My buying signal

G’day Foolish readers,

The cowardly Paris attacks are weighing on global share markets, the S&P/ASX 200 Index dipping below 5,000 at the open.

Even before these horrific terrorist attacks, markets were jittery. The ASX fell over 3% last week, dragged down by BHP Billiton (ASX: BHP), Santos Ltd (ASX: STO) and Telstra Corporation Ltd (ASX: TLS).

Yes, even Telstra and its 6% forecast fully franked dividend yield (8.6% gross)…

Wall Street fell even further last week, slumping 3.6% as weak earnings and the prospect of rising interest rates weighed on the share market. The volatility index or VIX, otherwise known as the fear index, jumped above 20 for the first time since August.

Personally, I look at the VIX above 20 as a buying signal, my simple thinking being that when fear is high, share prices are low and dividend yields are high. It’s the best of all worlds.

Nothing strikes fear into the heart of investors more than share market volatility, and the prospect of losses.

I get it. Watching your share portfolio fall, something that is entirely outside of your control, is not fun.

Worse, you don’t know when the pain will end, and how far your portfolio will fall before it turns.

Markets fall much, much faster than they rise. That’s what can make them scary and make you fearful.

Fear makes otherwise rational people do highly irrational things.

They sell shares simply to stop the pain.

They are tempted to buy gold, mistakenly thinking it’s a safe haven.

They are tempted to go all to cash now, before the market falls further, with the intention of buying back in when shares stabilise.

The sad truth is all of this will doom their portfolios.

On August 24 2015, US fund giant Fidelity received over 160,000 phone calls from worried investors, one of their busiest days ever. They wanted help on a variety of topics, including how to manage their portfolios during times of volatility to the pitfalls of converting to “all cash” and the possible reasons behind recent market drops.

On that day, the Dow dived 1,000 points at the open, ultimately ending the day down 588 points, its worst points decline since August 2011.

Since its low on that day, the Dow is up over 12%… and that’s even after last week’s fall.

The lessons are clear…

You can never time the share market.

In times of extreme share market volatility, your first course of action is to do nothing.

In times of extreme share market volatility, your best course of action is to put more money to work, buying shares in some of your favourite companies, at the cheaper prices on offer.

That’s precisely what I did on Friday afternoon, adding to two existing positions, and opening one new position.

One was a fast growing ASX 200 company trading on a forecast P/E of less than 11 and a forward fully franked dividend yield of almost 6% (8.4% gross).

For me, it’s one of the best and cheapest shares on the whole ASX. I was very happy to add to my existing position at these knock-down prices.

The other two were small-cap companies, both with favourable tailwinds and long growth runways ahead of them. Sure, they are a little more risky, but with more risk comes the opportunity for outsized returns.

Speaking of risk, everyone has their own definition.

My favourite definition comes from the world’s most successful investor, Warren Buffett

“Risk comes from not knowing what you’re doing.”

If you think having 70% of your money in the big four banks means you have a diversified portfolio, you don’t know what you’re doing.

If you’re tempted to sell shares because of market volatility alone, you don’t know what you are doing.

If you think an investment in BHP Billiton is safe just because it’s a large, blue chip stock, you don’t know what you are doing.

If you day trade, you don’t know what you are doing.

If you think share markets only go up in straight lines, you don’t know what you are doing.

If you buy speculative penny mining shares because you’ll make a killing in the share market, you don’t know what you are doing.

If you only buy shares when markets are calm and going up, you don’t know what you are doing.

The list could go on and on.

Boil it all down, and successful investing can be defined simply as buying a good basket of shares with the expectation that group of shares to do well, over time.

It’s not when you buy, although stating the obvious, buying now, when markets are lower, is likely a better time than buying in March this year, when the ASX was much higher.

When you sell is absolutely critical. Buying well, and not ever selling, is the ideal scenario. As Buffett has said, his favourite holding period is forever.

The S&P/ASX 200 index is down 7% so far this year, and down 16% from its April high.

Consider this…

— If you needed the cash, were you better off selling today, or in April?

— With share prices lower today, and dividend yields higher today, were you better off buying in April when the S&P/ASX 200 Index was at close to 6,000, or today when the same index is close to 5,000?

As ever, facts trump emotion.

When markets are low, buying shares is the rational thing to do.

When markets are low, and interest rates are low, buying shares is the rational thing to do.

When markets are low, interest rates are low, and dividend yields are high, buying shares is the rational thing to do.

The next step is down to you.

By all means, go ahead and buy shares in Telstra. The 6% fully franked dividend yield will serve you well.

But if you’ve already got your fill of Telstra…

Or you’re looking for the prospect of capital growth to go with your dividend yield, you may want to look outside the usual suspects…

It’s precisely in those waters that Andrew Page, our resident dividend expert, fishes.

His most recent BUY recommendation fits the bill almost perfectly.

The company operates in a sector with some secular tailwinds, which should propel its growth for years to come. It’s the cheapest stock in its sector, trading on a forecast dividend yield of over 5%.

To find out the name, and save $100, grab a full 12 month subscription to Andrew Page’s Motley Fool Dividend Investor share advisory service. In today’s choppy market, it could just be your best bet now.

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Of the companies mentioend above, Bruce Jackson has an interest in Telstra and BHP Billiton

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