In the wake of the unprecedented financial crisis, even ultra-safe money market funds have come under pressure and flirted with losses. The fact that the government was obligated to step in and guarantee the safety of these investments underscores just how far the turmoil has spread.
But even though the turmoil is widespread doesn't mean you should start stuffing money under your mattress. Despite the financial chaos, there are still ways to stay ahead of the market.
First things first
It's not sexy, but especially during uncertain economic times like these, one of your first priorities should be to have a safety net of readily available cash. Experts recommend having six months' worth of living expenses to cover your family in the unfortunate event of a job loss or serious illness.
Despite their recent flirtation with loss, money market funds are still the best place for money you may need at any time -- and with the government backing them, you can feel sure that your savings won't disappear.
Avoid financial stocks ... for now
Right now, just about everything has been beaten down by the market, but that doesn't mean everything is a good buy -- even if Warren Buffett has bought it.
Buffett recently announced that his Berkshire Hathaway (NYSE: BRK-A ) would invest $5 billion in Goldman Sachs (NYSE: GS ) . Sure, it was psychologically important to the market to get such a vote of confidence from the Oracle of Omaha, but it's not clear how much more damage the crisis will inflict on our banking system. Despite the fact that he also owns stocks such as American Express (NYSE: AXP ) and US Bancorp (NYSE: USB ) , I'd advise staying away from financials until the dust clears.
Instead, intrepid investors might want to consider picking through the pile of stocks that have gotten battered over the past year, despite being far away from the meltdown. Big names like Pfizer (NYSE: PFE ) and GlaxoSmithKline (NYSE: GSK ) , for example, are both down around 25% over the past year and now sport price-to-earnings ratios of less than 13, significantly less than the broader market.
But one of the sweetest sources of bargains in the current market may be closed-end funds. Closed-end funds are known for their high dividend payouts and can more easily invest in less liquid securities than traditional mutual funds can, making them an excellent diversification tool.
Because these funds have a set number of shares and are bought and sold on an exchange, their share price fluctuates based on the forces of supply and demand. Their relative expensiveness is judged based on their net asset value (NAV) and whether they're selling at a premium or a discount to that NAV.
Closed-end funds have seen their prices plummet recently, and many funds are now selling at record discounts to NAV. In mid-September, the average discount in the closed-end fund industry stood at 13.7%. Currently, the average discount is 12%. That's like getting $100 worth of assets for just $88! Many industry insiders say they've never seen fund discounts at levels like this -- and certainly not for this long.
If you want to get in on this asset sale, consider picking up a few discounted closed-end funds like Eaton Vance Enhanced Equity Income Fund (EOI), General American Investors (GAM), or Royce Focus Trust (Nasdaq: FUND ) . All of these funds are trading at a substantial discount to their NAV and feature terrific long-term track records and seasoned management teams -- key criteria all.
The Foolish bottom line
The stock market is a scary place right now, and there's nothing wrong with wanting an excellent fund in which to invest. There's also nothing wrong with getting a little advice to help you find those excellent funds.
The Motley Fool's Champion Funds investment service has a list of vetted recommendations -- and a new pick arrives every month. Our picks are beating the market by nearly 11 percentage points, and you can view all of our top mutual fund investing ideas with a free 30-day trial. Just click here to get started -- there's no obligation to subscribe.
Amanda Kish heads up the Fool's Champion Funds investment service. At the time of publication, she did not own any of the companies mentioned herein. Berkshire Hathaway, American Express, and Pfizer are Motley Fool Inside Value recommendations. US Bancorp, GlaxoSmithKline, and Pfizer are Income Investor recommendations. Berkshire Hathaway is a Stock Advisor choice. The Motley Fool owns shares of Berkshire Hathaway, Pfizer, and American Express. Click here to find out more about the Fool's disclosure policy.