How I Invest: Part Six Why You Should Buy and Hold Stocks in Your Portfolio
What to do with all this cash on hand?
I am a buy and hold investor by nature. That is I don't like to trade too much, trading can be the biggest drain on an investors capital. Instead I enjoy buying stocks and bonds allowing them to rise and pay regular income, often re-investing the income in the form of dividend reinvestment plans (DRIP). Overtime if a stock or bond does rise in price I will cream the increased value; selling part of my holding to recoup my original cash investment or a large portion at least and look elsewhere for new investments.
This means at times my portfolio (list of stocks and bonds) needs re-balancing. Sometimes as with monthly paying bonds the steady DRIP increase also unbalances the portfolio, also requiring re-balancing.
Recent Market Moves
Recently I saw a large move in the value of some of my bond holdings. The largest move was in Barclays Aggregate Bond Fund (AGG). This fund had risen over six percent since I had originally bought it a few years ago. Together with a large dividend payout per month it was overwhelmongly dominating my portfolio. So I sold off some of the bond holding in AGG at just over $106 recouping about 50% of my original invest ment and maintaining a good and still profitable holding.
Doing this gave me some cash reserves to go on the hunt for new opportunities reduced the risk from a large fall in the price and allowed the balance to partially be regained.
The price of AGG is still above $105 (as of 1st April 2011). As such my broker program allows me to switch off my DRIP and divert future dividends into cash within my account. I am taking advantage of this service at the moment because to me the price is on the high side. I will wait until the price falls closer to $100 before re-entering the DRIP program. which with ING Sharebuilder is as simmple as clicking a button on a dialog screen.
This is now also ploughing cash back into my account from dividend income on a monthly basis.
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How to Use the Cash.
I have looked around at some possible investments. Many stocks are pretty well up to full price, in that they are near their 52 week highs/ I tend to avoid such stocks, they can break through the 52 week high level spectacularly, but often resistance pulls them equally rapidly back.
Another idea I use is to increase the investment in some of my smaller but good paying dividend stocks. Two of my best and most recent acquisitions were CSX Corporation (CSX) I like this railroad and freight company, it replaced my holdings in Burlington Northern and Santa Fe (BNI) which was bought out by Warren Buffett and Berkshire Hathaway about eighteen months ago. I like it because it is a strong brand., Though off its lows it has a strong performer and as a freight transport company should benefit in economic growthh increases The second stock was Consolidated Edison (ED) a good dividend paying utillity, also looking to the future it is a strong company who's product, electricity and steam for heating and oil extraction is a good prospect.
Because I am looking to hold these stocks for the long term it is nice to get a good price. I usually set a buy limit trade with Sharebuilder to run from Tuesday night to Friday, I set it pretty low, about 50cents below the previous weeks high. The limit trade costs just short of $10 so I want to get a good vlock of shares. This technique changes on the weekend.
If at the close Friday I still think the stock is close to good value, I place an automated purchase order for the following Tuesday. The automated order costs just $4 per stock group, so less than half the price of a normal trade.
This method has worked in my favor a few times, if the price falls dramatically for bad market days I catch the drop, if it doesn't fall too much then I can evaluate and either re enter a limit order or go for the automated option.
Either way I have a Win - Win situation
Warren Buffett Books
For the purposes of disclosure, I do still own shares in Barclays Aggregate Bond Fund (AGG), CSX Corporation (CSX) and Consolidated Edison (ED)