9 tips to tough out the times

Feeling frustrated? Here's some help for the toughening times that'll keep paying off long after the crisis has passed.

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By Money Magazine staff

What should states and cities try first to deal with the financial crisis?
  • Cut services
  • Raise taxes
  • Ask Washington for help
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(Money Magazine) -- It's hard to find any good news about your money these days. The stock market is tumbling. Banks are failing. Home values are cratering. And you're watching your retirement disappear.

Before you panic though - pause - and take a deep breath. No one expects the economy to fix itself overnight, but there are many ways you can protect yourself now.

Here are nine simple How-to's:

1. How to earn a yield of nearly 5%

If you're retired (or will be soon), chances are you're obsessed with exactly one thing: getting a predictable income stream that's as safe as possible while still delivering a decent return, whether the market is gyrating or not. Here's a sensible way to build such a portfolio.

Start with a conservative fund that holds a broad assortment of stocks paying generous dividends. An ETF (exchange-traded fund) is the cheapest way to go. Vanguard High Dividend Yield (VYM), which currently pays 3.4%, is a good choice because it isn't overloaded with financial stocks.

Boost your take by putting some money into a higher-yielding stock ETF such as iShares Dow Jones Select Dividend Index (DVY), currently paying 4.4%, or SPDR S&P Dividend ETF (SDY), paying 4.2%.

Put the rest into low-cost bond funds and perhaps a REIT to add diversity and boost your yield. Because of their low expenses, I like the intermediate-term Vanguard Total Bond Market ETF (BND) (4.6%), Vanguard High-Yield Corporate Bond (8.1%) and Vanguard REIT Index (4.9%).

Allocate your money according to the suggestions below for a yield of 4.9% (you'll want to dial back on the stocks as the years go by:

  • 30% Vanguard High Dividend Yield ETF
  • 30% iShares Dow Jones Select Dividend Index ETF
  • 20% Vanguard High-Yield Corporate Bond Fund
  • 10% Vanguard Total Bond Market ETF
  • 10% Vanguard REIT Index Fund --Michael Sivy
2. How to "ladder" CDs for safety and income

Instead of dumping a lump sum into one certificate of deposit, it's smarter to divide it across CDs of various maturities - a concept called laddering.

Why bother? Two reasons: You'll hedge interest-rate risk and keep cash flowing back into your hands periodically (handy if the idea of locking up the money for years bothers you).

"If rates go up, you can reinvest mature short-term CDs into higher-yielding ones," explains Sheryl Garrett, a financial adviser in Shawnee Mission, Kans. "And if interest rates go down, your longer-term CDs help insulate you from that drop."

Let's say you have $50,000 to park in CDs (keep no more than $250,000 at any one bank to make sure it's FDIC-insured). Split the money into $10,000 increments and buy five CDs: one with a one-year maturity, one with a two-year maturity and so on up to five years.

As each CD comes due, roll the money into a new five-year CD (assuming you don't need to spend the cash). Do this every year and you'll maintain a balanced ladder of CDs ranging from one to five years. --Ellen Florian Kratz

3. How to know when a stock is really a bargain

When the market plunges 5% in one day, lots of stocks might look like they're on sale. But are they? Here's how to ID the true values. (Get the data below at morningstar.com.)

  • Step 1 Look at a stock's forward P/E. This is the price investors are willing to pay for every dollar of expected earnings. Compare this ratio with that of the company's peers and industry benchmark. The S&P 500's forward P/E is 13.8. What you want to see: ratio lower than average but not too low (Matthew Sauer, a senior vice president at value-oriented Ariel Investments, is cautious about P/Es below 8).
  • Step 2 Look at the trailing P/E, which is based on a company's past earnings. It will show whether a stock was cheap before the market's recent free-fall. What you want to see: ratio lower than industry average.
  • Step 3 Check the price-to-cash-flow ratio. This shows how much cash a company generates per share. It's sometimes a more reliable measure of value than P/E because cash, unlike earnings, cannot be manipulated easily by accountants. Again, compare the ratio with the industry benchmark and peers. What you want to see: ratio lower than average.
  • Step 4 Look for stability. A company that isn't highly leveraged (laden with debt) has a better chance of riding out the economic downturn. To find out if that's the case, see the company's balance sheet at The SEC's Web site. Divide total assets by total equity. What you want to see: ratio of 2 or lower (10 or lower for financial firms).
  • Step 5 Read the news. No matter what the numbers say, a stock could be a rotten choice if, say, the company is embroiled in a potentially costly lawsuit. Not every stock that appears cheap is a good deal. What you want to see: no obvious problems. Bottom Line: If a stock passes all these tests, you could be onto a good buy. --Carolyn Bigda

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