By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report
As you might imagine, I have been inundated with telephone calls and e-mail messages from investors who are trying to understand exactly what's happening in the world's financial markets right now.
Needless to say, little of this has been a surprise to us here at Money Morning. We've warned that the subprime-mortgage fallout would have real staying power, that the dollar would continue to sink and oil prices to rise, that inflationary pressures would take hold, and even that some of China's hotter stocks would correct. Several of these are issues I've been warning investors about for years.
In my columns and during presentations I've made across the country, one of the key points that I reiterate time and again is the importance of diversification. By diversification, I'm referring to the importance of keeping your money in front of factors that matter, while avoiding those that don't. And my idea of diversification is worlds away from the shtick that Wall Street's Armani Army trumpets over and over again.
Let me explain ...
In the late 1990s, for instance, many investors "diversified" into tech - which sent them off the cliff like the lemmings they were when the dot-com bubble imploded in 2000. Many of those folks still aren't back to even. And some were burned again this summer when an over-reliance on "safe" tech stocks caught up with them: Techs stumbled and gave their portfolios a nice haircut.
And while it looks as if the U.S. Federal Reserve may try to bail them out - you can't be certain that a rate-cut-fueled rebound will get you back to even.
Besides, why struggle to recoup your losses when it's so much easier just to stay ahead of such nasty reversals in the first place. Not only do you keep your risks at a minimum and avoid losses, you also position your investments to generate massive profits when the powerful global forces that we key on send your stocks higher.
To diminish your risk exposure while positioning yourself for the inevitable rebound, here are some moves investors should make right now:
- Mix in Safety and Balance: When markets correct, volatility soars. We saw that happen in 1987, after the Dow Jones Industrial Average dropped a staggering 22% on Black Monday, having learned that international monetary flows really were linked. That means that the gyrations we've been experiencing in recent weeks are likely to continue for some time to come. With the so-called "decoupling" of global markets still in its early stages - and world markets as highly correlated as they are right now - don't ever forget that what happens in one market, will usually be replicated in others.
- Invest for Income: This is yet another investing truism investors have either forgotten, or have just chosen to ignore, falsely believing that income investing is "boring." Dividend-paying stocks outperform non-dividend paying stocks by even more in down markets than they do in up markets. What's more, by consistently reinvesting dividends during down markets, investors can substantially expand their asset base, which puts them way ahead of the game when markets recover and stock prices soar - as they always eventually do.
- Follow the Money: While Armani Army Analysts are lousy market prognosticators, there are two financial indicators that are well-worth following: Interest rates and currencies. In other words, while analysts can't predict the markets, interest rates and currency prices often can. For instance, if bonds rally and interest rates decline, smart investors buy. But, if bond prices fall as stocks are falling, better make like "Chicken Little" and break out the umbrella, since it's probably going to rain on your parade [if the sky doesn't fall, first].
- Future Profits are "Made in China:" Every investor needs a China strategy. But with global markets currently in turmoil, a "safety-first" strategy is key. Although it's tempting to invest "in" China-based companies, right now you're better off buying shares of firms positioned to profit "from" China. In other words, with market risks so high right now, it's far better to capture the profits of China's growth by investing in globally diversified companies that are doing business in that emerging Asia nation. That gives you the benefits of China without exposing you to the risk of direct investments in an immature and substantially unregulated market.
- Alternative Energy is No Longer Merely an Alternative: So-called "Big Oil" won't cut it any longer. In terms of direct investments in the oil patch, look at the smaller firms that actually do the work. That way, regardless of how much - or how little - oil is actually out there, you will profit from the firms who process, refine or move the crude. Also, look at established companies profiting from oil alternatives. The re-emergence of commercial nuclear power is a good example.
Far too many investors stick with the money-losing strategies pushed by Wall Street simply because that's how "everybody does it." Those investors fear that any change will get them into areas that are too sophisticated to understand and manage.
But that's just flat out wrong.
The strategies we advocate are actually elegant in their simplicity. And, as my experience has demonstrated over and over, the simplest strategies are often the best and can produce head-spinning profits no matter what kind of market we face.
How can you argue with that?
News and Related Story Links:
- Money Morning:
- How Dividend-Paying Stocks Can Help You Tame the Bear
- Money Morning:
Foreign Markets Slump, But U.S. Markets Gain
- CNNMoney.com:
What's the Definition of a Bear Market?
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.