The Motley Fool

Markets Are at New Highs: Time to Sell?

I have to admit that I was quite shocked to discover that both the S&P 500 and S&P TSX indices are hitting new highs once again. It wasn’t that long ago, only a few months, in fact, that everyone was running for the hills. Fears centred around tax-loss selling, slowing global growth, or interest rate hikes are no longer an issue. Sunny days seem to be back.

Anyone who had the stomach to invest back during the turbulent fall has now been handsomely rewarded. The easy money has been made, although buying when everyone else was selling was anything but easy. The real question, now that we are making new highs again, is whether you should sell your stocks and lock in your gains or continue to party while the music is playing.

At this point, when stocks are high and you are worried they are going to fall off a precipice, there are three points you should keep in mind to make sure your portfolio continues working for you.

Have a plan

This is the most important aspect of investing. Before you buy a single stock, you need to know ahead of time how you will react in a given situation. Fortunately for investors, there are really only three situations that will occur. Stocks will go up, go down, or do nothing. For each of those three situations, you need to know what you will do before each event occurs.

In my own situation, I am primarily focused on investing in Canadian dividend-paying companies. My basic strategy is simple. I find a company in which I want to invest and wait for a general market downturn. Then I buy shares of the company when it reaches my desired buy point. I always buy more shares when I am down 10-20% from my current average cost up to my desired portfolio weighting. For me, the weighting is 5% of my total Canadian dividend holdings. When the stock rises or stays the same, I do nothing but collect dividends.

Recently, Enbridge (TSX:ENB)(NYSE:ENB) was a good but frustrating example of the strategy in action. I like Enbridge as a company. It has an excellent, diversified portfolio of regulated utilities, both gas and renewables, as well as a solid pipeline business. Although its debt got a little high after its Spectra Energy takeover, it still had steady cash flow from these businesses to pay down debt and raise its dividend.

Focus on the long term

I have a rule for my Canadian dividend stocks: if I like the company and am satisfied with its financials, I will begin to buy shares when the yield reaches 5%.

I continued buying Enbridge for the next two years while the shares continued to fall all the way to around $38 a share. Over the course of those two years, those shares languished, testing my patience while I sat on those falling shares.

Over that time, the dividend continued to grow. The share price has come back. Now, the stock has capital gains as well as a good dividend. Those capital gains are tempting. I frequently think of locking them in at the cost of my dividends. But I have a long-term plan of income generation, and as long as the company’s business remains intact, I will continue to hold.

Focus on investing as a no-lose situation

A no-lose situation does not mean that the stock will not go down. It’s a mindset where you have a plan of action in place for when the stocks go up or down. When a stock you like goes down, that’s a sale and a buying opportunity. When they go up, your stocks are worth more, if they stay the same, they’re generating income.

This is also why I believe it is so important to wait and invest only when the entire market is retreating. Periods of total market chaos practically guarantee that your stock will be a winner as long as its basic company fundamentals are solid. Stocks like Enbridge, with strong, predictable cash flows and histories of dividend growth will be great buys when the tide is going out. Be patient and have a plan for long-term success.

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Fool contributor Kris Knutson owns shares of ENBRIDGE INC. The Motley Fool owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada.

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