After a barrage of bad news — a disappointing move by the U.S. Federal Reserve and a couple of really bad days for the world's key stock markets last week — it would be understandable if you wanted to dump all your investments, stick the cash in a duffel bag, and move to the hills.
As an investor, that would be the biggest mistake you could make, says Money Morning Chief Investment Strategist Keith Fitz-Gerald.
Although Fitz-Gerald is anticipating the whipsaw volatility to continue – and believes U.S. stocks are in for a particularly tough stretch – he's telling investors to stay invested if they can, stick with a solid game plan, and look for opportunities as they develop.
In fact, there are eight "mini-strategies" that investors can take that will let them navigate this near-term volatility, survive even a deep market downturn, and remain in the hunt for wealth-building, long-term investment profits.
"The key is remaining flexible and focused," notes Fitz-Gerald. "Remember, even the strongest trees bend in the wind."
A Hint of What's to Come
U.S. stocks started to skid in earnest Wednesday afternoon, after U.S. Federal Reserve policymakers announced an "Operation Twist" economic-stimulus strategy. The strategy wasn't well-received by investors, and the central bank may have exacerbated investor angst on a worldwide scale by stating that it was worried about global growth.
Last week's skid was just the latest episode in an erratic market that has seen the Dow zig-zag to a 16.21% loss from its peak of 12,810.54 on April 29. The sell-off spilled over into markets in Asia and Europe, and Fitz-Gerald says the pain is far from over.
He believes that key U.S. stock indices will re-test their lows of March 2009. If you've blotted those details out as a bad dream, we're talking about a stock-market bottom of 6,547.05 for the Dow and 676.53 for the S&P 500.
That put the Dow 7,617 points below its all-time high of 14,164 reached in October 2007 – a 53.78% drop. And the S&P's 56.8% decline knocked the index down 889 points from 1,565.15.
The Safety Strategies to Embrace Now
Worries about a decline of that magnitude could make the market sidelines seem like alluring real estate. Instead of cashing out, though, Fitz-Gerald says investors should follow these eight guidelines, while keeping an eye on their long-term investment goals.
- Stay in the Game: With such a dour near-term prognosis, it might be tempting to bail out of stocks indiscriminately. Do so at your own risk. Between 1928 and 2010, if an investor missed just the best 1% of the market days, the annualized return plunged from a positive 4.86% to a negative 7.08% – a differential of 12.94 percentage points. As Fitz-Gerald likes to say, "you miss 100% of the shots you don't take. Staying in the game if at all possible always has been, and always will be, the pathway to profits."
- Take What the Market Gives You: Bull markets aren't the only places you can make profits. The key is being nimble enough to recognize that the tide has changed. Last week, for instance, before gold began its plunge, Fitz-Gerald used "put" options in his Geiger Index advisory service to set up a trade that would profit on gold's expected near-term continued drop. "Everybody knew gold was going higher so it seemed reasonable to me to take the opposite side of the trade" noted Fitz-Gerald.
- Consider Alternatives: An example of other profit opportunities right now involves commodities – most notably gold and oil – which are worth buying on pullbacks (like we're getting now). These alternative assets will help preserve the value of your portfolio as the markets rollover or stagnate. B oth should accelerate dramatically when the world economy recovers, particularly as the U.S. dollar and e uro realign against the yuan in the years ahead. China and India, for instance, have both dramatically increased their resources purchases in recent years.
- Think Globally: The conventional wisdom used to be that you'd put 5% of your portfolio into "foreign" stocks. It's a new ballgame now, and some advisors say the right number is actually 30% to 40%. One way to achieve this objective is to put new money to work in so-called "glocal" stocks ( globally recognized brands with localized focus), with fortress-like balance sheets, diversified rev enue and experienced management. One recent study found that foreign sales accounted for 46% of overall revenue for S&P 500 companies that report sales from foreign operations – up from 30% just a decade ago. And some think that number is understated.
- Sell Strategically: C apture profits and protect your capital using "trailing stops" that are gradually ratcheted up over time. This will help you raise cash ( which can be used to buy into the rebound when it eventually happens) without the emotional turmoil that causes most investors to make rash decisions that doom them to years of sub par profits.
- Hedge Your Bets: Use specialized inverse funds to hedge downside risk that will accompany the rollover to the downside and rack up significant gains at the same time.
- Deal in Dividends: Dividend-paying stocks pack a punch – no two ways about it. A Tweedy Browne Fund Inc. study of the cash payouts concluded with this stunning statement: "Over the past 100-plus years, an investment in a market-oriented portfolio that included, most importantly, reinvested dividends, would have produced 85 times (our emphasis) the wealth generated by the same portfolio relying solely on capital gains."
- Keep Your Pencil Sharpened: Bear markets create bargains – often lots of bargains. Keep a shopping list of the companies you hope to buy, then wade in. If market conditions remain uncertain, change up your tactics. For example, consider averaging into your position over days, weeks, or even months, to make sure you don't overpay. That can help you take advantage of lower prices while also keeping you in the game. Think of it as a form of offensive defense.
"Discipline never goes out of style," Fitz-Gerald says. "your best friend right now is a carefully thought out, pre-planned investment program that helps you eliminate the kinds of knee- jerk reactions that are going to skin most investors for the third time in a decade – once on the way down, once because they buy in at the wrong time or with too much money, and once because they get left on the sidelines (again) when things eventually sort themselves out."
News and Related Story Links:
- Money Morning:
The Looming Bear Market: What You Can do That Washington Can't and Wall Street Won't
- Money Morning:
How You Can Beat 'The Street'
- Money Morning:
A Potential "Big Trade" That Will Put George Soros to Shame
- Money Morning:
Three Ways to Slash Your Risk Despite the Negative Investing Outlook
Market's 3 percent fall suggests deepening worry
- Rick Ferri:
Going Foreign With the S&P 500.
- Tweedy Browne Fund Inc.:
The High-Dividend-Yield Return Advantage.