Create a 'Defensive' portfolio during tough markets

The market is in pretty bad shape, but the reasons as to why are not what I want to touch on. What you should actually consider doing with your equity portfolio is what I want to elaborate on.

If you watch any of the financial shows on CNBC or MSNBC, I am sure that you have heard over and over that you should be moving your money out of certain sectors and into other more attractive or 'defensive' sectors. This is basically a cautionary move to ensure that your portfolio can weather the tough times. So where should you be moving your money from and then to?

Well, the consensus, myself included, feels that the less attractive plays are currently the following:
-Financials (the banks, brokerage houses, and savings and loans - note: if you are a long term investor a good idea would be to invest in the financials b/c many of them are at 10-yr lows and you can get a good return once they rise back to original levels down the road)
-consumer discretionary (luxury brands and the stores that manufacture products you can live without)
-small-mid cap companies (usually they unproven, don't pay dividends, and need loans to grow; during this time, credit is hard to come by and it is expensive to get loans)

And the more attractive, 'defensive' plays:
-Utilities (usually pay attractive dividends and people always need power and water)
-Energy (any of the oil refineries, oil services companies, and/or
-Consumer staples (items that people always need)
-health care (obviously people are always going to need doctor visits and medicine)
-large cap companies (many in the Dow Jones Industrial Average pay dividends and are multinational and have proven, diversified businesses with steady revenue)

So you are probably asking yourself, why these stocks outperform the others?

There are two main reasons why the 'defensive' industries tend to do so much better than the market during lean times:

1. They're reliable. These companies make the products that people buy even when their wallets are being pinched. In other words, toothpaste, toilet paper, medicine, and electricity.
   
2. They pay dividends. Dividends mean you get a steady return from a stock regardless of what the market is doing. So, all else being equal, you enjoy a head start over the stocks that don't pay dividends. Of course, when you're looking for reliable companies that pay dividends, you want to make sure your company has both paid and increased its dividend steadily over a period of at least 10 years. Only then are you getting a track record you can trust.

So these are some things to think about. Of course, another option is that if you are already invested in a stock that is taking a beating, you can 'dollar-cost average' and add to your existing investment in that company. This will not only increase your investment but also bring your cost-basis down. Check out my previous post on this topic if you want to learn more.

Some stock picks for the LONG TERM

Ok guys and gals, here are a couple picks for the LONG TERM. These would be perfect for the long term. Check what I say out, do your own research, watch the stock, and then make a decision about when or if you want to get in.

First, I love AIG at the current levels. Here's why: AIG is the world's largest insurance company and has a diversified financial service business, which includes casualty and life, asset management, and retirement services. They also have a brokerage and are a multinational company. The stock is currently around $37/share. Last June, it was at $73. To say the least, it has been killed. It also has a dividend yield of 2.2%. The current $37/share is a 10 year low. YES, you heard me right. A 10 YEAR LOW. It may go a little lower but if you get in now, you will have big gains in the long term. (I keep saying long term b/c it is important to give these huge companies that are undervalued now, time to come back and get a couple solid earnings years so that the stock bounces back to previous levels.) Here is the chart. The far left is 1998 and the far right is the present.

I also love the stock AMX, America Movil. This company is providing wireless communications services in Latin America. It has subsidiaries and equity investments in affiliated companies in the telecommunications sector in Mexico, Dominican Republic, Bermuda, Brazil, Guatemala, Nicaragua, El Salvador, Colombia, Ecuador, Argentina, Honduras, Uruguay, Chile, Paraguay, Peru, Spain and the United States. Theyhave license to construct, install, operate, and manage public and private networks and provide telecommunications services for fixed line and mobile phones in all of the mentioned countries. They are not at a low of any kind but have been relatively flat since March of '07. This stock has a ton of room for growth and since it is a preeminent telecom player in an emerging market (Latin America) I would hypothesize that it will grow and grow fast. The current price is $57/share and the 52 week high is $69/share; this proves that it is 20% off it's all time high and has a great upside. the dividend yield is almost 4%!! Here is teh 5 year chart.

So, take a look and see what you like.

Disclaimer: This is not a recommendation for everyone and the views and opinions that the author of this blog expresses are solely his and not intended to be for everyone. They are intended to be a starting point for the reader's further research. There are no guarantees in investing. I am simply trying to present an idea that I think has a positive outlook for the future.

'Socially responsible' investing.

So I asked a couple of my loyal readers what they were curious about. What they said surprised me at first but when I sat back and thought about it, what they were curious about made sense, especially in this day and age.

They were interested in Green Investing aka Socially responsible investing. This is investing in the stocks and bonds of environmentally committed companies. Generally, socially responsible investors favor companies with practices in line with environmentalism, consumer protection, quality, and diversity. These investors also avoid businesses involved in alcohol, tobacco, gambling, weapons, the military industry, and abortion. Many green companies make positive, innovative contributions to the environment. They do so by:

• using recycled products to manufacture goods
• cutting down on environmentally harmful by-products
• demonstrating a commitment to preserving and enhancing the environment, as evidenced by the products they make and the services they provide.
• maintaining clean environmental records and openly disclosing their policies and performance on environmental criteria
• making positive contributions toward actively promoting a healthier environment
• producing renewable energy products or products that try to help cure existing environmental problems
• responding positively to shareholder advocacy on environmental issues

Many companies are starting to or already involved in 'going green'. If you think that you want to invest in companies that are putting these practices into effect, do some research on them and figure out which have the best growth prospects. Some popular plays in the recent months have been the solar stocks and other alternative energy picks. People are really looking to the future and feel that alternative energy is a necessity since oil is topping $120/barrel.

There are also mutual funds and ETFs that only invest in socially responsible companies. Two of these are GEX and PBW.

If you are having a hard time identifying green companies or are just plain lazy, here is a website that has an extensive list of these companies and breaks them down by industry. http://www.sustainablebusiness.com/index.cfm/go/progressiveinvestor.stocks.

Check it out and do your due diligence before making any decisions.