How to Invest in This Environment

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An Overview of the Current Investment Environment

The first three-quarters of 2011 were a roller coaster ride for investors and there are still significant clouds over the U.S. economy. On the one hand, unemployment remains high, home building remains low, people continue to lose homes in record numbers, Greece, Spain and Hungary have serious financial problems and the American economy feels like it is stuck in a depression. On the other hand, companies like Apple, iBM and most of the major banks are reporting excellent growth in sales and profits.

It has been a trader’s market in the stock market for the first 10 months of 2011. The S&P 500 stock index is 2 percent above where it started the year, but has swung to both double digit gains and losses during the year. Gold bugs also had a nice half-year with the precious metal starting 2011 at $1,400 and is currently above $1,700. The price of oil also surged in 2011, climbing to $115 in the Spring but then falling to under $80 by September. Oil is currently in the mid $90’s.

Investment Ideas for the Current Environment

The safest place to invest currently appears to be the blue chip stocks. The large stable companies that are the pillars of the economy and keep making money in all economic conditions. Think about stocks like McDonald’s–MCD, Coca Cola–KO, IBM and Walmart-WMT. Review the recent earnings reports of any prospective investment. Stocks that are able to increase their dividends in this environment should maintain share value and it is always good to collect some dividends while waiting for the economy to sort itself out.

Think like a swing trader. There have been opportunities for investors to turn 15 to 20 percent profits already this year using market timing. This doesn’t mean short term trading, but looking for trends lasting several weeks or longer and getting out when the trend turns against you. It may take some timing skill to wring profits from the market going in to 2012.

Look at emerging market economies. The economies of countries like Brazil and Singapore continue to grow and they offer exciting investment prospects. An efficient way to invest in these foreign market is through focused ETFs. Practice a little patience when you are planning to buy into these funds. The economies may continue to grow, but somewhere along the line the markets will think otherwise and drive down the share prices of the ETFs. This will be the time to buy.

Searching for Income

With the rate on the 10-year Treasury note fighting to stay above 3% and short term investments paying almost nothing, it is a tough time for income investors. To earn yield, it may be necessary to significantly increase the level of risk. At the same time, if high yield investment have their yields move closer to investment grade rates, the results will be capital gains. Here are a couple of investment ideas for more yield:

Closed-end funds focused on high yield bonds. There are some very attractive yields from these funds and they pay monthly dividends.

Master Limited Partnership–MLP–Stocks. These stocks are in the energy and natural resources sectors and pay most of their cash flow out as distributions. Current yields are at historically high spreads against the rates for Treasury bonds.

Both of these asset classes require significant background research to separate the wheat from the chaff.

Bond rates moved lower through 2011. If this trend reverses it will hurt the values of long maturity bonds. Bond fund investors should focus on funds holding short to intermediate term bonds.

Understand the Risks

The discussions in this article are meant to provide information about possible investment ideas and are not investment advice. Do not make any investment decision without doing your own research and understanding the risks.


MLP MLP Overview,

Closed End Fund Association,

Seeking Alpha: Complete Guide to Emerging Market ETFs,