Mike Tyson once reportedly uttered these sage words of wisdom (and no, I'm not being sarcastic): "Everyone has a plan -- until they get punched in the face." Taken literally or metaphorically, truer words were never spoken.
These days, lots of folks are feeling punched in the face by the stock market. I'm guessing they're also feeling like they could use a new plan.
After all, the iShares Russell 1000 Growth (IWF) exchange-traded fund -- home to such large-cap racecars as Cisco Systems (NASDAQ:CSCO), Hewlett-Packard (NYSE:HPQ), and Monsanto (NYSE:MON) -- has declined by more than 25% on a year-to-date basis. Even the comparatively buttoned-down Dow-tracking Diamonds (NYSE:DIA) -- an ETF whose portfolio is home to the upper-crust likes of Chevron (NYSE:CVX), 3M (NYSE:MMM), and Johnson & Johnson (NYSE:JNJ) -- has fallen by nearly 21%.
New and improved?
Still, before tacking, and perhaps even flailing, in some new direction, it's well worth asking: What, if anything, is wrong with your current plan?
After all, you did your homework, right? You focused on your holdings' free cash flow history, as well as their forward-looking prospects. You dialed out macroeconomic noise -- even at its current deafening, jet-engine roar volume -- and zeroed in on operational prowess. You understood that, though it may take a while to catch up, a firm's stock price will eventually reflect its ability crank out and grow net income (aka profit). On that front, paying close attention to key profitability measurements, including return on assets and return on equity, no doubt came in plenty handy.
Again, I'm just guessing again here, but I'll bet you followed up that fundamental spadework with a fair amount of heavy valuation lifting. It's often the toughest code to crack, but when you compare a firm's price multiples (including price-to-earnings, price-to-book value, and price-to-sales ratios) with those of the broader market and industry peers, you can go a long way toward buying high-quality stocks on the cheap.
Sound like a plan?
If that sounds like a reasonable description of the way you assembled your portfolio, good, no, excellent for you. Even if you have been dinged up amid the mayhem -- and who among us hasn't? -- you have ample reason to stay right where you are.
Your losses, after all, are paper losses, unrealized declines that will only impact your purchasing power when you pull the trigger. Or, to circle back around to Mike Tyson's insight, when you make like your own worst enemy and punch yourself in the face, Fight Club-style.
My advice? Just don't do it. Unless you believe the economic end is nigh (I don't), patience really is a virtue. Since 1926 -- a period that covers even the years of the Great Depression -- the stock market has delivered an annualized gain of more than 10%.
In other words, sit tight on thoughtful and well-researched investments whose fundamental characteristics haven't changed.
Old and lousy?
If, on the other hand, as you look at your portfolio now, you're seeing a grab-bag of ideas that were perhaps not as, ahem, thoroughly vetted as they ought to have been, we have some suggestions. Eight of 'em, in fact.
That's the number of investments we've made at Ready-Made Millionaire, the Fool's real-money investment service whose portfolio features a power trio of world-class mutual funds, a high-octane ETF, and four cherry-picked individual stocks. Make no mistake -- our lineup has been rocked by the downturn, too. It is, after all, an all-equity lineup. But because the process we used to assemble the portfolio matches the criteria outlined above, investments that were bargains to begin have become even better values now.
That's good news for prospective members, particularly since our game plan -- to beat the market over the next three to five years and beyond -- remains intact. RMM will reopen to new members in just a couple of weeks. If you'd like to snag a free copy of our 11-Minute Millionaire special report and learn more about the service, just click here.
Shannon Zimmerman runs point on the Fool's Ready-Made Millionaire service and doesn't own any of the securities mentioned above. Johnson & Johnson is a Motley Fool Income Investor recommendation. 3M is an Inside Value choice. The Fool has a strict disclosure policy.
