Stocks Sink in Anticipation of Poor Profit Reports

The start of the profit reporting period for the fourth quarter of 2009 got off to a rocky start. On Tuesday (January 12, 2010) www.msnbc.com reported a drop in the Dow Jones of 36.73 (.34%); a drop in the NASDAQ of 30.10 (1.3%); and, the S & P 500 fell 10.76 (.94%). Big Dow losers included the much talked about Alcoa, reporting earnings far less than anticipated by Thomson Reuters, and Chevron is warning of a poor earnings report to come.

While I think the continued high unemployment rate and dismal holiday sales reports solidly indicate that the recession is not over, I still caution against impulsive reactions to this additional bad news - especially for the middle-class investor.

Stock Investment - Buy Low

In fact, I consider today's poor reports of plummeting stocks as just another excellent opportunity to buy. Everyone knows the old adage, "Buy low, sell high," but how many really follow that motto? In reality, folks often purchase stocks that are doing well and sell stocks in fear at the first signs of a downward turn.

The worst thing to do with your investments is to sell solely due to a temporary drop, especially one that is largely (although not solely) based on one company's profit report - and a quarterly one at that. Alcoa historically has been the first to report 4^th quarter profit, and, simply by doing so, gets a lot of press.

So, if you have a safe distance from retirement and are not in dire need of your savings to meet monthly expenses, I advise you to ignore the fact that every fiber in your body is screaming to follow the pack and "sell". Let a cooler head prevail and "buy"!

Of course, I am speaking from a position still at least 15 years away from full retirement. I am looking at stock prices in terms of a good purchase, not in terms of calculating my net worth. As a result, a temporary paper loss has no effect on my current lifestyle or budget.

Stock Investment - How Much to Risk

To determine portfolio distribution, the old rule of thumb suggested subtracting your age from 100 to determine the percentage of investments you should have in higher yield, more volatile vehicles - like stocks. Using this equation, a 40-year old would place 60% of investments in higher yield products. With Americans living longer and putting off retirement until later, some analysts suggest using 110 or 120 to calculate position. I still prefer the old school method, so, at 50 years old, 50% of my portfolio is currently in stocks.

Stock Investment - What to Buy

I prefer "safe" stocks. Now, I know there is really no truly safe investment on the stock market, but there are companies that pose a lesser risk.

McDonald's is one of my favorite stocks, and it holds a large position in my personal portfolio. McDonald's was not affected by today's reports. In fact, it had a daily gain of .55%. This is partly because McDonald's has been largely unaffected by the country's economic situation. Even the unemployed feel they are entitled to a splurge now and then. Regardless of how wrong this may sound, for some of us, McDonald's has become an epicurean splurge. As a result, while McDonald's might not be recession proof, it does appear to be recession resistant. Due to this fact, I continue to chalk up gains from my McDonald's holdings, and, as an investor who prefers safety to double digit gains, I'm happy with its 3.51% dividend yield.

I also like Home Depot. Its 3.11% dividend yield landed it on this year's Dogs of the Dow, although it's a Small Dog as it is among the five Dog stocks with the lowest purchase price. The Dogs are the top 10 highest yielding stocks as of December 31. Home Depot did take a hit on Tuesday, dropping .64%, but with more people fixing up their homes and the company working to manage costs, it's still a stock that has my attention.

Large Stock Drops - We've Been Here Before

If you're still not convinced that this is a market in which to buy, take a walk down memory lane with me. I started investing in stocks in 1986. Initially, I saw large gains - on paper - as the market surged. Then, on October 19, 1987, I, along with the rest of the country, watched as the market crashed - and my investments along with it. Even the darling of my portfolio, McDonald's lost half its value on Black Monday. Still, it eventually rebounded, as did many other holdings.

Profits - Not the Only Factor

Disappointing profits are never a good thing, especially when the whole country is anxiously anticipating solid indicators that the economy is on the upswing. Profit reports are not the sole factor in stock prices. Prices continue to be determined by what people are willing to pay. Successful stimulus packages and the upcoming congressional elections mean that we will continue to see our government moving towards stabilizing, and growing, our economy.

Still, highs and lows are the nature of the stock market. As an investor, it's up to you to use them to your advantage.

Stock and historical data from www.msnbc.com and www.money.cnn.com.

There is risk in any type of investment. Potential investors should analyze all information available and be thoroughly aware of all risks before making any monetary decision.