2/22/2012 6:37 PM ET|
5 ways investors can play defense
ETFs and even some market sectors can offer safety in the gathering market storm. The goal is to find stability that pays dividends.
Yes, the Dow is flirting with 13,000 again. But these are still crazy days for the economy and the stock market.
Big structural problems are in play -- from the world's $8 trillion debt hole to the specter of 1970s-style inflation, issues we've explored in my recent columns. We've dug a deep hole.
The takeaway: 2012 is shaping up to be a tough year, filled with market volatility, social unrest, political dynamism, a slowdown in corporate profits and a stalling of economic growth.
Efforts to fix the problem have focused mainly on central bank intervention. But with inflationary pressures building, the stage is set for a repeat of the mid-2011 slowdown, which was caused by rising energy prices.
So, what are investors to do?
Simply put, it's time to play defense by moving into large, stable dividend stocks.
No more bondslast week's column. But bonds are a terrible place to be no matter what the future brings: whether the economy weakens, inflation surges or both happen and we get "stagflation."
In any case, bondholders get lower prices and an interest rate that won't compensate for lost purchasing power or rising default and credit risks.
Right now, 10-year Treasury bonds are offering a 2% yield. After accounting for inflation, that's actually a negative 1% yield. And this assumes that the U.S. government will pay its debt in full despite last summer's downgrade of our AAA credit rating and politicians' lack of meaningful progress in addressing the structural deficit.
Inflation risk worries me most. A negative interest rate is dangerous: It disrupts the natural order of the money markets, twists incentives around and sows the seeds for big-time inflation.
And it also fits with the "financial repression" idea that has the government essentially stealing wealth from cautious bond investors by engineering negative real interest rates to pay down its debt, as it did in the aftermath of World War II -- a subject I explored in July.
Moreover, given the hopeful rebound in some of the economic data and stocks, interest rates should be higher, according to Credit Suisse analysts. The difference between manufacturing orders -- as measured by the ISM new orders index -- and Treasury yields has swelled to the highest level since 2003. (An increase in new orders suggests economic growth is improving, which should push up real interest rates. The fact it's not suggests the bond market is not buying the improvement for some reason. Either it's right and growth will slow again, or it's wrong and bond prices will fall to compensate.)
If my dour outlook is wrong and the economy rebounds, bond prices will fall to push yields back up to close this disconnect. That'll hand even deeper losses to bond investors.
If I'm right, then bonds are now priced to perfection, and the outlook is cautious relative to the outlook for stocks. Given that the market for U.S. Treasury bonds is the largest in the world, one must assume investors have the most accurate information. In other words, they're probably right.
Why dividend stocks?
Clearly, there are big, strategic reasons to avoid fixed-income assets. But there are also a number of reasons to consider dividends as a critical piece of your overall long-term investment strategy.
Historically, 70% of the total return from stocks has come from dividends. This has been even more pronounced over the past 12 years or so, with the Standard & Poor's 500 Index ($INX) now trading near levels first reached in 1999.
Backing up even more, over the past 112 years, U.S. stocks have returned an inflation-adjusted capital gain of just 1.9% a year versus a total return (including dividends) of 6.3% a year. Compare that with the 2% inflation-adjusted return to holders of long-term bonds over the period -- or the 0.9% return on short-term bills.
It's also worth noting that the last time the economy was in shambles and burdened with excess debt, as it is now, was in the late 1940s and early 1950s. The scars from the Great Depression were still fresh. And people were largely ignoring stocks and flocking to bonds.
But all that started to change in 1951. People were pushed out of bonds and back into stocks as the average dividend yield pushed well above what was offered on Treasury bonds.
I think we could see a repeat in the months and years to come. There is certainly the capacity for higher dividends: According to Wells Fargo, dividends equal just 27% of S&P 500 earnings, the lowest in 100 years.
In the postwar years, it was the increased attractiveness and "safety" of dividends that changed the tenor of the investing environment and unleashed the massive 20-year bull market that took the Dow Jones Industrial Average ($INDU) from a low of 161.6 in 1949 to a high of 1,051.7 in 1973, a gain of 551%.
If the past 30 years of the market was all about hot growth stocks, the next era of investing will be all about dividends and income -- making this a long-term thesis.
VIDEO ON MSN MONEY
He's not always right, but he's good at spotting trends...
His comments about Fed printing have been spot on, and his call tobuy Specie in Aug 2008, sure has been a winner. I still read his column, because he has made me a lot of money, on that call alone!
Clownfeet, are you 12? You write like some grade school socialist.
The markets had a good run..time for a little rest. Last one out the door please turn off the lights. We need to save energy.
Not only the remaining 1.5 trillion (out of 2.65 trillion) from last QE2 will be placed in the next months –creating more inflation- but also new signs of upcoming QE3 are part of Mr Obama’s administration on or before Dec 2012.
Please, we have to understand that the purpose of next QE3 -and maybe QEn - will be:
· Push Up assets prices (10%)
· Push “temporarily” Stock prices up (10%), and
· Finance Budget Deficit (80%)
Why does the USA Government do this? Because, they need money because due to the HUGE fiscal deficit; then; they asks The Fed “Could you please print fiat money for me because I have a lot of debt? Bernanke say “Yes Sir”. This is the way how debt is monetized.
Then, what does the US Government do? They create “secure government bonds” (I own U paper to The Fed) and thay have to set up at lower yield or lower interest rates.
For that reason, the USA banks interest rates rely on USA “Government Bonds yields” and they are now at the rock-bottom as a result of The Fed Reserve creates fiat money, by monetizing its debt.
Capish, Understand, entiende?
Now, regarding the money savers! Unfortunately, “savers” will lose their money, because most of them, holding the value SECURITY, invest “safely” for the long-term (5-10 to 15 years) through vehicles such bonds or mutual funds. Where are the mutual funds invested? At Stocks Markets; and how are these doing? Really bad and they will crash soon (2015-2017)
But “some financial planners” will continue saying. “Invest for the long-term, it is safe. Why do they do that? They lack of financial education and “they need their commissions for living”
For that reason we have to Prepare and Get Ready Against More Inflation: theelevationgroupreviews dot blogspot dot com
The real unemployment rate is for the United States is more than 15.0 %
What is the next step for Mr Bernanke?
The Federal Reserve will unleash $1.5 TRILLION dollars from the last QE2 into the economy and that will create more inflation. That means to double the entire money supply since 2008.
What would be the next step for Mr Bernanke if the economy becomes more stagnant?
The Fed will print more US dollars (QE3-Q4+) after new elections, and will print more during 2013-2014 creating the conditions to welcome the new great depression.
This situation will diminish the purchased power of debased dollar; dilute and wipe out all the pensions and long-term retirement plans. Why? Because they will be worth zero, “nada”
For that reason we have to Prepare and Get Ready Against This Inflation .... http://theelevationgroupreviews.blogspot.com
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If you are going to invest in the stock market, take “technical investment courses”. Learn how to make money regardless if the stock market is going up or down. Learn to invest with insurance, such as “stops” and “options.” You still have time to take classes, simulate or practice trading with small amounts of money and prepare for the biggest market crash in history.
Based on my own reading and Robert Kiyosaki book (Conspiracy of the Rich) the stock market will begin to collapse around 2016, and many professional investors (smart investors) will make a “killing.” Unfortunately, those being killed will be the amateurs and uneducated baby-boomers. Also, you can make extra money: coffeeganoexcel dot blogspot dot com
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You can retire according the traditional way or creating your own retirement plan. How? Traditionally you will receive advices form Financial Planners, who will tell you to buy "Mutual Funds and Stocks diversify for the long term". The other way is to learn 1) How to invest to acquire a good or great Return on your Investment (ROI); and 2) Create your own business; better if is a Recession-proof one. Both require some financial education.
At this time investing in the Stocks Markets does not make any sense at all. As I said before, during 2000-2010 the return of the DJIA Stock Market was 0.2%, and 0.2% is absolutely NOTHING.
The Stocks Markets in the world are following their END cycle and will crasn very soon after US Stocks Markets crash (2014-2015) ?? and USA will declare bankruptcy. It is much better to Invest in a another investing tool that provides you a great ROI. But the best investment is your FINANCIAL EDUCATION.
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[BRIEFING.COM] Equities ended on their lows with the S&P 500 down 1.4%.
The S&P entered today's session with a week-to-date gain of 1.5% as investors expected reassuring words from today's Federal Open Market Committee Statement.
Stocks traded with slim losses until this afternoon's FOMC Statement and subsequent comments from Chairman Bernanke sent equities and Treasuries to their lows while also providing a significant boost to the dollar.
Today's Statement was ... More
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