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If you
have been watching the economy for signs that it's safe
to invest in stocks, you might be wondering why the
Dow Jones
industrial average plunged 185 points Tuesday.
Although
investors have been concerned recently about growth in
China
, the economic news in
the United States
on Tuesday was among the best in a long time.
Manufacturing finally came in above recession levels,
and housing sales picked up as first-time buyers moved
fast to get the
$8,000
home-buying tax credit that runs out by the end of
November.
Yet,
investors turned away.
They were
following the advice of a favorite
Wall Street
slogan: "Buy the rumor and sell the news."
In other
words, since March the prospects for recovery have been
uncertain, but investors bet on it anyway, driving the
Wilshire 5000 stock index up 50 percent. While Tuesday's
news seemed reassuring, investors sold stocks to await
confirmation they haven't been overly enthusiastic.
"The
market had priced in the economic recovery and now needs
a steady stream of good news just to hold its own,"
said
Milton Ezrati
, market strategist for
Lord Abbett
.
If
stronger employment numbers emerge, that would be
convincing, he said. The wild card remaining is who will
drive corporate profits higher if U.S. consumers are
struggling to get jobs and are reluctant to make
purchases.
Some
analysts think stocks could fall 10 percent to 20
percent after the market's sharp climb. That leaves
investors with uncomfortable questions. Those who have
moved into stocks are wondering if it's time to back
away. Those on the sidelines are wondering when it's
time to move into stocks again.
"Don't
invest everything now," said
Mark Salzinger
, editor of the No-Load Fund Investor newsletter. Those
coming into stocks should invest a little at a time, but
those already invested shouldn't flee, Salzinger said,
as long as they have diversified portfolios.
Those who
have enjoyed tremendous surges in risky mutual funds
that specialize in high-yield bonds, emerging markets
and
China
could reduce exposure a bit, he said.
But
despite some excessive enthusiasm over investments in
China
and
Latin America
, Salzinger is reluctant to pull away completely because
investors could miss the sharp rallies that often come
without warning, he said. On days when stocks are
falling, he will add to holdings.
Meanwhile,
for investors nervous about the stock market rally
fizzling, a conservative way to manage exposure would be
through a mutual fund that invests in large companies
that pay dividends. Salzinger recommends the Vanguard
Dividend Growth fund.
"It's
like ballast," he said, because it invests in
companies with strong cash flow, and dividends provide
some insulation from falling stock prices. For retirees,
he suggests 10 percent of their portfolio go there, and
for 40-year-olds, about 5 percent. Overall, he suggests
40-year-olds keep 70 percent of their portfolio in a
blend of stock funds.
For
investors who pulled away completely from the stock
market, times are too unsettled to jump in completely,
he said. A sensible approach would be to invest monthly
in a fund that has the discretion to hunt for deals
across the stock market. By selecting respected fund
managers with latitude to move into small and large
companies, the investor doesn't have to figure out where
value is in the market. Salzinger suggests Artisan
Opportunity Growth fund.
After the
run-up in stocks, some sectors are considered pricey
and, consequently, risky.
Morningstar
analyst
Patricia Oey
is warning investors that infrastructure plays in
engineering and construction could be disappointing. She
thinks companies such as KBR, Fluor and
Foster Wheeler
could face declining revenue in an era of slow growth,
lower prices and competition. Although stimulus money is
going to flow into projects, she said, extra money will
simply make up for shortfalls that would have existed
locally without help.
Steve Leuthold
of the
Leuthold Group
is "very optimistic" about the stock market
through the first half of 2010. He's interested in
foreign financial companies, especially in emerging
markets, which, he said, are better positioned than
large U.S. banks. He also suggests adding Asian stocks
and Brazilian bonds as a hedge against a falling dollar.
For
investors nervous about speculative emerging markets,
Salzinger suggests the Matthews Asia Pacific Equity.
About 30 percent is focused on
Japan
, an area some strategists think is positioned to grow.
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