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Winning strategies in a can't-win market
Dow up, Dow down. What's next? Here are four strategies to survive the madness.
March 22, 2002: 2:13 PM EST
By Martine Costello, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Stocks are up! No wait, they're down! No wait, they're up again!

The market is giving investors a bad case of motion sickness. Fed Chairman Alan Greenspan says the economy is on a roll; the pundits say the bear market is over. Still, stocks seem to be on an up-down trajectory.

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If you're a bear, you worry that you'll sink money into a loser. If you're a bull, you don't want to miss out on a stock rally. Bonds don't look so hot with interest rates poised to creep up. What to do?

Here are four investing tips to get you through the tough times.

Dollar-cost averaging reduces your risk

This simple strategy is a way to participate in the market without betting the farm.

Here's how it works. Say you want to invest in Vanguard Total Stock Market Index, which tracks the Wilshire 5000 -- a bet, basically, on the entire U.S. stock market.

Instead of putting all your money in at once, you commit to investing a fixed amount each month (say $50, $100 or whatever you can afford). If the share price plunges, your fixed dollar amount buys more shares -- as the share price increases, you're buying fewer shares.

Use dollar-cost averaging
Buy dividend-paying stocks
Consider convertible securities
Invest for 15 years or more

"It takes the emotion out of investing," said Barbara Steinmetz, a certified financial planner from Burlingame, Calif. "People used to think they could time the market. Now they know better. Dollar-cost averaging is getting back to basics."

Over time, your average cost per share will be lower, so you'll reduce your long-term risk.

Dollar-cost averaging is easy because you can set up an automatic investing plan with a fund company. Put the payment coupon with your bills and every month think of it as a way to pay yourself first. Even better, have the monthly payments automatically taken out of your check so you'll never miss the cash.

Park your money in dividend-paying stocks

In an era of Enron-induced suspicion, nothing might seem safer than a dividend-paying stock. Simply put, it's when a company distributes its profits to investors. According to Hoover's, a financial publisher, more than 900 stocks have a dividend yield of 3 percent or more.

Many dividend investors pay attention to the Dogs of the Dow, a strategy that calls for buying the ten best-yielding shares in the 30-stock index. These include Philip Morris (MO: Research, Estimates), J.P. Morgan (JPM: Research, Estimates), General Motors (GM: Research, Estimates), and Dow Chemical (DOW: Research, Estimates).

Philip Morris is paying a dividend yield of 4.4 percent, while J.P. Morgan is paying 3.9 percent. Dow's dividend yield is 4 percent and GM's is 3.4 percent. The average stock in the S&P 500 pays a dividend yield of a little more than 1 percent.

Or, you can buy a fund that feasts on dividend stocks. Funds that invest in real estate pay healthy dividends, as do utility funds. In real estate, try Fidelity Real Estate Investment, which earned 30 percent in 2000, 9.5 percent last year and is up 7.5 percent this year as of March 20, according to Morningstar. (Click here for more on real estate funds.) And in utilities funds, Franklin Utilities has been in the top 5 or 10 percent of its category since 2000, according to Morningstar. The fund is up 3.7 percent this year.

Among more diversified stock funds, you might consider Vanguard Windsor II, which buys dividend-paying stocks with a value tilt, said Morningstar's Scott Cooley. The fund is up 4.3 percent this year. Another good bet is FBR Small Cap Financial, which buys banks and thrifts. The fund is up 9.9 percent this year.

Real estate and utility funds may pay a yield as high as 4 or 5 percent, while more diversified stock funds will pay 2 to 3 percent, Cooley said.

Take a convertible for a ride

Another way to protect yourself from rocky times is with convertible securities. You can invest in a stock that converts into a bond, or vice versa. Because it "converts," you get the best of both worlds -- stock appreciation on the upside and a bond coupon that pays a yield when times are tough.

Convertibles have paid off for T. Rowe Price Capital Appreciation, which earned 22 percent in 2000 and 10.3 percent last year, putting it 20 to 30 percent ahead of the S&P 500, according to Morningstar. The fund, up 7 percent this year, invests 53 percent of its assets in value stocks; 25 percent in convertibles; and the rest in bonds and cash.

"We pay attention to how to get absolute returns in a difficult environment," said manager Stephen Boesel. "To use a baseball analogy, we're trying to hit singles and doubles. We're trying to get to first base."

The fund also owns stocks such as Loews (LTR: Research, Estimates), an insurance holding company; FirstEnergy (FE: Research, Estimates), an electric utility; and Union Pacific (UNP: Research, Estimates), a rail and trucking company.

Think (really) long term

There are plenty of examples throughout history where people invested in the Dow or the S&P 500 and discovered 10 years later that they had lost money. There are hundreds more cases where investors broke even or eked out a tiny gain over 10 years, according to Ned Davis Research. For example, if you had been unlucky enough to invest on Aug. 31, 1965, you would have lost 0.6 percent 10 years later.

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Still, there is no 15-year period, and certainly no longer period, where stocks haven't delivered the goods, according to Ibbotson Associates, a financial research and consulting firm. During the past 76 years, only 22 of those years have been ones where the stock market lost money.

Peter Canelo, an independent investment strategist based in New York, recommends long-term investors reconsider what they're indexing in the market. The standard has been to invest in S&P 500 stocks. But half of the losses in the index last year were from big tech names. Instead of a tech-heavy index, consider old economy stocks like the Dow 30, he said.

"If you exclude tech and telecom, focusing on the old economy, I would expect 10 percent a year returns over five or 10 years," Canelo said.  Top of page