Wednesday, May 09, 2012

Investing in Tough Times

“If there's a single lesson that life teaches us, it's that wishing doesn't make it so. ” ― Lev Grossman, The Magicians
Like many others, I long (wish)  for the bull market of 1982 to 2000.   Those were the golden years when all the indices advanced significantly and just about every investment had a gain.    Equities did well during those years do to higher economic certainty.  Most of our investment gains were achieved during this time period.

However the reality is economic uncertainty is the norm and sustainable the stock market gains for inviduals are more difficult to achieve.   Here are the steps we've taken  to invest in a continued uncertain economy.

  • Be defensive.    At this point, I believe the downside risk of the market is high.  So we are mainly in cash.  Recently, I've purchased some defensive stocks and shorted stocks of companies that I expect to do poorly.  Doing so has provided some downside protection.  Despite the indices mostly falling since May 2, my long/short investment positions have gained 3-4%.
  • Buy proven recovery stocks.   Since the market decline of 08/09, some stocks have reached new all time highs, demonstrating the capability of their business to do well during poor economic times.  These stocks have also done well after the 2010 and 2011 corrections.   We will buy positions in some of these stocks when the market declines.
  • Increase dividend income.  With interest rates so low, it is difficult to get good returns from bonds and CDs.   One alternative we are using is good dividend paying stocks with 2-5% dividends.   I've started to purchase some as part of our defensive stocks and will purchase more when the market declines.
Of course, there are never any guarantees.  However, I think I can sleep well at nights if I build a portfolio using these principles.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment
This is not financial or investing advice. Please consult a professional advisor.

Copyright © 2012 Achievement Catalyst, LLC

1 comment:

Anonymous said...

I think that now is a great time to invest, if you have the money to do so. The market had a dip the past few days, so most stocks are available at a slight discount.