3 Ways to Crash-Proof Your Portfolio and Profit From the Dip
Aug 16th 2011 11:00PM
Updated Aug 19th 2011 9:13AM
Last week marked the first time in the Dow's 115-year history that it moved by more than 400 points for four consecutive days. No sector or stock was spared.
- On Monday, every single company in the S&P 500 closed in the red.
- On Thursday, almost all of the major stock indices closed in the black.
- The intervening days offered no relief, with the Dow closing up 430 points Tuesday and down 520 points Wednesday.
The turmoil we've seen this past week is enough to drive normally level-headed investors to make disastrous decisions with their money. But that doesn't have to happen to you.
A Few Words from Warren Buffett and The Motley Fool
Warren Buffett, one of the world's most successful investors, famously claimed that the most important quality for an investor is temperament, not intellect. To be successful, you need to stay calm and rational during the market's boom and bust cycles and avoid falling prey to the market's herd instincts.
We at The Motley Fool couldn't agree more. But we also recognize that all investors -- seasoned or completely new to stocks -- could use some hands-on guidance to put Buffett's advice into practice. Even during dull market days, it takes a strong resolve to ignore short-term market moves -- and the squiggly lines of a chart -- and stay focused on the underlying businesses of the companies in our portfolios.
This special report from The Motley Fool -- exclusive to DailyFinance readers -- will show you how to protect your wealth from your emotions and future market gyrations, as well as provide specific stock ideas from our top investors to bolster your portfolio's returns in the months and years ahead.
3 Ways to Improve Your Financial Outcome Starting Right Now
Motley Fool top analysts and advisors were on-call practically 24/7 answering questions last week during our daily live chats, talking stocks, dissecting macro and micro trends, and sharing our best tips for keeping calm and thinking for the long term.
We've boiled down the week's top takeaways to three key strategies that you can start using today:
1. Don't make a move without consulting your personal investing policy statement.
One week, you're a devoted proponent of long-term buy-and-hold investing. The next, you're dumping all your stocks as the market bottoms out and moving your money into gold when it is priced near record highs.
Sounds wishy-washy when it's spelled out like that, right? But, yup, you just sold low and bought high. Unfortunately, fear drives investors to do the darndedst things like that with their money.
The best counter to knee-jerk, adrenaline-charged thinking is ... clear-headed, thoughtful thinking. Unfortunately, in the midst of a flash crash, our brains don't make it easy to switch from full-on panic mode to calm reflection mode.
That's where an "Investor Policy Statement" can help. This deceptively simple one-page document can be a lifesaver when, say, you wake up and find that your largest holding has dropped 50% and are trying to decide whether to sell, buy more, or evaluate the situation before you make a move.
In fact, that's question No. 3 in the eight-question exercise designed to get to the crux of your investing goals, risk tolerance, and general approach to investing. Motley Fool online managing editor Brian Richards shows you how to create your own Investor Policy Statement in "What Kind of Investor Are You?"
2. Follow these seven recession-proofing rules to stay sane -- and solvent.
Your policy statement will help keep your mind from racing off the rails. Now it's time to keep your portfolio on course.
The boring old financial planning tenet -- diversify, diversify, diversify -- has never seemed as sexy as it has in the past week. Motley Fool analyst Joe Magyer goes beyond the same old advice about putting your eggs in different baskets in his "60-Second Guide to Recession-Proof Investing."
He starts with directions on assessing the holdings you currently have. If cash is not a part of your portfolio right now, it should be, particularly for any everyday or extraordinary purchases you will need to make in the next three years.
Another common refrain during the market turmoil is that investors should be exposed to global stocks. If you're underweighted in this area, a few good companies to consider, says Joe, are Coca-Cola (KO), Wal-Mart (WMT), and Visa (V).
As far as how much of your money should be in stocks, our 13 Steps to Investing Foolishly devotes an entire lesson to answering that question and provides a handy table to line up your risk tolerance to a specific percentage of your portfolio that should be exposed to stocks.
3. Strike now while opportunities are hot.
When everyone else is selling is exactly the time that you should be backing up the wheelbarrow and loading up with stocks. But just because a company's price has been beaten down doesn't mean it's a screaming buy.
Motley Fool co-founder and CEO Tom Gardner, for example, recommends taking a defensive stance by looking for companies with easy access to capital, substantial future opportunities in foreign markets, a stellar history of operating results, world-class leadership, and a steady dividend. One of our Stock Advisor service's core holdings is a company that fits the bill to a T: Costco (COST).
There are similar opportunities in businesses across the board -- from pharmaceuticals to waste management to tech to insurance and more. If you're nervous about getting back into the market before the wreckage has settled, start with baby steps and see what appeals to you in "By Reader Request: What to Buy If You're Opportunistic... but Still Scared."
2 Stocks for Turbulent Times
Surviving the market mayhem is just one part of our aim today with this report. There is also a silver lining to the dark cloud over the Dow -- investing opportunities that the down market revealed.
The Defensive Multi-national: Colgate-Palmolive
So-called defensive multi-national corporations are currently popular investments among The Motley Fool's writers and analysts. "Multi-nationals that are market-leaders with good margins and healthy growth prospects can make solid investments, especially as they make lots of sales in non-dollar currencies. The emerging markets have better growth prospects than in the U.S. So I think owning some multi-nationals is a good way to go," says Andy Cross, The Motley Fool's chief investment officer.
Colgate-Palmolive (CL) is one such company. As noted by Jeremy Phillips in "The Downgrade Be Damned: Here's What I'm Buying Now": "Back in 1895, when a certain newspaper called the United States 'a bankrupt nation,' another event quietly began occurring. In that year, Colgate began paying dividends on its common stock, and that has continued, 100% uninterrupted ever since. That's strong -- two world wars and a Great Depression strong, in fact. Add in that it has increased its (currently 2.8%) dividend in each of the past 48 years, and that its revenue sources are spread almost evenly around the world, and you have a great, diversified brand that I'm proud to own."
The Cheap High-yielder: Waste Management
Companies with great dividend yields more generally are similarly popular investments among The Motley Fool's writers and analysts.
Among the 10 dividend-paying stocks Financial Editor Ilan Moscovitz believes will outperform the market over the coming years is Waste Management (WM).
Jeff Fischer, advisor to Motley Fool Pro and Motley Fool Options, seconded Ilan's recommendation, saying that: "Waste Management has been thrown into the trash heap over the last month, declining from $38 to $30 on weak trash volume. The country's landfill leader and largest recycler now pays owners a 4.5% dividend. Although competitors are lowering prices to haul away your trash, as a landfill owner, Waste Management still benefits by charging these competitors to use its resources. Earnings estimates for 2012 were just lowered, but the stock trades around a reasonable 12 times consensus estimates. Although recessions lead to lower trash volume, this business should be able to sort through it and come out smelling stronger."
At the end of the day, there is no way to completely avoid the market's turbulence, nor the emotions that accompany such dramatic ups and downs during short periods of time. Many of the greatest investors -- from Peter Lynch to Benjamin Graham -- have gone on the record expressing the same feelings you're likely experiencing right now.
We hope the strategies recommended in this report will help quiet your unease and improve your future returns. Remember, stay calm and proceed with caution. You'll be through this before you know it.
The Motley Fool owns shares of Costco, Waste Management, Coca-Cola, and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Costco, Visa, Waste Management, Wal-Mart, and Coca-Cola, as well as creating a diagonal call position on Wal-Mart. Read The Motley Fool disclosure policy here.