As the last year has reminded us all, if you want to invest successfully over the long term, you have to know how to navigate two very different types of market environments. During boom times, you have to find the stocks that will let you take maximum advantage of rising share prices. But when times turn bad, suddenly you're more concerned about just keeping what you've already saved without losing everything.
The art of fine defense
In this month's brand-new issue of the Motley Fool's Rule Your Retirement newsletter -- available online this afternoon at 4 p.m. ET -- retirement expert and financial planner Robert Brokamp walks you through the importance of defending your portfolio from bear markets. He starts by referring to advice from Millionaire Next Door authors Thomas Stanley and William Danko:
The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning.
So how do you incorporate a strong defense into your investing strategy? Here are a couple ways you can prepare your portfolio for anything the markets throw at it.
Emergency funds
We've said it time and again, but the value of squirreling cash away for a rainy day has never been clearer. With the economy on increasingly shaky ground, and millions having lost their jobs over the past year, making sure you can deal with your own personal financial crisis has to be your top priority right now.
You're not going to make a mint from money you set aside, even if you go out of your way to avoid low-interest traps in favor of top-yielding options like money market savings accounts and short-term CDs. But remember, the point of having this money isn't to make risky investments -- it's to be 100% sure you have the cash you need whenever you need it.
Get more income
Similarly, although rising share prices make up a substantial part of the returns from stocks, you can't count on seeing your stocks appreciate in value during bear markets. That's why it's useful for at least some of your investments to pay you a steady flow of income.
When you're considering income-producing investments, bonds typically come to mind. But with yields on Treasury bonds at extremely low levels, many have turned to dividend-paying stocks to help get them through the economic recession.
For instance, below are some stocks that pay yields above what you can get from most long-term Treasury bonds and bank CDs. Each of them has a payout ratio well below 100%, giving you some confidence that the companies won't have to cut their dividends anytime soon, even if their earnings fall from current levels.
|
Stock |
Dividend Yield |
Payout Ratio |
|---|---|---|
|
Fortune Brands (NYSE:FO) |
5.7% |
33% |
|
Diageo (NYSE:DEO) |
5.6% |
57% |
|
ArcelorMittal (NYSE:MT) |
5.1% |
14% |
|
Kimberly-Clark (NYSE:KMB) |
4.6% |
56% |
|
American Express (NYSE:AXP) |
4.4% |
34% |
|
Kraft Foods (NYSE:KFT) |
4.4% |
50% |
|
Nokia (NYSE:NOK) |
4.1% |
53% |
Source: Yahoo! Finance, DividendInvestor.com.
In addition to traditional dividend stocks, there's another class of income-producing investments that look extremely attractive. I won't get into it here, but Brokamp devotes an entire page of this month's newsletter to discussing the pros and cons of investing in this area. He's adding to his own personal positions, and he likes the sector's long-term prospects.
If you want to know more about this promising investment, it's easy to get the full scoop. Rule Your Retirement is a subscription-based service, but you can take advantage of our free 30-day trial offer to read the new issue, as well as all the other resources we offer. Try it today and start learning how you can make your future brighter.
For more on preserving your retirement:
- Is the debt meltdown still coming?
- Why you need to prepare now to avoid a gruesome retirement.
- The best investment you can make today.
