By: Robert Thomson, 2008-02-03
This month marks one of the worst Januarys in the history of the stock market. With the housing bubble bursting and the dollar fading the future for US investors doesn’t exactly look promising. It seems like anything our friends at the all mighty Federal Reserve try to do misses the mark every time. Is it time to shake things up in Mr. Bernanke’s fleet of Harvard economic geniuses, or does congress need a slap in the face and a lesson in long run economics? If you share my opinion we need a large helping of both and if we don’t, a portfolio fortification is critical.
In the likely occasion of a recession in the near future few investors cannot afford to ride this terrifying roller coaster out. A major revamp of your portfolio needs to be on the top of your financial to-do list. First off most advisors are suggesting less equities and more debt investing. We all know what that means; get out the less glamorous yet notably more secure bond list. Here were going to do something a little different then what the typical investor would think of doing. Instead of investing in the usual 10 year T-bill, we are going to go the other direction. Moving about 15% of our portfolio into more profitable corporate bonds can add the necessary security needed, with about a 2-2.5% larger ROI compared to your average treasury bond. This accounts for anywhere between 10-25% of your portfolio the next step is figuring out what to do with the rest.
With a recession impending on the horizon one awful truth is imminent. Company earnings will start to contract and with earning contraction comes employment contraction. With this alarming truth comes the necessity to start preparing for an extended period of time without an income source just in case. If you feel like there is even the most remote chance of termination you will need some cash put aside that is readily accessible in times of distress. The general norm is to have at least six months worth of living expenses set aside in an extremely liquid account. Let’s say that at the very most 10% of your portfolio should be some form of cash or any other easily accessible investment depending upon your net worth. With the safest investments out of the way lets move on to more profitable/secure investments.
We’re going to steer away from owning to many individual stocks in this volatile market so the next areas we will look into are mutual funds and ETF’s. Investing in foreign companies seems to be the most logical way to go when the US is teetering on the brink of a recession. Finding mutual funds that invest heavily in companies in China and other emerging markets have the most promise right now. ETF’s, emerging market funds, also offer a very nice blanket of diversity. ETF’s focus investments on an entire market sector such as energy, technology, agriculture and so on. Investing anywhere from 20-30% of your portfolio in these particular vehicles will provide you with optimal security and diversity.
Recently looking more and more attractive, are what some people deem “Sin Funds/Vice Funds”. These investments focus on stocks that do particularly well historically in times of ill market conditions. Unlike most stocks during a down turn in the market, sin stocks or vice stocks, earning actually increase. It’s really a phenomenon most investors ignore. Vice funds offer a very unique intangible asset that is impossible to duplicate in times considerably rough markets. Focusing most of there investments on companies people tend to use more of when stressed and pinched for money, such as tobacco and alcohol, makes sin funds a very safe investment. Committing up to 25% of your portfolio to a reputable sin fund could have you bragging to your friends while they are crying about how much money they’ve lost in recent weeks. As you can see individual stocks aren’t exactly the safest investments for this market, but there are some stocks that are considered as relatively safe.
If you must invest in individual stocks please take our advice and go big. Large cap stocks seem like the only way to go right now, offering little relative risk. Companies like Coca-Cola and Microsoft are looking decent right now, but don’t risk too much money on individual stock picks they’re probably not worth it in the end.
Hopefully we have provided at least a slightly enlightening way of invest your money securely in the uncertain near future. Remember with every problem comes an opportunity so keep your eyes open for companies severely undervalued. Value investing for the long term right now is your safest bet when it comes to stocks so steer clear of most growth stocks unless you know something I don’t!
Secure your portfolio and see how Sin Funds are becoming the investment choice of top Wall Street analysts and investors. Don’t take a beating from the current stock market when you can capitalize on its negative trends.
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