No More Bull?
The stock market is showing signs of wear and tear. It's time to play defense
Diversify. It may seem counterintuitive in a market where every asset class looks expensive, but the markets continue to confound conventional wisdom. The so-called smart money predicted that long-term interest rates would soar once the Federal Reserve Board began hiking short-term rates. Yet the Fed has pushed short rates higher seven times since last summer. Since then, the yield on 10-year treasuries has actually fallen from 4.62 percent to 4.27 percent. Investors who moved out of bonds missed out on the 11.1 percent (and stocklike) returns of long-term government bonds over the past year. The S&P 500, meanwhile, rose 3.4 percent. "Failure to be disciplined will put the investor at risk, especially in an unpredictable market like this," says Michael Cuggino, fund manager for the Permanent Portfolio, which invests in a mix of stocks, bonds, real estate, commodities, and foreign holdings. Cuggino's fund is down only 1.6 percent year to date, versus a loss of 4.2 percent for the S&P.
Place your bets. While you don't want to change directions every time the market takes a dive, it does pay to adjust your holdings according to the overall direction of the economy. This may not be the time to plunge into economically sensitive holdings like technology stocks. Instead, you might want to emphasize more defensive stocks, such as those in the healthcare and consumer staples sectors, which includes blue-chip companies like Procter & Gamble that make things like shampoo and bandages that people use all year round.
Seek Out Dividends. Joseph Quinlan, chief market strategist at Bank of America's Investment Strategies Group, favors large companies that pay dividends. "Corporations are flush with cash now," Quinlan says. So even if they run into short-term problems, "dividend payers have the ability to generate income and total returns for investors."
When stocks gained nearly 30 percent a year--as they did in 2003--a dividend yield of around 2 percent seemed insignificant. But with stocks perhaps gaining only 7 percent or less, 2 percentage points can be huge. Indeed, while domestic stock funds have returned 5.6 percent on average over the past year, those with dividend yields of at least 2 percent have gained 9.5 percent.
Broaden Your Horizons. The world is getting smaller. Not physically but in terms of global business. The United States is no longer the dominant economy it was 20 years ago. India and China are developing huge consumer classes, while European firms are global leaders in pharmaceuticals, energy, and retailing. "It's going to be very important to be diversified geographically," says Jerome Jacobs, senior investment strategist with Putnam Investments. A weakening dollar also will boost foreign holdings.
Admittedly, none of these ideas is as sexy as plowing your money into nanotechnology. But that's how you invest in an aging bull market. "It sounds really boring, but you just have to pick your strategy, persevere, and take what the market gives you," says Brian Jones, a financial planner with the firm Cooper, Jones & McLeland. "I wish I could tell you something more."
The Ugly
Total returns on most stock and bond funds have been negative so far this year.
Gold & Silver Index* -15.9 pct.
Nasdaq -8.1 pct.
S&P 500 -4.2 pct.
Real estate funds -3.0 pct.
Taxable bond funds -0.1 pct.
Money market funds 0.5 pct.
Note: Returns through April 27
*Philadelphia Stock Exchange
Sources: Morningstar, iMoneyNet, Yahoo!
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