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D. Frank Norton: Protecting investments in this economic climate

It's Your Money

Posted: July 22, 2010 4:55 a.m.
Updated: July 22, 2010 4:55 a.m.

It has been a pretty miserable period to be in the stock market. The past two full months represent the worst May-June performance for the S&P 500 Index in 48 years.

July is turning out to not be any better. In fact, on a year-to-date basis, all of the major stock indexes are in negative territory.

Many of us have our retirement plans as well as regular investment dollars placed in stocks or mutual funds.

The outlook for the stock market certainly isn't that rosy looking forward at this juncture. We've got too much debt in the developed economies, lackluster job creation in the United States and a housing market that's beginning to slide again.

Even if we are not seeing a double-dip recession upon us, we still are seeing a soft patch of economic activity. Consumer confidence is down. The economy is losing jobs again.

Given the huge amount of stimulus spending and with interest rates at all-time lows, this is alarming, disturbing and depressing all at the same time. What happens when stimulus-spending dries up and interest rates go up, as both inevitably will? We just might see this economic recovery go into a holding pattern for some time to come.

So what do we do with our funds during this difficult economic period? For one, we try to mitigate the negative impact of a potential down to flat market by staying conservative. Investing a goodly portion of our investment dollars into money market accounts and into bonds and bond funds does not sound like very exciting investing to me. But sometimes that is what we have to do to preserve capital.

Second, for those willing to take some additional risk, there are mutual funds and exchange trade funds (ETF) that have funds which move in the opposite direction (inverse) of the market indexes.

So, if the S&P 500 index drops 5 percent, the inverse index funds would move about 5 percent to the upside - not bad. You can actually make money in a down market. The risk is that the market decides to go up anyway, in spite of the dour economic news. I have kept that in mind and have only allocated a portion of my clients' investment dollars into the inverse-index funds, thereby limiting risk exposure.

Third, there are alternative investments available, such as fixed-income alternatives that can potentially provide decent rates of return without being correlated to the fluctuations of the stock market. You may want to ask your financial advisor about such alternative-investment vehicles.

In any event, this is a time for caution. It looks like the best-case scenario seems to be a stock trading range, and the worst-case scenario being a plunging stock market.

D. Frank Norton is a money manager and financial planner in Santa Clarita. "It's Your Money" appears Thursdays and rotates between a handful of the Santa Clarita Valley's financial professionals. His column represents his own views and not necessarily those of The Signal.


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