News Analysis date published New: 
Monday, December 17, 2012 - 13:00
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Monday, December 17, 2012 - 13:00
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Monday, December 17, 2012 - 13:00

Take This One Simple Step NOW to Protect Yourself from the "Fiscal Cliff"

Monday, December 17, 2012 - 1:00pm

It's a question I've been getting almost daily from my subscribers: "What does the fiscal cliff mean for stocks, and how can I adjust my portfolio accordingly?"

To be honest, you're not going to like my answer... it's not something most investors want to hear.

Yet what I'm about to tell you has helped investors get through every major economic event of the last decade. It worked in the market downturn of 2002... then again in 2007... and it even worked through the financial crisis of 2008-2009.

In fact, through every major economic event the United States has ever faced -- including the Great Depression -- this investing strategy has helped investors earn staggering returns over the long term.

Yet despite all of its success, investors are still reluctant to use it. They actually think that by trading in and out of stocks on a regular basis, they're getting some sort of "edge" on the market.

So what's my advice for handling the "fiscal cliff?" Don't do anything. That's right, nothing. Just let the great companies in your portfolio -- the ones dominating their markets and paying investors fat dividends -- continue to grow your wealth over the long term.

Each day, financial talking heads get on CNBC and Bloomberg and try to convince you that some big economic factor is going to have a profound effect on the stock market.

Last year, it was the European debt crisis. A month ago, it was the election. And today, it's the "fiscal cliff." Next month, they'll have something else for us to worry about.

Although these events can move the market in the short term, over the long run, they simply don't matter.

Think of all the shocks investors have experienced in the past 100 years -- fhe Great Depression, World Wars I and II, the 1987 crash, stagflation and the tech bubble. And these are just some of the major items.

And yet, through all that, investing in great businesses -- dominant companies that pay rising dividends -- has proven to be a winning strategy.

A $1,000 investment in Coca-Cola (NYSE: KO) the day before the 1987 crash would be worth more than $14,000 today. A $1,000 investment in Becton Dickinson (NYSE: BDX) on the same day would now be worth more than $10,000.

When you own stocks like these, you don't sell them because some one-time event could negatively affect the stock market. People aren't going to stop drinking Coca-Cola because the S&P fell 5%. And they aren't going to stop buying coffee from Starbucks (Nasdaq: SBUX) because of an increase in taxes.

While the financial media frets over the latest impending catastrophe, these companies quietly continue to plow ahead, handing investors outsized returns in the form of capital gains and dividend increases. Just look at what these ten blue-chips, each of which is practically a household name, have done for investors during the past ten years.

As you can see, not only did these stocks "shrug-off" every major economic event in the past 10 years (and there were many), they were able to hand investors steady dividend growth as well.

But investing in great companies alone isn't enough. If you really want to increase your returns, then you should consider doing what I do and reinvest your dividends. By reinvesting your dividends, you're using your dividend proceeds to buy more shares of stock. As each position in your portfolio grows, so do your dividend checks.

Take a look at the same chart, but this time consider your total return if you had reinvested your dividends.

As the chart above shows, you can use dividend reinvestment to dramatically "juice" your returns. In fact, according to a recent report, if you had reinvested your dividends for the past 80 years, then your return would be 8 times higher than if you hadn't reinvested.

Action to Take --> So let the talking heads and the financial media worry about whatever they want, but at the end of the day, when it comes to you own money, never forget where the real returns from stocks come from over time -- dividends and dividend reinvestment.

[Note: One stock has raised dividends 463% since 2004... another has $9.21 per share in cash (49% of its share price)... another has returned 137% in three years -- more than triple the S&P's 39% gain. These are the type of investments that make up my Top 10 Stocks for 2013 report. To learn more about these top picks for the coming year, visit this link.]

Paul Tracy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of SBUX, BDX in one or more of its “real money” portfolios.