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The Role of Market Movements in Your Portfolio

And how investors can avoid ‘a world of hurt.’

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On this episode of The Long View, author and columnist Matt Krantz discusses retirement-planning tools, tips for individual investors, how to build a diversified portfolio, and more.

Here are a few excerpts from Krantz’s conversation with Morningstar’s Christine Benz and Amy Arnott.

The Fundamentals of Picking Individual Stocks

Christine Benz: We just want to go over your approach to picking stocks and how you think people should go about picking stocks. You’re a big believer in fundamental analysis, and you wrote the Fundamental Analysis for Dummies book. So, if someone is focusing on picking stocks based on fundamentals, what are the key ones that you think they should home in on?

Matt Krantz: I think growth is really important. You want to look at earnings growth and revenue growth. You want to compare GAAP earnings to adjusted earnings. You don’t want to see those get too far apart. Return on equity is a great measure to see how the management is performing. There’s just a laundry list of things that you can look at. Those are the big ones, of course. And then with the timing, you want to make sure you’re not buying stocks when we call them extended, which is when they’re basically straight up in the sky. Because a lot of times those do pull back, and it’s better to wait until they consolidate. So, you combine the chart action with the fundamentals to pick the best possible time to get in.

Technical Analysis and Helpful Stock Metrics

Amy Arnott: You mentioned the chart action and I know that Investor’s Business Daily puts a lot of emphasis on technical analysis. Do you look at technicals yourself and are there any metrics that you think are especially helpful?

Krantz: I’m the editor of personal finance. So, I’m mainly writing for people who buy ETFs and mutual funds. And while you can try that chart action with ETFs especially, for the people that I’m writing for, that’s not really what they’re trying to do. They’re just trying to pick out great funds and hold on to them and build diversified portfolios. So, for my corner of the world, that’s not as important. But, as you pointed out, a lot of our writers spend a lot of time on that. And if you visit our website and read any of the articles, they will talk about the technical levels that they’re looking at. But for my corner of the publication, we look mostly at broader sector themes.

The Role of Market Movements in Individual Investor Portfolios

Benz: How much attention do you think investors should pay to what’s going on with the broad economy, whether the direction of interest rates or recession and so on? It seems like interest rates have been super influential in the markets’ movements over the past couple of years. Can you talk about how big a role they should play in how investors approach their portfolios?

Krantz: I think it’s one of these things where it’s important to watch it and know what’s going on. Just like you would listen to the radio in the morning just to know what’s going on in the world, just to be an educated investor, but I also think you have to have some modesty and some reality in that. I don’t think I’ve met anyone that’s reliably predicted interest-rate changes in my life. And even if they did, it’s so random the way the markets can react to changes. There was a time when unemployment started rising, the stock market started rising because people thought, I don’t even know, bad news is good news or whatever. So, I think it’s important to monitor it but don’t put too much precedence on it in your portfolio because the odds of you being able to cash in wisely at the right time are not great.

Arnott: I think even a lot of professional investors were caught off guard by inflation being much higher than anyone expected so quickly and then cooling off, and interest rates have been tricky, too, for professional investors.

Krantz: It’s really hard because news is random, and we don’t know what’s going to come out day to day. And to try to convert that into a gain ahead of time is really tough.

Dividend Stocks and Retirement

Arnott: We know a lot of individual investors who put a lot of emphasis on dividend-paying stocks as a way of creating cash flows for retirement. Is that a good strategy, in your opinion?

Krantz: OK, that’s a tough one. That’s a great question. So, a couple of answers to that. I do think that people don’t pay enough attention to dividends. They account for about a third of the market’s total return over time. That’s a powerful force. And what’s also great about them is in that down year, usually your only source of any kind of return at all is a dividend. So, in that way, it offers some buffer. And I love it when my index mutual funds pay dividends because it’s reassuring and it’s this nice kind of return when everything else is going wrong.

With that said, I’ve seen absolute horror stories of people chasing yield. Pacific Gas and Electric PCG just makes me want to cry. People were chasing that. I think it had a double-digit dividend yield, and it’s from a utility in Northern California. Well, that’s like money in the bank. How could you not score on that? And it was a complete disaster. And that happens more times than you think. I can’t think of any other examples off the top of my head, but it’s actually fairly common. So, I think that dividends are awesome long term. And if you have a diversified basket of dividend-paying stocks, and you can get those in ETFs and mutual funds, I think it can work out all right. But if you start chasing yield, you’re just asking for a world of hurt.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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