Choosing Between Chaff & Flares Versus Eject For Dividend Investors

Bear Market, Investing Strategies, Volatility

I get to communicate with a lot of investors. Many express fears about a potential stock market crash, primarily triggered by eyeball-seeking financial news sources. Sure, investors should plan for the next market downturn…but to use a fighter pilot expression, pulling the ejection handle is not the answer.

After graduating from the U.S. Air Force Academy, I spent most of the 1980s flying combat aircraft for the Air Force, including the F-16A. The leadership traits and ability to make decisions under pressure (while moving at 1,000 feet per second) continue to influence my thoughts and actions to this day.

When flying a fighter, ejecting from the aircraft is something to avoid if at all possible—it’s the last resort to keep from dying in a crash. Ejecting ensures the plane will be destroyed. What you may not know is that fighters have onboard defensive countermeasures. The F-16 had chaff and flare dispensers. The chaff was intended to distract the course of radar-guided missiles, and flares would do the same for heat-seeking missiles.

If targeted for a missile attack, deploying chaff and flares to prevent the missile from striking the aircraft would be a much more desirable outcome than having said missile fly up the tailpipe, forcing an ejection and a long walk home.

I share these fighter pilot practices to convince you that ejection from the stock market is not the right plan for a stock market decline or crash that may or may not happen soon. The market could rise for another year or more before it takes a severe downturn. Instead of selling and going all cash, you need to think about portfolio chaffs and flares.

The goal is to build your wealth, sustain your wealth, and have that wealth provide a comfortable living in your retirement years. Trying to time the market by jumping in and out of stocks will likely not help you reach that goal.

Here are some chaffs and flares that will work a lot better than ejecting from the pilot’s seat because you believe the next market crash is right around the corner.

  • Have a portfolio management plan tailored to your knowledge, risk tolerance, and goals. A portfolio plan keeps you on track to meet your goals and makes you more logical about individual stocks.
  • Use or learn fundamental analysis. Doing this means judging stocks by the companies behind the shares. You should evaluate profits or losses and actual growth, and compare these metrics against peer companies.
  • Own some dividend-paying stocks. Dividends hit your brokerage accounts through both down- and up-cycles in the markets. Companies that pay dividends are profitable and more likely to recover from an economic downturn.
  • Keep some “dry powder” (cash or highly liquid securities that effectively function as cash) available to put to work during market downturns. You can’t buy low unless you have some cash to invest.

I don’t keep a large percentage of my portfolio in dry powder; instead, I add a little to the dry powder position every month. As long as the market keeps going up, my stocks keep going up, so my stash of cash continues to grow at the same time. No market timing is required. When we get into a market correction, I will be ready to buy some “on-sale” stocks on sale.

If all that portfolio management and fundamental analysis stuff sound like too much work, consider signing up for my Dividend Hunter service. Besides some excellent income stock recommendations, I spend a lot of time teaching those concepts.

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