Business Columnist
Thanks to a healthy stock portfolio, Derek Foster retired when he was 34 years old.
He later wrote and self-published three books about buying and holding stocks for the long term.
Despite heavy losses in his retirement portfolio, Foster believed that stock markets would recover soon.
Today, he's more pessimistic.
In early February, he sold everything he owned in his online brokerage account – $472,000 worth of stocks and income trusts – and moved into cash.
"I think we're in for more pain," he says when explaining his abrupt about-face.
"My strategy was to buy quality dividend-paying stocks and hold them through thick and thin.
"I held on all last year, but I've been doing lots of research and I don't think we're close to the bottom yet."
Foster admits he bit the bullet and disposed of some holdings at a loss.
"I bought Rogers at around $40 in the summer and sold it for a little more than $34 last month," he says.
"I bought Algonquin Power (an income trust) at $8 to $9 a share years ago. The distribution was cut and the price fell to under $2.50.
"I bought over 30,000 shares at this price and sold them in early February for $2.68 a share."
What caused his change of heart? Why did the poster boy for holding stocks turn so gloomy?
Foster, an engineer by training, has lived on annual income of about $36,000 from his stocks since he retired four years ago. This will not be a short recession, in his view.
"There is massive debt that has to be repaid and boomers are at the stage where they shift from spending to saving," he says.
"The economy will be very slow for quite some time."
Valuations were lower when the stock markets crashed in the 1930s and later in 1973 to 1974, he points out.
The dividend yield on the Dow Jones industrial average fell to 6 per cent before, but is at 4 per cent today.
The total market value of stocks fell to 50 per cent of the gross domestic product before, but is at 70 per cent today.
The price-to-earnings ratio of stocks fell to the single-digit range before, but is still in double digits now.
Will he go back to work to support his four children and stay-at-home wife?
No way, he swears.
He's selling put options on stocks he'd like to own – essentially, bidding to buy companies as their share price sinks.
This strategy – outlined in his latest book, Money for Nothing and Your Stocks for Free – gives him an extra margin of safety and higher dividend yields because of lower stock prices.
He's not trying to make bets about the stock market's direction, but is just hoping to preserve his nest egg.
"The move into cash saved me a little over $70,000 as of last Monday – though probably less with the rebound in the last two days."
The stock market boom from 2003 to 2008 was overdone, he now admits.
"How can a guy retire at age 34? I'm the biggest contrary indicator. It shouldn't happen that way."
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