Investment moves for a slow economy

The subprime mortgage meltdown, record oil prices, and a tumbling housing market have raised the specter of a recession. And the wild stock market volatility of recent weeks has put many investors in a defensive stance.

Investors shouldn't panic, but it's worth knowing how to build an all-weather portfolio to help you through such economic storms. The difficulty facing individual investors is that if you reshuffle your portfolio now, you might sell stocks or mutual funds after they’ve taken a beating, and buy defensive investments after their prices have been inflated by investors looking for a safe harbor. At the same time, if you try to hide out the recession in cash, reduce your exposure to stocks, or stop making regular contributions to your portfolio you may miss out on some good opportunities to buy.

“Investors should stay the course and keep investing,” says Alec Young, equity strategist at Standard & Poor’s. “Nothing outperforms stocks over 10-year periods, and investors who continue to buy when prices are low tend to do best.”

So unless you need cash immediately, you may be better staying put and weathering the storm. Still, there are some tweaks you may want to make to your portfolio. Here are some recommendations for the different market segments:

• U.S. large-cap stocks are relatively inexpensive and attractive at the moment, especially ones with lots of overseas business. You can play this trend by increasing your portfolio’s large-cap exposure, such as in an S&P 500 index fund or ETF.
• International stocks are still attractive. With growth in Europe and Japan slowing, emerging markets have the best long-term growth prospects and are less affected by some of the economic ailments in the U.S. Yet emerging markets are volatile, so your decision here should depend on your investing horizon and tolerance for a bumpy ride.
• Cash is king in a down market and will leave you ready to snatch up good deals. Short-term CDs and high-yield money market accounts are a good option. Avoid Treasury bills, which have depressed yields after investors poured into them as a safe harbor amid the recent instability.
• Buy a municipal bond fund. Treasuries have anemic yields right now. Munis are looking very appealing and many are yielding more than Treasuries, even before factoring in the tax exemption.

Take trading costs into consideration before shuffling your portfolio, and stay diversified. Also consider how hard it would be to buy back investments you sell now at a good price later on. If you buy, dollar-cost average, or buy in chunks, instead of all at once to help limit your risk.

—Chris Fichera

Comments

[muniman]

I believe that the following statement in this article is incorrect and misleading:

"Long-term bonds don’t have attractive yields now and would be hurt most if the Fed further cuts rates to spur economic growth"

The Fed raises and lowers short term rates, not long term rates.
High quality long term yields for have held up well and are in fact higher today than they were 6 months ago (for example 30 year AAA municipal bonds).
http://www.bloomberg.com/markets/rates/index.html

If the Fed lowers short term rates, then long term bonds may go up further in value. However, in the long term, if/when short term rates go back up, then long term bonds may decrease in value.