By Keith Fitz-Gerald
Money Morning/The Money Map Report
With the Dow Jones Industrial Average having dropped more than 370 points over recessionary fears on Tuesday, and the much-broader Standard & Poor's 500 Index having dropped by an equal 3%, it is clear that many investors have stopped thinking about stock-market profits.
But profits are exactly what they should be focusing on – especially now.
Here's a simple five part recession-investing strategy you can employ to make sure you get your fair share. Think of it as an "Investor Recession Survival Kit."
Let's take a look at the five key strategies you need to employ.
Recession Survival Rule #1: Sit in an Exit Row. One reason so many investors are getting clobbered is that they're holding on too long. If you're sitting in a movie theater and folks start yelling "Fire," you don't just sit there and watch the action unfold around you. Do that, and you'll get burned. It's no different with investing. That's why trailing stops are always a good idea: They can help you protect your principal and your profits during good markets; and they're absolute life savers when the going gets really rough – as it's been lately.
Recession Survival Rule #2: Bet on Income. When the markets lose their mojo, you don't want to lose yours. Dividends are indisputably the perfect talisman. As interest rates decline, there will be an upward pressure on dividend-paying stocks because investors start reaching for yields. And if all the recession fears turn out to be much ado about nothing, the stocks will rally when the market does anyway. And if inflation continues to escalate – as we've been saying that it will – many of the dividend-payers will be able to raise prices for their products and services, which will boost revenue and profits, and also enable them to boost their dividends. In short, this is one of those rare situations where you win under almost every scenario.
Recession Survival Rule #3: Build in Safety. Make built in safety-brakes a permanent part of your portfolio. You can do that with bonds, of course. But a far-easier strategy – and one that packs a potential for profits, to boot – is one in which you allocate up to 50% of your assets in our favorite balanced fund, the Vanguard Wellington (VWELX). Because this fund offers both safety and balance, we include this in the "Base Builder" portion of the portfolios we assemble for our trading-service subscribers. Since 1929, the Vanguard 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 a "safety-first" balanced blend that's about 60% stocks and 40% bonds. This asset mix maintains your ability to gain in bull markets, while minimizing your risk during more-bearish trading sessions.
Recession Survival Rule #4: Think booze, bombs, and butts. A beaten-down greenback means that U.S. companies – particularly those with strong export businesses – are trading for bargain prices. And so-called "sin stocks" are at the very top of that list. These include the traditional "snacks-and-smokes" stocks, including tobacco, snack foods, alcohol, and gaming shares. These firms often pay a nice dividend, and are positioned to expand their sales more rapidly than most companies in the current environment – which, of course, will boost the bottom line. We're also including defense-related issues in this venue, given the current focus on home security, the war in Iraq, and the concerns that additional problems could arise in other parts of the Middle East, with North Korea, or in other portions of Asia. The Bush Administration's proposed $588 billion defense budget for 2009 includes money for weapons systems being sold by Boeing Co. (BA), Lockheed Martin Corp. (LMT), Northrop Grumman Corp. (NOC) and other manufacturers. Even if the Bush budget plan is modified by Congress as expected, it still shows that U.S. defense spending continues to grow and that the market outlook for defense contractors remains strong. With any of these companies – be it sin stocks, gaming firms, or defense contractors – stick with firms that have lower debt, steady sales growth, and that are posting strong earnings. The best plays will be firms with global operations.
Recession Survival Rule #5: Hedge Your Bets. Professional investors hedge with options, futures and other types of derivatives, but you can achieve this far more easily with such specialized exchange-traded funds (ETFs) as the Rydex Inverse S&P 500 Strategy Inverse Fund (RYURX), which is designed to rise in value by 1% for every 1% the S&P 500 falls. You could also pick up shares in a commodity related ETF or two, and not just the soft stuff, either.
Agricultural funds are appealing, too, because of the emergence of such markets as China, India and South America. The StreetTracks Gold ETF (GLD) offers bullion-based pricing, but without the storage problems and liability of delivery The Deutsche Bank's Power Shares Agricultural Fund (DBA) is intended to reflect the performance of commodities in the agricultural sector – soybeans (31%), wheat (28%), corn (23%), and sugar (16%). The Van Eck Market Vectors Agribusiness ETF (MOO) reflects the infrastructure of the agriculture industry, focusing on chemicals (34%), agri-product operations (33%), equipment (24%), livestock operations (6%), and ethanol/biodiesel (2%).
When it comes to recession-survival strategies, here's a final – but important – thought to consider.
When the markets get rough, the temptation is to run for the hills. We undertand. We've felt that way, too, at times.
But whatever you do, resist the urge to run.
Studies show that investors who stay in the game and pursue profits using strategies like the one we've just outlined tend to capture the biggest returns over time.
Studies also show it's best to buy when there's blood in the streets – even if it's your own.
[Editor's Note: In addition to serving as the Investment Director for both Money Morning and The Money Map Report, Keith Fitz-Gerald is also the editor of the New China Trader service. A professional trader who splits his time between the United States and Japan, Fitz-Gerald's returns for subscribers have run as high as 1,804% in the past three months. For additional info, please click here].
News and Related Story Links:
- Seeking Alpha:
Safety in Sin Stocks: Good Bets for a Slowing Economy.
- Money Morning:
Gold Glimmers As Inflation Hedge.
- Money Morning Investment Research Report:
Outlook 2008: Five Ways to Profit From Soaring Agricultural Prices.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.