The Stock Market continued its dismal performance in July. The month saw some bright spots –when oil prices declined and companies posted good earnings reports—but those gains were quickly negated as investors reacted to gloomy statistics from the auto industry, the housing sector, and the job scene. It takes a disciplined approach to avoid knee-jerk reactions, but as seasoned traders know, the most significant opportunities are created in tough times.
Traditional tried-and-true investment ideas have taken a hammering of late. Many people’s confidence in home equity has been shattered, inflation fears have surfaced, stock prices have dived, and commodities have surged. Perhaps it’s natural to wonder if the “old” rules still apply, and if your portfolio needs a major overhaul. The pros urge caution. Here’s a synopsis of some of the strategies and opinions from leading investment experts.
- Some investors—Warren Buffet among them—believe the worst is over in the financial sector of the market but that some more write-offs are to be expected as problems work their way through this sector. Some analysts expect a rebound in the U.S. sometime in winter, when the global market picks up again. Not everyone subscribes to this viewpoint, and some fear that interest rate cuts have helped spur inflation and that we’re in for more bad news.
- There are some bright spots on the horizon. Despite the nation’s economic woes, some big corporations –industry giants from diverse sectors (a blue chip group that includes IBM and Johnson & Johnson) are still cash-rich. Past recessions show us that companies that spend cash judiciously to take advantage of the opportunities created by the economic slump emerge from a recession strong and poised for growth. Of course, the key word here is “judiciously”, dithering on the sidelines won’t reap future gains but ill-conceived strategies won’t help either. To identify organizations with cash to spend look at their financial reports to find those with money after paying their creditors, re-investing in their business, and paying dividends to investors. And, to find the smart spenders among the blue chips, look at management’s track record.
- Other investment gurus are looking for companies whose customers will keep buying despite rising prices. This category includes manufacturers of consumer basics.
- Analysts have been preaching the wisdom of including international holdings as part of a balanced portfolio. It is true that the U.S. continues to be the main contributor to the world economy, but a burgeoning middle class in China and in Asia are changing the picture…forever. As a result, the U.S.’s slice of the global GDP pie will be smaller. With this in mind, many analysts are recommending that individual investors build up their foreign allotment to 20 percent or more (depending on individual investor needs).
- A word of caution for investors who are eyeing other investment vehicles as the answer to the market woes: commodities are a traditional hedge against inflation, but the chance to buy low is long gone. For most individual investors, commodities continue to be a highly volatile option. Including a relatively small exposure may be a good idea for some people, because commodity prices do counter stock price trends. However most “typical” investors usually have some involvement in commodities via their participation in stock funds. This being the case, further forays may not be needed. Also, investors –especially those approaching retirement –might give bonds some thought. Traditionally avoided in inflationary times, many bonds are still out-performing the inflation rate, and new types of inflation-protected bonds are now available to consumers.
As always, investment planning is as individual as the person who owns the portfolio. It’s often helpful to know what type of opinions are circulating, but before leaping into action, seek suggestions from your tax and investment professionals.
