
Image source: Getty Images.
The best you can do is try to focus your investing attention on the things that you can control. That basically means you should stop trying to guess the direction of Wall Street. Instead, focus your efforts on buying great companies at reasonable prices -- the kinds of stocks that you will be comfortable owning through the inherent market and economic cycles that come and go on Main Street and in the market.
My "go-to" approach for turning recessions into opportunities is to focus my attention on dividend stocks. Dividends are much more consistent than earnings, which generally head lower during recessions, over time allowing me peace of mind, since collecting regular quarterly checks stops my emotions from swinging wildly. I actually track my dividends each month in a spreadsheet.
Pick the best
Clearly, you can't just pick any old dividend-paying stock. You want to focus on companies that have long histories of annual dividend increases behind them. I tend to focus on stocks that have at least a decade of annual dividend increases, giving heavier weight to companies that have achieved 25-plus years of annual hikes and especially those with 50-plus years of annual growth (the elite group known as Dividend Kings).
This quickly limits my investible universe to companies with a proven record of success. From there, I focus on companies that have historically high dividend yields, which highlights names that are likely trading at value prices.
I'd love to suggest that this is all it takes, but honestly, it's just the start of the process. The next step is to dig into the companies you unearth to make sure they are simply facing near-term headwinds, not long-term troubles.
The exciting part here is that recessions are likely to lead to a lot more buying opportunities, since Wall Street will probably be in a dour mood. In other words, this mental investing shift turns recession from being scary to an opportunity to buy great stocks at great prices.
That said, you need to think about creating a diversified portfolio. For example, you might want to buy a consumer staples stock like Hormel (HRL), a technology giant like Texas Instruments (TXN 1.25%), and a healthcare stalwart like Medtronic (MDT 0.89%). All of these companies have historically high yields today and incredible dividend streaks behind them.
I own them all and, in fact, recently added to my positions in Medtronic and Hormel. Texas Instruments still appears fairly attractive as well, historically speaking.
But step back and think about each of these stocks. Hormel sells food, which we need in good times and bad. Texas Instruments' microchips go into thousands of products and are sold around the world, giving it a broadly diversified business with a growth bias in an increasingly digitizing economy. And Medtronic's medical devices are increasingly in demand, thanks at least partly to the broad aging of the global population in developed markets.
Simply put, this approach isn't really about buying high-yield stocks; it is about creating a diversified portfolio of great companies. Dividend checks are the icing on the cake and, if you track them like I do, a way to quickly monitor for trouble.
Keep it simple
You can try to time economic cycles and invest in stocks that will benefit from the ups and downs. I've been investing for a long time, and I have yet to see anyone who can successfully do this on a regular basis.
I've found that a better approach is to focus on building a portfolio of strong dividend stocks, using historical yield ranges as a way to buy when stocks are cheap. Sure, you'll have more opportunities to find cheap stocks when there's a recession, but you need to make sure you continue to focus on the best companies (long dividend histories) and portfolio diversification (buying companies across unrelated industries). If you take the time to make these mental shifts, you'll probably find that recessions aren't so scary after all.
