By William Patalon III
Executive Editor
Money Morning/The Money Map Report
Manic trading sessions like the one Wednesday - the Dow Jones Industrial Average endured a wild 625-point swing on its way to a 299-point gain - can be very tough on an investor's psyche.
You don't know which way the market will move next. And you don't know where to put your money.
But here's a secret: There are moves you can make now that will allow you to profit no matter which way the Dow swings. And there's a bonus: This strategy will not only boost your profits, it will also reduce your risk.
Here at Money Morning, we've identified 12 investments that - as a group - should help you profit in up markets and down. We've dubbed them the "Dow-Beating Dozen." The strategy is simple to deploy.
Let me explain ...
G-Force Investing
With the wild week U.S. stocks have endured, American investors are probably feeling more like bungee-jumpers.
With U.S. markets closed for the Martin Luther King holiday on Monday, overseas stock markets plunged. That made for a very tense opening Tuesday. Even after a surprise rate cut by the U.S. Federal Reserve - a three-quarter-point reduction that was the biggest interest-rate action in nearly 25 years - the Dow plunged nearly 465 points in early trading.
After investors had a chance to analyze the rate cut and its implications, they pared the loss substantially. Even so, the Dow ended the day at 11,634.82, down 128.11 points, or 1.06%. At that point, the 30-stock blue-chip bellwether was 16.2% from the record levels it achieved last year.
That set the stage for Wednesday.
After dropping more than 325 points during the morning trading hours, the 30-stock Dow Jones reversed course and posted a gain of nearly 300 points for the day - a swing of more than 625 points.
During that gut-wrenching journey, the Dow traded as low as 11,644.81. The DJIA ended the day at 12,270.17, up 298.98 points.
The U.S. financial sector led the charge, posting its biggest gain in five years. Bank of America Corp. (BAC) and JPMorgan Chase & Co., (JPM) - the biggest U.S. lenders by market value - rallied after Bear Stearns Cos. (BSC) advised buying shares of large banks. Those are all important points.
Bank of America added $3.18, or 8.5%, to close at $40.57, its largest gain in eight years. Dow components JPMorgan - up almost 12% for the day - and Citigroup Inc. (C) (up 8%) both helped to boost the average higher.
Both the broader Standard & Poor's 500 Index and the tech-heavy Nasdaq Composite Index were also down in early trading, only to recover and end the day well into positive territory. The S&P 500 ended the day higher by 28.10 points (2.14%), to close at 1,338.60. The Nasdaq climbed 24.14 (1.05%) to close at 2,316.41.
Yesterday (Thursday) was tame by comparison. After dropping a fairly tepid 28 points by noon, the Dow headed north again. It gained 108.44 points, or 0.88%, to close at 12,378.61.
A Dozen Ways to Beat the Dow
The Dow Jones index is now down only 12.8% from its record trading high of 14,198.10, set Oct. 11. Its record high close was 14,164.53, set Oct. 9.
That was the news.
But here's the story.
Investors can position a portfolio to profit no matter which way the Dow moves. Let's take a look at the 12 key profit plays to make now.
Fly Inverted: Whether you're playing in Vegas or trying to outwit the Dow [some more rueful investors might argue that they're one and the same these days], it pays to hedge your bets. And that goes for both stocks and bonds. To address this need, bolster your portfolio with a few "inverse" funds. We've chosen two. The Rydex Inverse S&P 500 Strategy Investments Fund (RYURX) appreciates as the Standard & 500 Index drops [the S&P and the Dow typically move in tandem, so we're covered, here]. Not only can specialized investments such as this one protect your portfolio from some of the damage inflicted by falling stock markets, they can add to your upside without forcing you to first dismantle your portfolio. On the bond/income side, consider the Rydex Inverse Government Long Bond Strategy C Fund (RYJCX), a fund designed to move inversely to Treasury bonds; up to this point, it has been a terrible investment as T-bond yields have trended steadily downward and prices upward. But it may be ready to come into its own. Remember: The crisis in the U.S. financial markets caused by resurgent inflation is likely to hit the Treasury market first, so this Rydex "inverse" fund should correspondingly benefit.
Add Balance: While this may sound like advice that the late Pat "Wax On/Wax Off" Morita might've offered to The Karate Kid, this is also some sage wisdom for investors who are trying to beat the Dow. In all market climates - but especially in the midst of the maelstrom we've experienced of late - it's always shrewd to make sure that a good slice of your money is in investments that offer both safety and balance. We call those our "Base Builder" investments, and one of our favorites is the Vanguard Wellington Fund (VWELX). Since 1929, this fund has captured 80% or more of the market's upward moves [including many of the years where there were market gains of 20% or better], even with its "safety-first" focus and a balanced blend of investments that's about 60% stocks and 40% bonds. This asset mix maintains your ability to gain in bull markets, while minimizing your risk during the Dow's more-bearish trading sessions.
Dig Those Dividends: Make no mistake - dividends matter. Probably more now than ever. Thanks to the late 1990s Internet boom and the surge of wealth created by the emergence of China and other newly capitalist economies in Asia, investors have become so intoxicated with the concept of capital gains that they've forgotten the persistent power that dividends provide. Well get this: Since 1926, dividends have accounted for 35% of the total return that investors have reaped from stocks. Put another way, says Bernstein Global Wealth Management, "a dollar invested in 1926 in U.S. large-cap stocks would have grown to nearly $2,300 today. But take out the dividends [and the effect of compounding on those reinvested dividends], and that same dollar would be worth a little less than $88." Ouch. Clearly, if you want to trounce the Dow, dividends are a crucial component of any strategy you employ. The PowerShares International Dividend Achievers (PID), or the Alpine Dynamic Dividend (ADVDX) funds are two logical choices to fill the bill. The income they kick off is reinvested over time; during down markets, that builds your asset base, positioning you for a rebound. And when the Dow Jones finally gets up a head of steam and chugs north as U.S. markets recover, the compounding effect will guarantee that you end up well ahead of the pack. Plus, the exposure to international markets helps diminish the risk associated with a U.S. Federal Reserve that seems to be employing a policy of benign neglect when it comes to the U.S. greenback.
Go for the Gold: You don't have to be one of the perennially bullish gold bugs to see that the yellow metal is only going to go higher. Demand from newly minted consumers in China and India have added to the potential customer base, which shifts demand for gold into a higher gear. Then there's the inflation-stoking effect created by the sinking U.S. dollar. Add in the fact that oil prices are set to move higher, too [trust us, the recent retrenchment is but a brief respite ... oil prices could easily double before the year is done], and there's only one conclusion to reach: As part of our Dow-beating elixir, you have to buy gold. In our view, the StreetTRACKS Gold Trust (GLD) is about the most efficient way of getting a pure gold play that you'll find. So bizarre is the world that we live in that gold - at a price below $900 an ounce - is beginning to look cheap. Remember: Back in 1980, during the country's last major bout of inflation, gold achieved a peak that in today's money would be equivalent to about $2,200 an ounce.
Grab the "Global Titans:" Dividends, income, balance and hedging are all great, and are crucial elements of the financial foundation we've constructed for you, but if we really want to beat the Dow, we need to mix in some growth. But it has to be safe and sensible growth. The companies we call the "Global Titans" are the first piece of that growth strategy. These companies may well be headquartered in the good old U.S. of A., but they derive a hefty portion of their sales from overseas. That imbues them with the "perfect storm" of safety and profits: There's the safety provided by the stricter regulatory rules imposed on U.S.-based firms; and there's the profit-stoking growth provided by markets abroad that continue to advance, even as the U.S. economy winds down. We look for companies with great long-term prospects, and put a premium on firms that pay dividends. Among the firms we count as key ingredients of our Dow-beating elixir: Yum! Brands Inc. (YUM), PepsiCo Inc. (PEP); MGM Mirage (MGM); and McDonald's Corp. (MCD). [If you want to make this portfolio a "Baker's Dozen" of Dow-beaters, we'll give you one more Global Titan, this one with even more long-term potential: The Boeing Co. (BA), which will benefit immensely from the growth in China, Vietnam and other key markets in Asia. To see what we mean, click here to check out our free research report].
Jump on Japan: Although inflationists were pressuring it to do so, the Bank of Japan did not cut interest rates on Tuesday. Japan's stock market has fallen about 16% this year, and that makes no sense, given that the country is incredibly liquid, and that its domestic businesses are enjoying a robust economic recovery. As part of the second element of our growth formula for eclipsing the Dow's performance for the rest of this year, invest in Japan. Go for the SPDR Russell/Nomura fund (JSC), which invests in smaller, Japan-based companies that have little or no exposure to global exports.
Ride the Rocket: It's always worth investing a small piece of your portfolio in somewhat-speculative - but well-thought-out - investments. They may be "special-situation" turnaround plays, or stocks or funds connected with emerging economies such as China, India or Latin America. We call these our "Rocket Rider" plays, and the name fits: They can really soar, but the ride can be incredibly rough. Unfortunately, too many investors focus the majority of their investments on this high-risk category, instead of properly employing it as a small addendum. There are plenty of rockets that are ready to be ridden, and there are even a few that won't explode along the way. But if we were to pick one, it would be Citigroup Inc. (C). The shares of the banking giant are already well off their highs. And there may even be a bit more downside here. But that's why it's the consummate Contrarian stock pick. On the positive side of the investment ledger, Citigroup has already attracted major capital infusions from such knowledgeable outside investors as Prince Alwaleed bin Talal, who fueled Citi's turnaround in the early 1990s, and sovereign wealth funds from Singapore, Kuwait and Abu Dhabi [the Abu Dhabi Investment Authority, or ADIA, is the United Arab Emirate's state-controlled investment fund].
Make these Dow-crushing moves now. And the next time Dow breaks, your portfolio won't fall.
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.