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Play It Safe With CDs and Bonds

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In the current market, there's no place in your portfolio for a company that offers little more than a business plan and hope for future glory...

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Individual investors may want to move to cash and municipal bonds during the current market downdraft. The key: A safe haven until the turmoil stirred by fears of a global liquidity crisis eases.

"I think cash is going to be king near-term," says Cody Tafel, a Minyanville professor and a registered investment advisor in Richmond, Va. "I think the rest of this year is going to be rough and, unfortunately, down."

The reason for moving to cash is simple: CDs offer a guaranteed return – no brain wattage required – and with a little planning, full FDIC coverage. (See: "CDARS: Seeing the Forest for the Trees".)

Successful equity investing requires sharp research and a constant wary eye on the portfolio. Does The Little Guy want to go up against Wall Street gunslingers who devote their entire working day, not to mention a couple of marriages, to following the market?

Bonds aren't as sexy as IPOs and rank somewhere below pork bellies dressed in tutus in the affections of many hot-shot investors, but right about now dull is good.

"It's always the right time to have a superior defense," says Ryan Krueger, a Minyanville professor and a principal in Kruger & Catalano Capital Partners in Houston. "I have said for years that AAA-rated tax-free municipal bonds are the best-kept secret on Wall Street. I wouldn't own a share of any stock in any market without defense."

Remember that interest earned from a CD will be taxed as ordinary income, eroding your return. This makes tax-free munis look sweet.

If you've been bitten by the gold bug, keep in mind that gold is a defensive play and shouldn't be viewed as a way to make a quick buck, even in a sour equity market. (See: "Is Gold Right For You?".)

Fears of a global liquidity crunch have kicked stocks in the butt. The Dow Jones Industrial Average has fallen as much as 7.1% since its high of 14,021 July 19.

The trouble started with concerns about risky sub-prime residential mortgages wringing liquidity out of the market and slowing economic growth at home and abroad. The Federal Reserve and the European Central Bank acted quickly to add liquidity in an effort to boost confidence.

"The market is telling us that there is much farther to go," says Kevin A. Tuttle, a Minyanville professor and chief executive officer and chief equity strategist at Tuttle Asset Management in Orlando, Fla.

Nevertheless, the economy is generally strong and few analysts talk seriously about a looming recession. Minyans tend to be an optimistic bunch and many believe they can beat the market.

If you plan to remain invested in the market, it's probably wise to stay away from financials and pharmaceuticals, especially as the election draws closer and politicians, notably Democrats, beat up drug companies in search of . . . what? Oh, wait – votes.

Diversification is the key to successful investing and Exchange Traded Funds offer broad holdings that few individuals can match in their portfolios.

ETFs offer investors a basket of holdings in a market index, industry sector or even foreign currencies. The funds don't deal directly with shareholders and therefore have lower costs. ETFs are flexible, low cost and tax efficient. Just about anything you can do with a share of common stock can be done with an ETF.

But unlike mutual funds, you can't add small amounts to your holdings without incurring broker fees. This makes mutual funds a better bet for many individual investors, despite higher management fees. In general, ETFs are buy-and-holds because constant churn will erode your returns through higher fees.

All the red flashing on computer screens recently means that high-caliber stocks are available, or will be soon, at good prices. The trick, of course, is buying at or near the bottom. If you have a foolproof technique for that, call the U.S. Patent Office.

"I think there will be opportunities soon in quality stocks," says Minyanville's Tafel.

If you're a long-term investor rather than a trader, here are some stocks worth a look:

Oil recently fetched $72.66 a barrel on the New York Mercantile Exchange. Worldwide demand remains strong, driven by burgeoning economies in China and India. Major oil companies such as ExxonMobil (XOM), Conoco (COP) and Chevron (CVX) have had good runs. A good bet might be oil field services companies such as Schlumberger (SLB), Halliburton (HAL) and Superior Energy Services (SPN).

Defensive plays might be found in well-run companies that sell mundane stuff few think about until you need it – Walgreen (WAG) and CVS/Caremark (CVS) come to mind. Companies that make a lot of that stuff and derive a significant portion of their revenue from overseas include Johnson & Johnson (JNJ) and Procter & Gamble (PG).

Minyanville Professor Kevin Tuttle owns Cisco Systems (CSCO), maker of whizzes and whirrs used to link networks and bring the Internet to life, and Lam Research (LRCX), a maker of semiconductor processing equipment.

The backbone theory of investing might be extended to IBM (IBM), provider of mainframe computers, storage systems and services, and Hewlett-Packard (HPQ), best known for personal computers, servers, printers and networking equipment.

You'll note that these are established companies. This is what the pros call "flight to quality." In the current market, there's no place in your portfolio for a company that offers little more than a business plan and hope for future glory, especially when CDs and municipal bonds represent a secure here and now.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
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