As we begin a new year and hopefully leave COVID-19 and the variant infections in the past as a bad memory, it is the ideal time to do a review of your financial plans and an inventory of your current holdings. Currently, many of the major financial publications and Wall Street pundits publish their lists of the best investment strategies for the upcoming year. I tend to take those with a grain of salt, as I have made it a point to save many of these predictions and review them after the year has passed. I check to see who was right, who made money and who was off the mark, losing money for their readers.
However, in spite of all the trendy strategies you see floating around, this is an opportune time to implement some strategies that have proven beneficial a surprising number of years in the past. One strategy I have used for nearly 40 years is called the “Dogs of the Dow.” It utilizes the top 10 components of the Dow Jones Industrial Average with the highest dividend yield. The Dogs of Dow requires one to rebalance at the beginning of every year, selling the ones that no longer meet their criteria. In doing this rebalancing, you frequently find that the ones you must sell usually had the most price appreciation in the previous year. The strategy is frequently employed in variable annuities when someone checks the automatic rebalancing box on the initial annuity application. I mentioned I’d cover proven strategy, and one of the biggest recent tests was the financial crisis of 2008. In the ensuing 10 years, the Dogs of Dow strategy beat the DJIA, cementing it as one of my top choices. As my favorite Wall Street adage goes, “dividends don’t lie,” and the Dogs of Dow is further proof. There are also many various mutual funds and exchange traded funds that mirror the “Dogs of the Dow” performance.
The beginning of the year is also the perfect time to employ another strategy I like called “Dollar Cost Averaging.” The beauty of this type of investing is that it removes the compelling desire that many investors have to purchase a security at the absolute lowest price. Essentially, an investor will commit a set amount of funds to invest in a stock, bond or mutual fund on a periodic basis. This can be weekly, monthly or quarterly. By doing this, an investor can reduce the volatility of an investment and take advantage of low prices by buying more shares at one point than at other times. The secret to this strategy is to select an investment that you are comfortable purchasing over an extended period of time. I frequently employ Dollar Cost Averaging in UGMA accounts for preschoolers and toddlers. Those accounts are typically set up by parents and grandparents to provide a nice nest egg in the future for higher education or a jumpstart to their adult life. It compliments a 529 Plan extremely well.
Author & Registered Principal, John Starke
John Starke has spent more than 22 years in the financial services industry. Prior to becoming a registered principal, he spent decades in the commercial real estate development and construction industry, giving him tremendous insight into alternative real estate investing, 1031 exchanges, and various trust strategies to mitigate taxation. He focuses on education, and hosts many free events to help consumers understand financial issues, often inviting other experts to speak.