By Joe Smalley, Accredited Investment Fiduciary®

August 5, 2011

The stock market closed off more than 500 points on August 4th, and it has been down 9 days out of the last 10.  What is going on?  There are many headwinds that we are facing including a slowing economy, the end of government stimulus (QE2), and European debt contagion.  Add to that mix a political debate on the debt ceiling that culminated in a large reduction in government spending, and the markets have sold off almost 10%.  So what are some strategies to use during challenging times like these?

You’ve heard me talk before about being diversified and owning good quality investments.  That, of course, is still true.  You’ve heard me say that your situation is unique and you should consider carefully how your investments should be aligned with your goals, risk tolerance, and time horizon.  Still true.  Ok, you are still reading this, so you must really want some strategies.  Here are some ideas, but be sure to discuss these with your financial advisor before making any decisions: 

  • Seek out yield
    • With U.S. Treasuries yielding next to nothing, and corporate bonds yielding not much more, instead of selling all of your stocks and hiding out in low paying bonds, try to identify investments that yield more than what bonds are yielding – and still give you some upside potential.
      • Stocks that pay a good dividend
        • There are a number of high quality stocks that are paying 4% +, a couple of Dow components (both phone companies) are yielding 6%, and 22 of the 30 Dow stocks are yielding more than the U.S. Treasury bond
      • Real estate investment trusts (REITS)
        • Hard assets that spin off income, like real estate, have yielded more than 5% in the past, though past performance is no guarantee of future results.

 

  • Uncorrelate
    • If an investment moves up when stocks move up, and moves down when stocks move down, that means that the investment is highly correlated to stocks.  It might be a good idea to find an alternative investment that is uncorrelated to stocks. 
      • Commodities (gold, oil, agriculture)
      • Real Estate
      • Private equity

 

  • Hedge
    • While we’d like to think that everything can only go up, most of us have lived through some down times.  2008 comes to mind.  That being the case, position some of your assets so that they have the potential to go up when the market goes down.  (Instead of uncorrelated, these investments are negatively correlated.)
      • Options
      • Long/short
      • Absolute return

 

  • Take profits off the table
    • Look at your statement from the end of July and compare the value to your statement from the end of July 2010.  Consider taking the difference and selling that amount and investing in one of the investments described above. 

   

  • Backstop your investments
    • If you bought a stock at $10 per share, consider putting a sell stop in at $8 per share.  That can help limit your loss.  Likewise, if the stock has gone up since you bought it, pick a price below what it is trading at now, set a sell stop and help protect your gain. 

 

  • Find your balance
    • Each year you should balance your portfolio back to your asset allocation model.  Inevitably, you have had some winners and some losers – that’s just how it goes.  By rebalancing, you maintain your original asset allocation and help lock in gains and reallocate to investments that need to be bolstered.  If you haven’t done that in a while, now might be a good time.  Investors should note that asset allocation does not assure against market loss and that there is no guarantee that a diversified portfolio will outperform a non-diversified portfolio.

 

  • European vacation
    • Now might be time to take a vacation from European companies and investments, and U.S. companies that have a lot of exposure to Europe.  Germany is doing some heavy lifting when it comes to bailing out their neighbors and the debt problems that exist may ultimately result in a restructuring of the EU.  In the meantime, European stocks could continue to disappoint. 

 

  • Put your cash to work
    • If you are like most people, you are still sitting on some cash from the downturn a few years ago.  Now might be a good time to start putting some cash into the market using a dollar cost averaging strategy.

 

The reasons for the downturn are numerous, and none of them will be solved over night; this could go on for some time.  Confidence is being lost in Europe, in the U.S. government, and in the global economy.  A double dip recession is more likely than it was just a week ago.  But there is a silver lining to the downturn in that the dollar is strengthening and the price of oil has come down sharply.  That is little comfort, however, when the market sells off as sharply as it has.  It is human nature to want to get out of the way of a downturn.  Remember, though, that your financial goals are probably long term in nature, and your investment strategy should be, as well.  As Dr. David Kelly, the Chief Economist for JP Morgan Funds said on a conference call Wednesday, how you feel should not dictate how you think.  The key here is to be balanced, to be disciplined, and to ensure that you are on track to accomplish your financial goals. 

 

With the TIPs yielding so little, Europe struggling, corporate earnings strong, and stock prices sharply lower, now might be a good time to review your strategies to see how to position your investments during these challenging times. 

 

As always, if you have questions about your situation, please contact us. 

 

All investments carry risk.  No strategy can guarantee a profit or protect against a loss.  All strategies should be used to help you accomplish your overall long term goals.  Past performance is no guarantee of future results. Not all equities offer a dividend and dividends are not guaranteed. Real estate investments are subject to a high degree of risk because of general economic or local market conditions; changes in supply or demand; competing properties in an area; changes in interest rates; and changes in tax, real estate, environmental, or zoning laws and regulations. REIT units/shares fluctuate in value and may be redeemed for more or less than the original amount invested. The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income. International investing involves risks not inherent with domestic investments, such as currency fluctuations, differences in accounting methods; foreign taxation; economic, political or financial instability; lack of timely or reliable information; or unfavorable political or legal developments. Investing in alternative investments may not be suitable for all investors and involves special risks such as risk associated with leveraging the investment, potential adverse market forces, regulatory changes, and potential illiquidity.  Investors must meet specific suitability standards and understand these investments are for a long-term investment horizon.

 

Joseph D. Smalley is a financial advisor practicing at 2900 West Rd., Suite 222, East Lansing, MI 48823.  He offers securities and advisory services as a registered representative of Commonwealth Financial Network®, a member firm of FINRA/SIPC and a Registered Investment Advisor.  He can be reached at (517)487-4850 or at smalley@smalleyinvestments.com.