Buying Your Way Down

As the Dow Jones Industrial Average index (DJI) has fell 5.80% from 17,472.66 on the week of August 17, sliding another 3.57% on August 24. Looking ahead, the index looks like it will continue sliding, triggering more fears as traders exit their positions taking profits and cutting losses as it moves south.

As the Dow Jones Industrial Average index (DJI) has fell 5.80% from 17,472.66 on the week of August 17, sliding another 3.57% on August 24. Looking ahead, the index looks like it will continue sliding, triggering more fears as traders exit their positions taking profits and cutting losses as it moves south.

While the traders are closing out their long positions, it creates an opportunity for investors to enter the market grabbing valuable shares while they are going on offer.

A quote by Warren Buffett goes:

Be Fearful When Others are Greedy and Greedy When Others are Fearful.

Right now, people are fearful for not knowing if the drop is a short one or if it is the start of the bearish trend since the market has been bullish since the last recession in 2008.

Should I Start Buying Today?

The fact is, we also do not know if prices will rebound sharper tomorrow or how long this bearish trend will last. To put all your money in and start buying today may regret if the stock price continues falling. The opposite is true also, if your wait till the stock price rebounds, will you be fearful that the price will drop tomorrow and regret later when the stock price suddenly makes an abrupt u-turn, bouncing hard and furious?

To prevent regrets from happening, one good strategy to use is the “Dollar Cost Averaging” strategy. This strategy involves equal investments at regular intervals to spread out the risk of buying shares too early or too late.

Dollar Cost Averaging

The Dollar Cost Averaging strategy works better in a bearish trend than a bullish one. Let me do some simple mathematical calculations to show you this.

You have got $60,000 to invest and you decided to split your total investments into $5000 each, to be invested once a month for one year. Assuming that the share price today is at $100 a share, falling or rising 3% a month in a bearish and bullish trend and eventually the share price hits $200 a share.

In a bearish trend, total profit when the share hits $200 a share will be $81,917.56.

Share Price Number of Shares Bought Number of Shares Owned Total Cost
$100.00 50 50 $5,000.00
$97.00 51 101 $9,947.00
$94.09 53 154 $14,933.77
$91.27 54 208 $19.862.20
$88.53 56 264 $24,819.84
$85.87 58 322 $29,800.50
$83.30 60 382 $34,798.33
$80.80 61 443 $39,727.03
$78.37 63 506 $44,664.61
$76.02 65 571 $49.606.11
$73.74 67 638 $54,546.86
$71.53 69 707 $59,482.44
Final Market Price @ $200 per Share $141,400.00
Total Profit $81,917.56 137.72%

In a bullish trend, the total profit when the share price hits $200 a share will be $42,146.00.

Share Price Number of Shares Bought Number of Shares Owned Total Cost
$100.00 50 50 $5,000.00
$103.00 48 98 $9,944.00
$106.09 47 145 $14,930.23
$109.27 45 190 $19.847.50
$112.55 44 234 $24,799.74
$115.93 43 277 $29.784.62
$119.41 41 318 $34,680.23
$122.99 40 358 $39,599.73
$126.68 39 397 $44,540.13
$130.48 38 435 $49,498.27
$134.39 37 472 $54,470.76
$138.42 36 508 $59,454.00
Final Market Price @ $200 per Share $101,600.00
Total Profit $42,146.00 70.89%

We can see that the total profits almost doubled when comparing investing averaging down as compared to investing averaging up.

The Bottom Line

While the rest are in fear of putting their money into the market, it is a good opportunity to be greedy and start your investment plans. Making regular investments now at the start of the new bearish trend may prove to be the best investments you would ever make. It may be painful at times to see the stock price keep falling but keep in mind, when the price hits the bottom, the only way forward is to go up.

Portfolio New Addition: Johnson & Johnson

Second stock to be added into my portfolio, Johnson & Johnson has got a range of everyday products that can be found in almost every household. A long-term investment that is aimed to achieve my goal of financial freedom through investments. A look at the rationale behind investing in Johnson & Johnson and a reminder to why it is worth holding on to it.

Johnson & Johnson logo | Investor MonkeyJohnson & Johnson (NYSE: JNJ) is a holding company engaged in research & development, manufacture and sale of a range of products in the health care field, primarily focused on products related to human health and well-being.

Johnson & Johnson is organised in three business segments: Consumer, Pharmaceutical and Medical Devices.

Some of the more popular Johnson & Johnson’s everyday products includes Johnson’s Baby range of products, Band-Aid, Listerine and Acuvue.

Rationale for Additional to Portfolio

Consistent dividend payouts is the main key reason to why Johnson & Johnson is chosen to be added into the portfolio. Not only has Johnson & Johnson been paying shareholders consistent dividends, they have been regularly increasing their dividends for 53-years. Only six other companies have longer continuous streak.

Over the last five years, Johnson & Johnson has an average dividend growth of 7.4% while the Earnings per Share (EPS) growth at 24.59%. The EPS is growing at over three times more than the dividend growth. The much stronger EPS growth shows that Johnson & Johnson will be able to sustain its dividends using its earnings.

With a current dividend yield (TTM) of 2.87% as of August 18, Johnson & Johnson beat the desired current yield of 2% at time of purchase. Dividend payout ratio is at 42.5% indicating that, in the future, if earnings of Johnson & Johnson drops, they still have the room to increase their dividends.

Transaction Details

Date August 18, 2015
Shares 5
Price 99.17
Yield (TTM)* 2.87%
* as at time of purchase

Creating a New Portfolio

Having gone in circles and now back at my starting point, I have decided to start my investment portfolio fresh. This portfolio is created to help me find a basket of company shares to invest in that will be able to pay a dividend to create a monthly paycheck for my retirement.

After going rounds in circles trying to profit via different means, think at the end of the day, we should just go back to basics and remembering why I wanted to invest for.

Journey to Financial Freedom Through Passive Income

Although I have not exactly forgotten why, I kept deviating away from the path of my journey with hopes to earn more profits. Not only did the deviation cost me some monetary losses, more importantly, time was lost and here I am again standing at the starting line of the race.

What Went Wrong?

Investing for passive income generation is a long journey. Along the way, you seen cars zooming past and you hope you could hop on and it can bring you to your destination faster. However, most of the time, a ride on the highway is not a free ride. Without the right experience and knowledge, you will be brought to the same point (even worse, further away from your destination), yet having to pay for the ride.

That was what happened to me. In the midst of my journey, I saw another investment vehicle which has the potential of profiting $10,000 a month. But after a couple of setbacks, I lost almost all my $5,000 worth of investments and decided that the kind of investment does not suit me at all and thus decided to stop. All within a month (shall not say what is the investment as I can only say I did not have the experience nor the knowledge to profit in it). It was only then, it daunted to me that investments should not be that hard or risky.

A New Portfolio is Born

What could be more easy than to make regular investments in shares for dividends, reinvest the dividends and at the end of the term, collect a monthly paycheck?

One of the simplest method in investing is income investing. Income investing involves three key points:

  1. Investing in companies that pays dividends,
  2. Reinvesting in the dividends paid and
  3. Compounding Interest.

Adding on to the three key points of income investing, I have added another point Dollar Cost Averaging.

Not hard right?

Details of My New Portfolio

My new portfolio is about finding stocks of companies that I can invest in that pays dividends to their shareholders. Not only that dividend payouts must be consistent, dividend growth is equally important else a huge capital is required to achieve the monthly $3,000 paycheck that I am looking for. Guidelines in looking for these companies, in term of their dividend policy, is the company should be paying a dividend with a yield of approximately 2-3% and it must have a good history of paying growing dividends (preferably at approximately 10% annually).

Will be diversifying my portfolio, investing in companies in 4-5 sectors while limiting the number of companies to around 15-20. To achieve that and reduce the cost of commissions, I will be looking at adding new companies into the portfolio for the first year or two before adding positions to the individual companies.

Deciding between investing in Singapore or US shares, I had chosen the latter as my US broker allows me to do dividend reinvestment (or DRIP) which is yet another key point. Yes, we can keep the dividends and manually reinvest the dividends annually or as an when the sum of the dividend payouts allow me to buy a lot. But in income investing, the earlier I start, the earlier I will reach my goal.

Finally, as I do not have a huge capital to start off with, I will work with regular investments of $500 monthly adding more when I can afford. This not only allows me to kick-start my investment journey earlier, dollar cost averaging strategy is also used and I do not need to hold my investments and regret while seeing the price keeps going up.

When am I Starting?

Well, I have already started my new portfolio, technically in the month of July 2015. Made my first addition to my portfolio in early August and my second addition to the portfolio just yesterday.

The Bottom Line

Investing should not be a time-consuming task especially if passive income is to be generated through investing (else it should not be called passive income). A simple reminder on the rationale of why the portfolio is created will help to keep me in my path on my journey to financial freedom.

P.S. Will try to write the rationale to the second company I have chosen to invest in a.s.a.p. 

Edited (August 20, 2015): I have added my rationale to the additional of Johnson & Johnson to my portfolio. Have a look here.