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Weekend Investor
March 18, 2011, 7:01 a.m. EDT
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Food companies' dividends weigh on investors
First Take "º
Set my dividend free, but stop buybacks
By Chuck Jaffe, MarketWatch
BOSTON (MarketWatch) "” Look at any timeline of U.S. stock market history, and every steep spike or free fall carries a brief but descriptive explanation:
"November 1963: Kennedy assassinated"
"September 2001: Terrorists attack U.S."
"September 2008: Lehman Brothers collapses"
Over the past century, financial markets have been pockmarked with dozens of unpredictable, large-scale disruptions. "March 2011: Japan Earthquake/Tsunami" is likely yet another.
What each of these have in common is they can all be considered a "Black Swan" event.
In layman's terms, a Black Swan is an unforeseen circumstance that prompts average investors to contemplate making wholesale portfolio changes "” before it's too late.
The Black Swan theory was chronicled by Nassim Nicholas Taleb in his popular 2007 book "The Black Swan" (revised last year). Taleb writes about extremely rare or highly improbable events that have a major market impact, positive or negative, but which surprised even the experts.
One key element is that the Black Swan, in hindsight, can be rationalized. In the case of the current situation in Japan, a possible rationalization is that investors in an island nation in the Pacific earthquake zone can and should expect their positions to be vulnerable to the damaging effects of violent earthquakes and tidal waves.
"Look, we all hate this volatility; it is too much," said investment adviser Judy Shine of Shine Investment Advisory Services in Denver. "The answer is not a "?fear portfolio.' The answer is to only have as much in stocks as you can afford to ignore these very regular traumas."
Indeed, market timelines show that Black Swans happen fairly often, but don't necessarily have long-lasting impact on the stock market. With that in mind, the standard advice of financial advisers has been to stay the course, and, in Shine's words "to ignore these very regular traumas."
Easier said than done. But given that abrupt market-changing events will always be a reality, here are five tools that advisers say belong in every investor's "Black Swan survival kit:"
Some investment advisers would say the survival kit starts and ends here.
Diversification is not so much about buying different asset classes as it is combining different types of risk, from principal risk (stocks) to interest-rate risk (bonds) to purchasing-power risk (certificates of deposit) and more. Diversify across industries, borders, types of investments -- so you have a fighting chance to avoid problems when trouble flares.
"You build strong, diversified portfolios for your clients, you don't put too much into any one type of investment, and you ride out the inevitable black swans," said Steve Goldberg, principal, Tweddell Goldberg Investment Management in Silver Spring, Md. From the archives: 10 ways to weather stormy markets.
Why do companies always ruin a good thing by doing stock buybacks?
1:26 p.m. Today1:26 p.m. March 18, 2011
"SEC sues IBM over alleged Korea, China gifts http://on.mktw.net/h8Q9hz" 11:32 a.m. EDT, March 18, 2011 from MarketWatch
"Wells Fargo, J.P. Morgan, other banks raise dividends after stress tests http://on.mktw.net/hKkhcq" 10:42 a.m. EDT, March 18, 2011 from MarketWatch
"Federal Reserve gives green light for dividend hikes at big banks http://on.mktw.net/gOIhZg" 10:04 a.m. EDT, March 18, 2011 from MarketWatch
"U.S. stocks open sharply higher Friday, paced by gains in Cisco, GE http://on.mktw.net/erZlFd" 8:38 a.m. EDT, March 18, 2011 from MarketWatch
"U.S. stock futures gather strength on reports of Libyan ceasefire http://on.mktw.net/eKu7FV" 7:48 a.m. EDT, March 18, 2011 from MarketWatch
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