Is Now The Time To Reevaluate Your Portfolio?

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 |  Includes: CHL, LINEQ
by: Elliott Gue

All the economic models in the world won’t do your portfolio any good if you don’t take action to respond to changing market conditions.

You don’t need to be early in predicting a recession or bear market to limit the damage to your portfolio. Bearish analysts who call a market top each time stocks dip often miss out on any upside when stocks recover from these temporary swoons. You’re far better off waiting for the indicators to point to recession than jumping the gun.

This advice is particularly true for market declines that accompany severe recessions such as the Great Depression and the Great Recession. In short, bounces in the beginning stages of big bear markets often offer opportunities for investors to reposition their portfolios.

Market pullbacks may be painful, but corrections also create plenty of opportunities for investors--especially during panic-driven selloffs.

My strategy for taking advantage of the recent pullback remains the same as the one articulated in my InvestingDaily.com article on How to Play the Sell-off.

Although there’s a one-in-three chance that the US economy will slip into recession, the stock market has overreacted to the economic headwinds, potentially setting the stage for a significant rally in late 2011 and early 2012. Even if the US slides into recession, many stocks are worth buying at current levels. We would focus on three key themes.

Buy Yield

As Roger Conrad observed in The S&P Downgrade, Dividend Payers and Low-Cost Capital, the yield on 10-year US Treasury bonds recently slipped to less than 2 percent. Although the yields on lower-grade “junk” bonds have risen, the yield spread between high-grade corporate debt and Treasury bonds of similar duration remains near record lows. Income-oriented investors won’t find much to like in the corporate bond market, either.

Investments that offer favorable yields and the potential to generate steady income over time will remain in high demand. For most of the 20th century, dividends accounted for at least half the total return investors could expect from the stock market. Income investing fell out of favor in the late 1990s, but dividend-paying equities will be essential to outperforming developed markets in this century.

Fortunately, the recent market rout offers periodic opportunities to scoop up our favorite high-yielders at a discount. Many of the top picks, I track for my investment advisory website, Personal Finance, have limited exposure to economic conditions or commodity prices; their dividends should remain intact, regardless of broader conditions. These periodic sell-offs reflect the spillover from a weak market, as opposed to company-specific problems. This gives you the opportunity to lock in high-yields that will sustain your returns through any downturn. For Example:

Linn Energy LLC (NSDQ: LINE), a master limited partnership (MLP) that focuses on producing oil and natural gas, has locked in favorable pricing by hedging all of its oil production through 2013 and all of its gas output through 2015. The partnership recently boosted its quarterly payout and more hikes to the distribution are likely. Yielding close to 8 percent at current prices, Linn Energy LLC is looking very attractive.

Buy Emerging Markets

With the US economy expected to grow at a subpar rate over the next few years and Europe’s political elite sorting out the EU’s sovereign-debt travails, the emerging markets have become infinitely more attractive to investors.

Investors had worried that governments in emerging markets would tighten monetary policy to rein in inflation; the developed world’s troubles reduce the likelihood of tightening.

For a combination of yield and emerging-market growth, consider shares of telecom giant China Mobile (NYSE: CHL). The firm’s ADR has rallied sharply of late as investors flock to names with a reputation for defensive growth. Also, take a look at Yiannis Mostrous’ article, Chinese Internet Stocks Up Big: Get Ready for the Facebook of China, for more picks and ideas.

Disclosure: I am long LINE.