For many investors,> the past five months have been beyond frustrating. The stock market has been a roller coaster since the "flash crash" in May. In the bond market, yields are at near-record lows, and warnings of a bubble are growing louder. Housing prices have been stagnant. Oil has been sluggish. Interest rates on cash accounts mostly top out around 1.3%. Hardly inspiring.
In this environment, where every option looks lackluster, shaky or both, many investors stopped dead in their tracks, says Ron Roge, head of R.W. Roge & Co., a Long Island advisory firm. "People seem to be frozen into place, because they don't know what to do."
It's time to thaw out. Not every account is empty. Not all investments are doomed. Not every asset flounders or sinks at the same time. To the contrary, there are still many opportunities out there to help get your portfolio back on its feet. And you can still strike a smart balance between safety and steady returns.
Of course, it s also time to modify expectations, something professional money managers have been doing constantly in the two years since Lehman Brothers collapsed. There s not much easy money out there, says Tom Orrecchio, a principal at Modera Wealth Management in New Jersey. But it's still possible to have a diversified portfolio "that works for you, that allows you to sleep at night, and still gives you some exposure" to returns.
SmartMoney spoke with investment professionals to identify which areas offer some modest growth or reassuring shelter yes, even in this climate. Just try not to react to every market ripple, says Matthew Tuttle, president of Tuttle Wealth Management in Stamford, Conn. As always, "you've got to take your emotions out of it, because they will drive you crazy."
So, what to do with your money now?
Large-Cap Dividend Stocks
For investors looking for steady returns and the potential for growth, look for dividend-paying shares of big companies with a global footprint.
Not all dividend-paying stocks are alike, and in the recent economy, many companies have elected to cut their dividend. Companies with an international reach may be less likely to do so, because a robust overseas businesses can buffer the dividend, says Kim Arthur, portfolio manager of Main Management, an ETF investment firm in San Francisco. "I'd much rather put my faith in being long Johnson & Johnson (JNJ)
"If you're able to find these stocks that are yielding 4% and you don't need that capital in the next five years, I'm willing to say start stepping back in," she adds.
Overseas profits power a dozen dividend focused funds based on major stock indexes. The iShares Dow Jones Select Dividend Index (DVY)
Don't let the bearish talk about the looming bond bubble put you off the asset class entirely. With their guaranteed rate of return, bonds can still be more profitable than cash.
There are a few ways to gain exposure to bonds, including purchasing the securities themselves and buying into a bond mutual fund or ETF. Funds provide diversification and liquidity, but they don't pay back principal like an individual bond. In this environment, it's best to strike a balance between the two.
"I don't think there's one clear winner when you talk about the retail level fixed-income investor," says Steven Roge, a portfolio manager at R.W. Roge, who recommends a 50-50 split between a ladder of bonds with different maturities and bond funds that offer broad diversity and allow an investor more liquidity.
Funds can hold bonds that might be hard to access individually, Roge says. "The manager can move in and out of different sectors and, different durations, and that's s something an individual investor will have a lot of trouble doing," he says. "It's best left to someone who does that every day, all day long, at a mutual fund."
Some bond funds and ETFs do the laddering for you, such as the Claymore BulletShares ETF family, which ladders different bonds with maturity dates from 2011 to 2017.
When bonds or bond funds are used this way, their investors should not fear talk of a bond bubble, says David MacEwen, chief investment officer for fixed income at American Century Investments. "If you're sitting there worried to death about buying a bond fund and you're worried to death about losing your assets you just have to hold until it matures and you get it back," he says.
MacEwen favors diversified bond funds based on the Barclays Capital Aggregate Bond Index, comprised of about two-thirds intermediate maturity Treasuries and AAA-rated corporate debt. Since 1929, investors who have held the index for a minimum of four years have never lost money, he says.
Orrechio also recommends low-rated, high yield corporate bonds as a way to make the best of current weak conditions with an eye to better times ahead. There's some risk involved, but he believes it's manageable.
"As the environment improves, corporate bonds will be less sensitive to changes in interest rates, and [the underlying corporate performance] will improve as the business cycle improves, lowering the risk and letting investors benefits from the yield.
Although gold prices have risen sharply this year, raising questions of how much higher they can go, the metal can still offer a safe haven and some diversification as the bond and equities markets sort themselves out.
Should you go 50% into gold? No, but 5% makes sense for investors trying to stay diversified.
Generally, as the dollar weakens, gold rises. Gold also tends to rise in a crisis. And with the Federal Reserve promising to prop up the economy as needed, the dollar could stay low, relatively to other currencies, for a while yet.
Global demand will also be good for gold, says Roge, adding that he expects demand to rise in India as the country grows more wealthy.
Orrecchio cautions that some of the 16% rise in the price of gold this year is a reflection of broad uncertainty about the economic outlook and range-bound equity trading, and some of that sharp rise could recede in a more volatile market. "A lot of this [buying] is about jitters, he says.
The trick for individual investors is finding the best way to gain exposure. ETFs tied to gold offer tax advantages over holding the commodity itself and the psychological comfort of being able to sell off quickly.
Arthur says funds linked to the metal itself, like the SPDR Gold Shares (GLD),
Sometimes the best offense involves stepping up defense, and as one part of an investment portfolio, cash remains a good defense.
"In this environment we're suggesting to clients that they hold more cash," Orrechio says.
Tuttle says his most conservative clients are as much as 50% cash at times when there's no clear market momentum though that cash is ready to deploy into stocks when the current trader's market has one of its periodic pickups.
"Our most aggressive portfolios are about 30% cash," he says. "There's a lot of risk to being in the market, and depending on your level of tolerance for that risk you can decide how much you want to sit this out."
That won't make much money even high-yield savings accounts aren't offering much more than 1.3% after the teaser rates expire. Of course, it won't lose money either, which means it limits the hit a portfolio can take if there s another dip.
"If the market hiccups, you'll still have enough cash to weather the storm and get through another downturn," Orecchio says.
Clients at R.W. Roge have cash allocations in the double digits, including 3% to 5% in outright cash and a good deal more in the blended mutual funds. Roge says those buffers have protected investors from the market's harshest dips.