Earthquake Aftermath: Top Trader Details Three Defensive-Investing Strategies in the Wake of the Disaster in Japan
Money Morning Chief Investment Strategist Keith Fitz-Gerald has called Japan home for more than two decades – a fact that has given him a view of that country that few U.S. investors will ever have. That insight – combined with his innate financial acumen – gives Fitz-Gerald an unrivaled understanding of the global-investing climate at [...]
Defensive Investing: A Stock-Option "Insurance Policy" that Can Protect Your Profits
If you don't deal a lot with stock options in your investments, you probably don't realize just how versatile options actually are.
In fact, stock options can be used:
- As a low-cost way to speculate on expected price movements.
- To generate some added income on stock holdings.
- To hedge against market reversals.
- And even as a form of "insurance" – when used to "lock in" gains on profitable positions, protecting those profits against such stock-market reversals.
Three Ways to Brace for a Double-Dip Recession: Going for the Gold
The last time the U.S. economy suffered through a double-dip recession, this country was struggling to overcome the fallout from an Arab oil embargo, Vietnam War-era deficits, and an inflationary spiral that just wouldn't let go.
That 1981-82 double-dip downturn – the result of an economic "shock treatment" aimed at curing those ills – consisted of two recessions that were separated by a single quarter of growth.
The current backdrop is very different from the one that was in place back then, but the threat of a double-dip recession is no less real. Indeed, with each passing week, and with every new economic report that comes out, the possibility that the U.S. economy will backslide into a double-dip recession seems to become more of a probability – or even a likelihood.
"For me a 'double-dip' is another recession before we've healed from this recession [and] the probability of that kind of double-dip is more than 50%," Robert Shiller, professor of economics at Yale University and co-developer of Standard and Poor's S&P/Case-Shiller home price indexes, told Reuters. "I actually expect it."
Defensive Investing: Use Dollar-Cost Averaging to Reduce Volatility Risks
Dollar-cost averaging has long been a strategic staple among mutual fund buyers. Longer-term investors use it to smooth out the effects of short-term price fluctuations, but the tactic seldom has been practical for purchasers of individual stocks – that is until now.
For those unfamiliar with the strategy, dollar-cost averaging – also known as constant-dollar investing – involves the regular purchase of a smaller fixed-dollar amount worth of shares over time, as opposed to the lump-sum purchase of a large number of shares at once. For example, rather than buy $1,200 worth of shares of fictitious company XYZ in January, you might buy $100 worth of XYZ shares each month for the full year.
The technique offers several advantages for fund investors:
- Because you are investing a fixed-dollar amount at regular intervals, you don't have to be concerned with trying to time the markets.
- Since the fixed-dollar amount you invest buys more shares when prices are low and fewer when they are high, your average cost basis levels out over time. This reduces the risk that you might pay too high a price by making a lump-sum purchase at the wrong time.
- The lower average cost basis mutes the impact of short-term volatility on your existing holdings.
- You can build a sizable position in a single fund, even if you never have a large sum of money to invest at any one time.
Defensive Investing: Beware of Municipal Bonds
Of the speculative excesses that misguided monetary policy and a prolonged recession has caused, the one that poses the most danger to investor wealth is the financial bubble in state and local municipal bonds.
Municipal bonds – usually referred to as "munis" – are very popular portfolio plays because of tax advantages that, in effect, enhance their rates of return. There's also an allure because of their local nature: Investors can invest in specific bond issues that provided the money for projects such as schools, highways, bridges, hospitals or housing that actually affects the community in which the investor lives. That makes them a very tangible investment.
But there's a problem.
State-and-local-government finances have taken a bigger beating during this economic downturn than during any other recession since World War II. Even worse, that beating came after the easy money available during this stretch encouraged those same governments to venture well beyond any reasonable limits in terms of their borrowing. They're now stuck with a bigger-than-warranted debt load – which can't be covered by the property tax stream that's been reduced by record-level housing defaults.
The bottom line: At the present time, "munis" may not be the benign – or even alluring – investment that they've been in the past. In fact, thanks to continued fallout from the worst financial crisis since the Great Depression, some munis may be more akin to bombs than bonds – ticking away and just waiting to blow up your portfolio.
Defensive Investing: Keeping Your Options Open with Covered Calls
Once you get beyond buying puts or calls for purely speculative purposes, no other options strategy is more popular than employing the use of covered calls – and with good reason: Few investment techniques offer more potential benefits with such a low level of risk.
Considered the most conservative of all option plays, this strategy – which basically involves selling (or "writing") one call option for each 100 shares of a stock you own – can be employed for one or more of five distinct purposes:
- To generate a stream of additional income – over and above dividend payments – from individual stocks in your equity portfolio.
- To generate a stream of income from stocks you own that pay no dividends.
- To reduce the effective cost basis of longer-term stock holdings by bringing in option premiums, thus recovering some of the original purchase price.
- To provide a limited hedge against potential losses in portfolio value as a result of overall market pullbacks or cyclical downturns in the prices of specific stocks.
- As an income-producing substitute for a "limit-sell order" – intended to liquidate a stock position when a specific profit target is achieved.
Inflation Isn't Dead, Just Sleeping – And TIPS Can Protect You When It Awakens
Investors are always on the lookout for hot tips. The best tips highlight investments that pack a big potential profit punch, but that haven't yet started their move.
That's just what we have for you here.
We're not talking about the "inside scoop" on some obscure stock. What we're referring to are government-backed "TIPS" – or, as they're more formally known, Treasury Inflation-Protected Securities.
Admittedly, inflation hasn't been a major concern of late. The U.S. Consumer Price Index (CPI) was actually down by 0.2% in May, extending a 0.1% drop in April, while May's core inflation – which is the CPI measured without the volatile food and energy components – was just 0.1% higher. That's why many market analysts and media pundits are now saying deflation is much more of a worry for U.S. markets than inflation.
However, many of Money Morning's top experts – including Chief Investment Strategist Keith Fitz-Gerald and Contributing Editor Martin Hutchinson – disagree with that assessment. Recognizing the inevitable inflationary impact of increasing deficit spending, growing federal debt, rising state and local taxes and a weakening U.S. dollar, they see renewed upward price pressure not too far down the road.
That makes this the perfect time to learn about TIPS and how they can protect you when inflation again rears its ugly head.
Defensive Investing: Seven Signs Your Dividend is in Trouble
Both the U.S. stock market and the U.S. economy are navigating rough waters right now.
U.S. employment, which had appeared to be moving into rapid expansion, suffered a setback in May, with the economy creating only 41,000 jobs. Meanwhile, the stock market – even with the recent rebound that brought it back to the 10,000 level – remains more than 15% below its cyclical high.
That's been the uncomfortable pattern: One economic report points toward a continued U.S. recovery; the next one points toward recession. Sometimes the contradictory research is separated by a single day, other times they are just hours apart. The resultant uncertainty is whipsawing U.S. stock prices – and is leaving investors feeling shaky.
Fortunately, there is a ready remedy, not to mention a place of refuge, from this kind of grinding uncertainty – high-yielding dividend stocks.