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Strategies to Protect Against Higher Declines



Nilus Mattive discusses ways to protect against further market declines. Mr. Mattive explains why he believes that dividend paying shares are the best way to get paid while the market idles in neutral.



June wasn't kind to the stock market. In fact, the S&P 500 had its worst month since September 2002 and its worst June since 1930. The end result is that the S&P 500 is now back below 1300, the same place it was at in the beginning of 2006; it has given up all the gains made throughout 2007.



The S&P 500 was at the very same 1300 level as far back as 1999. In between were massive rallies, but over the last eight years, the market has basically been stagnant.



During these economic times, Mattive believes dividend-paying shares are the best way to get paid while the market idles in neutral and interest rates remain insultingly low. This belief is further supported by the fact that dividend-paying stocks have performed better during past bear markets than non-dividend-paying shares.



Mattive also thinks strategies like dollar cost averaging work very well for putting new money to work in the kind of market we have right now. But there are some ways to insurance against further market declines in the shorter term.



The first is to protect capital appreciation plays with stop loss orders. Stop loss orders are instructions that tell your broker to sell your shares should they reach a predetermined price level. For example, if stock XYZ is trading at $10 a share, you might give your broker a stop loss order of $8. Then, if XYZ hits that level, it will automatically be sold at the best price possible. While stocks with a lot of liquidity should get unloaded very near a stop price, there is the chance that the market will move down so fast that your order will get filled at a lower price than you specified.



Another possibility is to place a stop limit, which is a very specific order telling your broker what range of prices you're willing to accept on the trade. However, Mattive does not recommend stops for long-term, income-generating investments, provided the company is still viable and the dividend is reasonably secure. This could result in continually getting stopped out of positions and losing the current income, which is the real benefit of buying and holding dividend stocks.



Stops can also be employed in profitable positions as a way to lock-in gains in the event of a market decline. Simply raise the stop loss as the profits pile up.



Secondly, consider Inverse exchange traded funds to hedge your income positions. Essentially, these work in the same way as traditional ETFs, providing an all-in-one-shot way to invest in a particular sector or market. However, unlike traditional ETFs, they're designed to go up when that sector or market goes down.



More and more of these inverse funds are coming on the market. There are now inverse funds for everything from the Dow to real estate shares. There are even double inverse funds that will do the opposite of their targeted market times two! One such fund is the Rydex Inverse 2X S&P 500 ETF (RSW). If the S&P 500 falls 1%, this ETF should rise 2%.



The danger of an inverse ETF, especially a leveraged one, is that money can be lost quickly if the market starts heading back up. Small position in an inverse ETF can be used as a way to cushion the effect of a down market on an overall portfolio.



Finally, diversify your portfolio with alternative assets. Gold is the classic alternative investment, and it's been on a tear lately. Gold is viewed as a safe haven from other markets as well as inflation. It can be purchased either through buying bullion or an exchange traded fund such as the SPDR Gold Shares (GLD), which holds physical gold in trust for its investors.



"Bottom line: While I always suggest you take a longer term view of the market, and not let the day-to-day movements get you down, I also want you to know that there are plenty of easy ways to build additional protection into your portfolio without compromising your income-generating positions," says Mattive.



To read this issue online, please visit: http://www.moneyandmarkets.com/Issues.aspxThree-Ways-to-Guard-Against-Market-Drops-1943



About Nilus Mattive & Money and Markets:


Nilus Mattive, a financial analyst at Weiss Research, is the editor of Dividend Superstars, a monthly publication and is also the editor of the company's daily e-letter, Money and Markets. Formerly a senior editor of Standard & Poor's The Outlook, the oldest continuously published investment newsletter in the country, he has written for a number of investment websites, including BusinessWeek and Individual Investor. Mr. Mattive is the author of The Standard & Poor's Guide for the New Investor (McGraw-Hill, 2004) and has appeared on the popular investment radio show, Traders Nation, to discuss his views on personal finance. Mr. Mattive graduated cum laude from the University of Scranton.



Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.






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