Investing In Uncertain Times

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Congress finally passed the multibillion dollar bailout to provide liquidity for our fragile financial and banking system. While no one is happy that the American taxpayer is being forced to underwrite the excessive mistakes made by corporate executives who themselves raked in millions in incentive pay over the past several years, the alternative would likely have been even more painful. The remaining questions include, “Is the bailout enough?” And, “How well will it work?” First, I believe it will not be enough. This is a trillion dollar-plus problem that will only be exacerbated by poor execution by government officials. Does anyone remember Katrina? Or how about the Iraq war where billions of dollars remain unaccounted for? This program is on a massive scale never before attempted by our government. I expect long lines at the government teller window as corporations rush to unload toxic debt that continues to mount on their balance sheets. The government must decide who gets the money and on what terms. This will quickly erode into an inefficient fiasco.

While the short-term outlook for our economy and stock market is murky at best, I believe the bailout prevented a much worse and more chaotic outcome than if we had simply allowed our free market system to play out. Given the circumstances, how should you position your investments for maximum safety in such a way that you don’t miss the opportunity when (not if) the stock market begins its recovery? In times like these, fear rules the marketplace and investors tend to make one or a combination of three moves:
  1. Go to cash. Often investors will simply throw in the towel and move all their money into money market accounts. Regular money market mutual funds were given a boost by the federal government last month when Treasury Secretary Henry Paulson agreed to fully back all money market funds deposits through September 19. This means transfers to money market funds after that date are not protected by the federal government. Under new rules this month, FDIC bank money market accounts are fully protected up to $250,000 through December 31 2009.
  2. Buy Treasuries. Treasury bills have long been considered the safest place to invest your money. As investors have rushed to transfer money to treasuries during this crisis, interest rates on treasuries have plummeted to below 1%, so while your money is safe, it’s not earning much of a return.
  3. Buy Blue Chip stocks. Investors who do want to remain invested will tend to move their money to the biggest and best companies in America. Names like Johnson & Johnson, Proctor & Gamble, Abbott Labs and Southern Company.
Some investors will buy gold or gold shares hoping to profit on the bad news but gold historically performs unpredictably during uncertain times. With the uncertainty surrounding this crisis, consider dividing your money between blue chip dividend-oriented stocks and insured money market funds or treasuries. When the stock market begins its recovery, it is likely to do so quickly and you will be positioned to take advantage of it. How you allocate between the two should be based on your personal facts and circumstances and your risk tolerance. Your stock allocation should be a minimum of 40%. This market environment is perfect for 401-k investors who are investing new money each month at these depressed prices.
Posted On: October 12, 2008
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