7. Keep money in stocks It's important to keep a portfolio allocation in equities, even when you're nervous about them, say William Trent, CFA, a freelance equity analyst who is also the editor of an investing Web site, Stock Market Beat, and a writer for TheStreet.com.
Trent suggests that an investing strategy that will work in down markets is to write put options on stocks to capture the premium income on stocks you would be willing to own if the put was exercised.
He offers an example of selling a put option on a stock with a strike price of $20, a current market price of $20, a July option expiration and an option premium of $2.
If the price of the stock goes up or remains at $20 per share, then the put isn't exercised and the option writer keeps the put premium of $2 per share, $200 per contract. (Option contracts on stocks are written on 100 shares of stock.)
- Put option -- A put option gives the owner of that option the right, but not the obligation, to sell 100 shares of the stock at a set price, called the strike price, on or before the expiration date.
- Strike price -- The specified price on an option contract at which the contract may be exercised.
See the Guide's Glossary for a further explanation of these terms.
If the stock price falls below $20 per share, the put is exercised and the put option writer has to buy the stock at $20 per share, $2,000 per contract. The premium income offsets part of the cost so the put writer effectively owns the shares at $18 per share, $1,800 per contract. This example ignores commissions and taxes.
This approach is not appropriate for neophyte options traders but can work well for investors who are willing to accept the risk that they will wind up owning the stock at the net cost if the contract is exercised against them.
8. Don't chase yield Lynn Mander, CFA, CFP, chief investment officer of First National Bank of Chester County in West Chester, Pa., says that the current investment environment is not a good time to chase yield in the bond market.
She points out that bonds historically have been seen as a haven in economic downturns as investors flee the stock market and look for the interest income paid by bond investments. But what's different this time is that the stock market and the economy are feeling repercussions from problems in the bond market.
Unsophisticated investors don't have the tools to properly evaluate the bond investments, says Mander. Quality is the name of the game in bond investing, whether it's the full faith and credit pledge of an FDIC-insured CD investment or the credit quality of U.S. Treasury or government agency debt, says Mander, while the municipal market is seeing risk positions shift with the changing status of municipal bond insurers.
Mander also advised that investors should be cautious in considering annuity contracts in what is essentially a low interest rate environment for fixed income annuities.