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How to Profit Despite the Gyrating Dow

December 05, 2008 – by Richard Band

The most basic technique for curbing stock market risk in your portfolio is to enlarge your holdings of paper that pays a fixed rate of interest for a defined term to maturity.

Start with the safest vehicles of all: FDIC-insured bank money market accounts and CDs.

One of the few pleasant results of the ongoing credit crunch is that banks, in a scramble for deposits, are paying much higher yields than the U.S. Treasury.

For example, you can earn around 2% on a money market account with no minimum balance at Virginia’s Capital One Bank (800/564-7426 or www.capitalone.com) with free check writing.

Don’t need the funds immediately? Consider a CD at GMAC Bank (866/246-2265 or www.gmacbank.com).

For a six-month term, the bank is offering 2.6%. The rate goes up to 3% at the one-year mark, and you can even nail down 3.5% for five years if you don’t mind locking up your money that long. Minimum deposit: $500. (New to investing? Learn how to build a fortune from scratch here.)

Investment #2: TIPS

Depending on how passionately you feel about safety, you might keep the majority of your fixed income kitty in bank accounts. However, there are advantages to tiptoeing out on the risk spectrum…

At the moment, for example, seven-year Treasury Inflation-Protected Securities (TIPS) pay a base yield of 2.7%, plus the rate of inflation — the yield had been up over 3%. Historically, it’s rare to pull down a real yield of more than 3% on inflation-protected government IOUs.

For an easy entrée, I recommend Vanguard Inflation Protected Securities Fund (VIPSX; 800/662-7447, $3,000).

The fund’s share price will fluctuate somewhat from day to day, but I envision a total return — interest plus price gain — of at least 6% and possibly as much as 10% in the coming year. See also: 5 "Bear Killer" Investments.

Get Richard’s latest buy under price on VIPSX when you join Profitable Investing risk-free today!

Investment #3: Bonds

Good-quality corporate bonds could deliver an even bigger punch, assuming the economy doesn’t fall off a cliff.

For diversified exposure to this sector, you might try an exchange-traded fund like iBoxx Investment Grade Bond Fund (LQD). Current yield: 5.8%.

Given calmer credit markets, LQD could post a 12%–15% return within a year.

Investment #4: Futures

For investors seeking greater potential appreciation, managed futures funds are worth a look…

Commodity futures give you the opportunity to bet on rising or falling prices for items such as oil, gold, soybeans, cotton, bonds, various currencies and stock indexes.

Since raw materials often go up in price when financial assets are tumbling, futures trading can provide a useful hedge for your portfolio. Moreover, the ability to sell futures short (bet on the downside) allows you to profit even when everything seems to be circling the drain, including raw materials.

Most investors, in my experience, aren’t temperamentally suited to selling short. (Commodity prices can never fall to zero, while they can — theoretically at least — rise to infinity.)

To get around this psychological barrier, I favor professionally managed futures funds, most of which rely on computer-driven trading models that can just as easily issue sell signals as buys.

This year, in a welcome contrast to the financial markets generally, a number of futures funds have logged positive returns.

Now more than ever it’s important that you bolster your defenses and cushion your portfolio. Richard Band’s Profitable Investing can help. As the newsletter world’s #1 authority on investing for low-risk growth, his Total Return Portfolio has quadrupled investors’ money since inception in 1990 — while taking far less risk than the popular stock indexes. Get the same advantage for your portfolio. Click here to get started with this special offer!