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Shock-Proof Your Retirement

February 26, 2008 – by Richard Band

No, it wasn’t supposed to happen this way. Normally, the three months from November to January are the peppiest in the stock market calendar—and for sound reasons, too. By late in the year, companies have typically fessed up to their mistakes of the past and put on a smiley face for the year ahead. Mutual fund managers finish their tax-loss selling for the year on October 31. And starting in January, investors great and small pour fresh cash contributions into retirement accounts.

However, none of those seasonal influences counted for much this time around. Instead, the blue chip stock market indexes dropped in November, December and January–the market’s first “downside trifecta” during these usually buoyant months since 1969, and only the second since the end of World War II.

But we all know that economic slumps don’t last forever. Furthermore, history reminds us that, once investors sniff a business recovery in the wind, stock can rebound with startling ferocity. In the past century, the stock market has never tumbled for more than 36 months without triggering a strong rebound. So as we wait for this storm to pass, here are three growth strategies you’ll want to implement today.

Remember That Cash in King

Start by building a generous cash reserve in the form of money market funds (or FDIC-insured bank money market accounts) and certificates of deposit. When the stock market runs into rough weather, cash can prove to be a lifesaver. Instead of liquidating stocks or mutual funds at fire-sale prices to cover living expenses, draw down your cash reserves until the stock market improves. As a rule of thumb, I recommend that retirees keep enough cash on hand to meet about three years worth of living expenses. The idea is to be able to outlast even a prolonged bear market on Wall Street.

Buy Some Stocks to Pad Your Paycheck

After you’ve set aside adequate cash reserves to meet your immediate spending needs, I recommend earmarking the balance of your portfolio for dividend-paying stocks. See, faster-growing companies can usually adapt more successfully to inflationary conditions than slower-growing businesses that pay out a large fraction of their profits as dividends. That’s why I suggest even retirees to steer part of their wealth into lower-yielding, “growthier” investments. Here are a few I recommend to my Profitable Investing subscribers.

Buy the Berkshire’s of Tomorrow

I’ve often recommended Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B), which has never paid a dividend–and, in fact, I hold Berkshire in my own “pre-retirement” portfolio. At the moment, Buffett’s baby looks a bit too expensive to add more shares, but I’ve got a Berkshire twin just for you!

Like Berkshire, this stock is an insurance holding company with high underwriting standards and an excellent growth record. Also like Berkshire, it is gradually diverting some of its copious cash flow to purchase businesses outside the insurance arena. And believe it or not, this Berkshire look-alike has created more wealth for its shareholders during the past 10 years than Berkshire has. Yes, over the same stretch it has also (without a dividend) beaten the total return for the S&P 500 by about 3.3% a year.

Lucky for us, the stock price has pulled back rather sharply in the first few weeks of the new year. In my judgment, it’s a super opportunity to lay a cornerstone for your retirement prosperity “far down the future’s broadening way.” Buy it before it’s too late!

We’re All in This Boat Together

Yes, for many retirees, the market’s shaky start puts a formidable obstacle in our way. But, the market’s recent detour into bearish territory could also prove to be a powerful blessing in disguise for us–if we play our cards right.

Now that a severe “correction” has rocked Wall Street, “Dr. Bernanke” is now encouraging economic growth instead of restraining it. And that’s why now is a wonderful chance to stock up on “growthy” stocks like the Berkshire Hathaways of tomorrow. Stock market history is a great teacher. And once the market regains its “mojo,” we may very see the Dow Jones keep climbing to 16,000 and higher in 2009 and 2010!

The smart money has quietly built its holdings on the same stocks Richard Band has been buying at Profitable Investing for years! Get the seasoned perspective you are looking for and the name of Berkshire’s twin in the March issue of Profitable Investing! Sign up now for your RISK-FREE trial subscription! Richard Band’s recommendations for conservative investors have grown 900% since 1984! Don’t miss out!