Defensive Investing

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These are the times that try men's (and women's) portfolios.  The Dow Jones Industrial Average has been down for the last 8 trading sessions and unless something positive happens within the next few hours, that number will go to 9.  Seeing months or years of appreciation dissipate in a matter of days is discouraging.  Make that depressing.

So should investors just sell and sit it out?  That really doesn't help.  Yes, you would have lots of cash, or cash anyway.  But if there is good news that spikes the market, you'll be sitting on the sidelines, wishing you were still holding your stocks instead of your bank statement.  If you still have some stocks that haven't performed in years, it's most likely time to get rid of those.  Any stocks that have increased earnings during the last 3 years are definite keepers.  Just imagine what they'll do when the economy gets rolling again.

If you have the inclination to add to your portfolio, think defense.  Look for stocks that give decent (but not extraordinary) dividends.  Those stocks will most likely continue to pay.  For example, a stock like Entergy (ETR) has a yield of 5% and earnings of $6.95 for the last 12 months.  It's an Electric Utility so there isn't going to be a catalyst for a quick upward move, but there most likely isn't going to be anything that drives it down fast either.

Another defensive idea: buy a large cap growth and income fund.  Names like Vanguard Growth and Income Fund (VQNPX), Janus Growth and Income Fund (JDNAX), and Fidelity Growth and Income Fund (FGRIX) are only 3 of many funds.  Find more at www.morningstar.com.  Be sure to check the fees each charges.  Most likely Vanguard will be the lowest but then performance is what really counts.  See how well each fund did for the last 3 years, the most trying in many decades.  Those with positive returns deserve more attention.

Allocate across many sectors.  Include REIT's even though they're still out of favor.  Don't go for the highest yields.  Those units are the riskiest.  Stick with more conservative ones.  A good example: Colony Financial  (CLNY) which specializes in buying and managing commercial mortgage loans, REO properties and commercial mortgage backed securities.  In the first 2 quarters of this year, net income rose by 352%.  The dividend in the first quarter was raised 100%.  There's no long term debt.  Second quarter payout was 52% above last year's second period at 32 cents vs 21 cents.  The yield at the current rate of dividends is 7.2%.  Other REIT's earn almost 20%, but the higher the yield, the greater the risk of it not continuing.

Other sectors to consider: oil and gas (CHV or XOM are 2 of the biggest), gold (ETF's are a good way to own gold), and financials (Wells Fargo: WFC is doing well again).  The idea is to have a good diversification.  And not too much money in any one stock or any one sector.  With this economy so fragile, no one can tell which areas will prosper or fail.  Cash is a good sector to own as well.

Just don't get out of the market completely.  You'll miss any rally, and it's hard to get back in.  Play defense for a while.  As in basketball, it wins the game.

- Ted Allrich
August 2, 2011




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Mutual Funds , Stocks


Ted Allrich

Ted Allrich

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