After the beating that markets took Friday, Wall Street seems to have taken a slight step back to ask whether if this is the beginning of the dreaded “double dip” or if Friday’s pullback was a normal action after 8 months of double-digit gains.
In layman’s terms, no one knows whether the equities party is over for this year.
Ford’s announced that it’s back in black, making close to a billion dollars last quarter and raising expectations for 2011. The news was greeted with a relative shrug. Most indices were up about a percent, but far below their loss from Friday.
With a slew of economic data to pour through, it might be a few days before the talking heads decide which direction the markets should go and what the next two months have in store for us.
So does that mean it’s time to bail on stocks, calling it quits for the remainder of the year? Not necessarily. Here are five things you can do right now to buttress your portfolio as we finish the fourth quarter of 2009.
Go to Cash
One of the most powerful lessons that new investors can learn is that you don’t have to been “all in,” all the time.
If you’re uncertain on the market current, or if you can’t find an investment that you like, don’t lower your standards or change your approach. Wait it out, stay in cash.
Too often, this is viewed as the antithesis to investing.
And there is some truth to this. Cash doesn’t grow. In fact, it loses purchasing power to inflation every day. However, that’s only detrimental for longer periods. For short stays, cash is a fine alternative to plunging into a new trade that you’re unsure of.
If you’re uncomfortable with the current levels of risk, or are uncertain of the direction of the broader markets, go to cash and wait until conditions warrant getting back in.
Leaders in down periods also tend to be leaders when markets turn around. Look for companies that have shown strength against a dropping market as leaders in the next rebound.
Companies that move against the market tides give you very clear indications of their strength and growth potential. This works in both declining and rising markets.
Buy the strongest companies in any dips or downturns and watch them power higher when the tide moves with them.
While this may seem to be in opposition of the “Buy Strength” rule, bottom feeding can be a good way to pick up major cyclical and large conglomerates at a significant discount to their value.
One of the best ways to do this is by buying dividend bearing companies. Because dividend return rate is based on your net purchase price, purchasing these can substantially increase your total return.
Adding trusted blue chips during market dips can help balance your portfolio’s volatility and give you capital appreciation when the market does move upwards.
While it’s a good idea to rebalance your portfolio on a regular basis, doing this during market tops and bottoms can help bring your allocations into correct proportions more frequently and forces you to sell high and buy low.
Another forgotten aspect of rebalancing is using trailing stops. By going back through your portfolio and tightening or increasing your trailing stops ensures that you lock in profits and limits your losses.
Reduce Your Basis
Many investing books will tell you that you shouldn’t throw good money after bad.
This is true… most of the time.
If you hold large positions of stocks that you know you are going to hold for at least five years then adding to them could be the right thing to do.
A good example would be a dividend bearing stock that you like and will hold well into retirement for income. If it’s priced lower than what you bought it for, adding to that holding will reduce your average cost per share and increase the amount of dividends you earn.
It’s recommended that this be done only on well established companies that you are very comfortable with. Doubling down on a penny stock that has lost 70% of its value doesn’t make much sense. Doing the same for a company like General Electric (NYSE: GE) is a different story.
Uncertainty is the only constant in the markets, but that doesn’t mean you need to sit idly by while you wait for what’s next. Take charge and your portfolio will be the better for it.
Market making ideas,
Full Disclosure: No positions in any security mentioned above.