Time to protect your portfolio! With the stock market averages making new highs every few weeks, investors are becoming increasingly edgy about what will happen next. These are unsettling times. We have a high US national debt running about $17 trillion. Added to this the US Federal Reserve has bought $4 trillion of bonds and mortgage backed securities from the big banks. They are now in the process of reducing their purchases, but they still must sell these securities back to balance their books. In addition they must continually issue new bonds to finance our debt.
On the world stage, China, that was the driving force for growth has slowed down considerably. They are in the midst of unwinding the credit bubble that formed in their real estate market. Europe is muddling along and must de- leverage some $6 trillion of sovereign bond debts. The Middle and Far East are in complete turmoil with wars and uprisings occurring more frequently.
Turning to the economy, profit margins are being squeezed, layoffs are continuing and our unemployment is too high. The investor is wondering what will happen next and what to do when it happens. Here are a few ideas that can be of benefit:
Do an in- depth analysis of your investments. Where is the revenue for each stock you hold coming from? What is the likely prospect that the revenue stream will continue? If you own a 401k get a prospectus and find out what companies are in your portfolio. Compare each stock with a trusted rating agency such as Morningstar or Zaks Research. Unless you are high risk taker, the ratings should be at the high end of the scale.
Look for stocks that have paid dividends for an extended period. In bad times you may need to rely on these dividends.
Stay away from the bond market. Most advisors will tell you that you need to diversify your portfolio with bonds and cash. Interest rates are near zero and the US Federal Reserve plans to keep them there until mid 2015. However, inflation is heating up, especially in food and energy. This is not counted in the Fed numbers. What could happen is that the Fed may be forced to raise rates sooner than expected. When rates rise the price of your bond will drop. Bond interest rates or yield move opposite the price of your bond. Often the price of the bond will fall faster than the rise in rates. Also be leery of municipal bonds after the recent collapse of Detroit’s bond market. Municipals have higher yields but you may get caught with another debacle.
Remember, the higher your stock price rises, the greater the risk. It is time to protect your profits by placing stop loss orders below the current price. Here again, examine each stock, its price and where you want to place your stop. If the market starts to turn down, you may want to buy some “inverse” ETFs. These will rise when the market falls. Or you may even buy some gold, either physical gold, gold stocks or gold ETFs.
The more homework you do now, the greater will be your chances of surviving a downturn when it occurs.