It's the best of times. It's the worst of times. So Charles Dickens wrote that first. It still applies. For all the terrible news, there's plenty of opportunity for investors who take the initiative and advantage of what may occur only once in a lifetime.
1. Refinance your mortgage. If you own a home and can qualify (I know, 2 big assumptions in this economy), you need to refinance now. Interest rates on mortgages will most likely not go any lower. The reason? Banks have a built in cost structure that won't allow them to lower rates much below 4% on long term mortgages (floating rates are a different story). Even if you did a refinance a year ago at 5%, you can do another one now for about 4%. On a $100,000 mortgage, that saves you $1000 a year for the next 30 years. Make it a priority. The sooner you do it, the more money you'll have for other purchases.
2. Buy high yielding mutual funds or ETF's that specialize in mortgages. Yes, there are plenty of reasons not to buy them, but the biggest reason to buy them is that it's hard to beat their yields. Ones like VNQ by Vanguard, RWX, an international diversified real estate fund, RWO, the SPDR Dow Jones Global Real Estate ETF, IYR, the iShares Dow Jones US Real Estate Index Fund, and RWR, the SPDR Dow Jones REIT ETF deserve an investor's time and attention. All have solid yields and offer diversification and professional management. Some have moved off their lows, but the advantage here is that there is capital appreciation potential. When the mortgage mess is finally cleaned up (no one knows when that will be), these funds will see their prices increase. In the meantime, you're paid well to watch and wait.
3. Pay off your credit cards. This is always a good rule because the majority of cards have rates of more than 13%. Most stocks don't return that much in a year (on average). And many stocks go down, especially in this market. Make paying off your credit card a priority.
4. Expect more volatility. This means a change in your mind set. There isn't going to be a long, uninterrupted market rally for some time. That isn't going to happen until there are more real jobs (not government created ones), and people buy homes. The stock market is going to react to problems in Greece or short falls in earnings with more violence than normal because investors are nervous, scared. Yes, we've had a few days of good upward moves, but unless there's substantial, real progress on the underlying problems facing most economies, don't expect a continuation of better stock prices. Can't happen without the fundamentals at least starting to be in place. Right now, there is no substance behind these up days. Only hope. If these latest hopes are premature, we'll see some nasty hits ahead. Expect more of the roller coaster ride. If you get your mind set on that, it won't be as painful when it happens.
5. The banks aren't going away. Some of them will. But the better capitalized ones with good management will be around. Take a look at Wells Fargo (WFC) and JP Morgan Chase (JPM) as examples. Picking up a couple of solid banks for your portfolio on days when the market takes a wallop will pay off.
6. Never get out of the market completely. Sure times are stressful, but getting out of the market or trying to time the market is a sure way to miss a great leap on a day when there is real, solid, good news. This market is already able to move up more than 300 points in a day (and down more than 400) on mere hopes of resolution of current problems. Wait and see what happens when solid economic data start to come in. Being out of the market or trying to time the market is impossible. Always keep some money in strong stocks, the ones that are the core of your portfolio.
7. Avoid gold. You've missed the gold boat. It sailed. No matter what it does from here, it most likely won't go much higher unless there are more terrible surprises. It's already pricing in the European mess as well as terrorist attacks. Those are known problems. The fact that it's getting very volatile (up $65 one day, down $45 the next) suggests that investors don't know which way it will go. Beside, gold pays no dividend and in order for you to make money, someone has to have more fear than you do to make the price go higher. Stay out of the gold fields unless you own a gold mine and need to hedge.
8. Have some money available for investing when stocks get hammered. It's a good time to be defensive, but not so defensive that the fetal position becomes attractive. If you can hold some money aside for days when the bad news hits, you can pick up some great stocks at great prices. Develop a list of stocks you've always wanted to own and track them. Then make a wish list price for each of them. You'll be pleasantly surprised that many of them will get to your levels in these wildly gyrating markets. But you have to have money to buy them. So keep some of your powder dry for those opportunities.
9. Go with the winners. Now isn't the time to invest in hopes (stocks that have great ideas but no earnings). The big stocks with solid earnings will lead this market higher. Look at names like IBM (IBM), Apple (AAPL), Google (GOOG), Potash (POT), and Caterpillar (CAT). They have the capital to survive almost anything. And they're adding to their cushions every quarter.
10. Take a look at a chart for the Dow Jones Industrial Average. A good site is on MarketWatch.com. Click on the Dow Jones data in the upper right of the site, then click on Chart. You'll see that over the years, the trend is definitely higher. Not in a straight line, but eventually higher. It gives you some perspective on the current turmoil. We'll eventually get out of this and move higher again. No one knows when, but it will happen. So try to relax a little, even though the stock market is making all of us nervous on some days. Keep the long term perspective in mind.
- Ted Allrich
September 28, 2011