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The stock market had its worst plunge in two years, Standard & Poor’s downgraded US credit rating from AAA to AA+ for the first time in seventy years and Europe is battling a credit crisis of its own.

According to Standard & Poor’s, your money is safer in Liechtenstein than in the US!

The impact of the US losing its stellar credit rating was brutal. All three indexes were down by more than 5% and Dow sank to 11,000.

The President’s address to the nation did little to assuage the woes of investors.

What should the individual investor do?

Let’s explore some options.

Sell

When there is panic all around, it is difficult to stay still. Selling now when everyone’s selling is a bad bargain. Sell if a company’s fundamentals change, not on market fluctuations. Keep your investment horizon in sight.

Hold

Or called the path of least resistance. Bury your head in sand and hope this will die down soon.

Rebalance

If you have a structured portfolio and if it is time to re-balance, don’t hold off on that.

Dollar Cost Averaging

If you are into dollar cost averaging, continue to invest. Not investing now would mean missing out on some nice gains when the markets do bounce back.

Buy

Investor panicBuffett famously said: Be greedy when others are fearful and fearful when others are greedy. It can be a very tough thing to, to stand against the panicking crowd. And there are no guarantees. This could be a start of a long drawn out recession or the markets could jump right back, catching up with the previous highs.

It is in times like these you should keep your horizon in perspective. Invest for the long haul. People aren’t going to stop brushing their teeth (PG) or stop going to McDonald’s (MCD) because the markets are down! Coke (KO) is still the king of colas and even folks with a Prius need gas (XOM) to get around. Profits for Walmart (WMT) may be down, but it still remains the undisputed leader among retailers.

Benjamin Graham’s rule #1 was to invest in companies with a PE ratio of less than 16. And in those days, most companies paid dividends. Here are some top notch, dividend paying companies with a forward PE of less than 16.


Procter & Gamble (PG)
Dividend Yield: 3.54
PE: 12.6

Exxon Mobil (XOM)
Dividend Yield: 2.68
PE: 7.5

Coca-Cola (KO)
Dividend Yield: 2.89
PE: 14.8

Johnson & Johnson (JNJ)
Dividend Yield: 3.73
PE: 11.2

Kimberly Clark (KMB)
Dividend Yield: 4.45
PE: 11.7

AT&T (T)
Dividend Yield: 6.21
PE: 10.4

Altria (MO)
Dividend Yield: 6.19
PE: 10.6

Chevron (CVX)
Dividend Yield: 3.46
PE: 6.3

Lockheed Martin (LMT)
Dividend Yield: 4.35
PE: 7.4

Walmart (WMT)
Dividend Yield: 2.98
PE: 9.6

McDonald’s (MCD)
Dividend Yield: 2.897
PE: 13.8

All are low beta, defensive stocks and market swings don’t affect them as much as say, technology stocks. Now would be a great time to add positions to these stocks.

Most of these stocks would’ve made you money even during the lost decade, and I believe they have the potential to get us through this and future market turbulence.

Or you could put your faith in a money manager who’s managed a whopping 20.2% return annualized, for his ‘clients‘ from 1965-2010!

My Thoughts

I maintain my aversion to domestic financial stocks. Bank of America (BAC) fell by a whopping 20% on news that AIG is suing BAC for its role in mortgage securities fraud.

Citi (C) fell by more than 16% and JPMorgan Chase (JPM) by more than 9%. All three banks have heavy exposure to bad European debt.

The folks who perpetuated the mortgage crisis are still at the helm and the cleanup act has been slow, to say the least. AIG’s lawsuit won’t be the last. I will stay away from this sector for now but continue adding positions to low PE dividend paying stocks mentioned above.

I share Buffett’s resistance to tech stocks as well. My exposure to technology stocks is mostly limited to Apple (AAPL) which too, I’m sure, will take a beating. But I should still remain above water since I bought the majority of AAPL when it was known mostly as the maker of a music player.

If this period of uncertainty continues, one asset will continue to hit new heights – Gold. Gold feeds on fear. I have very little exposure to precious metals as I’m still evaluating this asset class.

The rest are ETFs and defensive stocks. I have no intention of selling any.

Staying invested.

Disclosure: Long on all the stocks mentioned in this post except BAC, C, JPM. I’m not a qualified financial professional, this is not investment advice.

Source: Market Meltdown, What Should You Do?