Adapting Bogle's Ways of Controlling Risk to the Higher Yield Strategy (Connolly report June 200 page 459)
Because the strategy of investing I follow is very different from that followed by most other investors, I'm in the market to buy dividends, Bogle's three approaches to controlling risk require some adaptation.
1 Stay the course: As most of my common stocks were purchased years ago and, with dividend growth, now have a yield much above 6%*, I plan to hold them for the increasing income being generated by the rising dividends, regardless of what the market as a whole does. Here are some examples: BC Gas Apr'95 now 9.0%, BNS May'90 15.2%, Fortis Mar'95 now 7.5%)
2. Broadening focus: I plan to broaden the focus of my portfolio, but not until the good dividend growth stocks I'm after are selling at much higher yields. In the mean time, I think Bogle is correct in this statement he makes about gold. "I may be the first serious investor in decades to bring up the subject of gold as a useful portfolio diversifier, but surely it fills the bill." As the U.S. stock market and American dollar declines, the price of gold should increase.
3. Reduce equity exposure: I have sold and am selling overvalued stocks - common stocks which I own which are near the bottom of the list that have poor prospects for dividend growth and that have a low* yield. Currently, some telcos fit into this category: some of the banks have had a good run recently too. Ask yourself: Do I regret not having sold some stocks in the spring of 1998 when the stocks we follow peaked? If so, the current bear market rally has provided us with a second chance.
As I am into higher yield stocks and count on growing dividends to gee up my retirement income, against Bogle's advice, I do not plan to buy bonds. The yield is good on bonds and unlike common stock, the principal is guaranteed, but the income from bonds is fixed. I roll short term certificates with my cash and I am waiting for better values in common stocks...higher initial yields.

The little window for buying higher yield common stocks which opened in February of 2000 seems to have, unfortunately, closed. Hopefully, in the second stage of the bear market, opportunities for good value will present themselves again. Patience is required. Treasury bills and their ilk, at some 5.5%, are quite acceptable in this environment. The aim in a bear market is to preserve capital.
* Following two decades of record returns, both John Bogle (speech Jan 5, 2000) and Warren Buffet (Fortune Oct 99) expect stock returns (gains + yield) to average 6% a year over the next decade. Links to these are on my web site.

(There were four weekly plotted position graphs: Aliant, BCE, National Bank and Telus)

As you can discern from the chart, Aliant is well "below" it's average position in the list. AIT is overvalued, but it yields 7% on our MTT cost. We've already sold enough to get our money back and pocket a nice profit. We can't lose now. Do we sell more? Thought: there will not be much AIT dividend growth in the years ahead. Thought: how strongly do I believe we are in a bear market?

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