What's next for responsible investors?

People living on fixed incomes and other 'safe' investments have been punished. Pros give tips on how to move forward in a rocky market.

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By Paul R. La Monica, CNNMoney.com editor at large

When will the economy begin to turn around?
  • Later this year
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NEW YORK (CNNMoney.com) -- Everybody is feeling the pain of this recession and bear market. But older Americans, especially those living on fixed incomes, are really getting squeezed. And it's not fair.

Many people were fiscally responsible during the credit bubble. They saved. They invested in supposedly steady, stable blue-chips that offer the security of dividends as well as low-risk bonds. It's a strategy that's supposed to protect you during downturns.

But this isn't your average downturn.

JPMorgan Chase (JPM, Fortune 500), a bank that's supposed to be among the "healthier" financial institutions, announced Monday it would slash its dividend by 87% to just 5 cents a share in order to preserve capital. Based on the new payment, the stock will yield a puny 1%.

CBS (CBS, Fortune 500), Dow Chemical (DOW, Fortune 500) and Harley-Davidson (HOG, Fortune 500) have all taken a hatchet to their dividends this month. And The New York Times (NYT), after cutting its quarterly dividend by 74% in November, completely suspended it Friday.

The bond market hasn't offered much respite either. With the Federal Reserve lowering interest rates to near zero, the yield on the U.S. 10-Year Treasury note is now hovering at around 2.75% as investors flocked to buy Treasurys. (Bond prices and yields move in opposite directions.)

"The rates on most fixed-income securities deemed safe are at 20-year lows. The flight to Treasurys has pushed yields down, and there's much less appetite for anything else that's riskier. So if you are relying on income, it's a question of low risk but very little return," said Rob Williams, director of income planning at the Schwab Center of Financial Research.

Meanwhile, keeping money in a bank isn't doing much either. The average rate on a money-market account is a miniscule 1.56%, according to Bankrate.

Unfortunately, as long as this recession persists, the Fed is unlikely to raise rates any time soon.

And in a speech Monday evening, Dallas Federal Reserve president Richard Fisher, who was a voting member on the Fed's interest-rate setting committee last year, pointed out that this is a problem for those depending on dividends, bonds and bank savings during their retirement.

"I remain concerned about the effects low rates have on aging baby boomers and the elderly who played by the rules, saved and squirreled away money and are now earning meager returns on their fixed-income portfolios and bank deposits," Fisher said.

So what can be done? I'll admit that I've tried to preach that people remain level-headed. If you're investing for the long-term, this is obviously a scary time. But it's not reason to panic and dump all your 401(k) into gold stocks.

However, there is no hard and fast rule for investing for the long haul since it all depends on how close you are to retirement.

It's easier for me to stress a level-headed approach because I'm probably three decades away from retiring. I fully expect to see many more booms and busts (hopefully not as bad as this one) during my lifetime, and I can afford to ride them out.

Diversity is the key

For those whose time horizon may be shorter, experts say sticking to a diversified investing approach makes sense, even though there will probably be more turmoil ahead.

With that in mind, there are some areas of the fixed-income market that could be attractive to older investors. Williams said that municipal bonds, despite scary headlines about budget problems for many states and cities, are still fairly safe.

"The risk is still relatively low and returns on munis after taxes have been one of the highest for any sector in the past five years," Williams said.

Schwab has a list of recommended tax-free bond funds on its Web site, including the American Century Tax-Free Bond fund, Federated Short-Intermediate Duration Municipal Bond fund and Wells Fargo Short-Term Municipal Bond fund.

And for those willing to tolerate more risk, some money managers say that investing in select stocks still makes sense. They suggest seeking quality companies, not necessarily high dividends.

Jason Tyler, senior vice president and director of research operations with Ariel Capital Management in Chicago said JPMorgan Chase's decision to cut its dividend is a perfect example of why investors can't rely on quarterly payments in this environment -- even from companies holding up better than their peers.

"Dividends can go away in a heartbeat. They are so fragile," Tyler said. "Frankly in this market, dividends are discretionary on the part of management."

Instead, Tyler said he's looking to invest in companies with strong enough balance sheets to survive the recession and whose stocks may have been unfairly punished in this year's market rout.

One example Tyler gave is luxury retailer Nordstrom (JWN, Fortune 500). Even though the company reported a big decline in sales during the holiday season on Monday, expectations were so low that Nordstrom wound up doing better than what analysts feared. As a result, the stock surged nearly 15% Tuesday.

Chris Guinther, president and chief investment officer of Silvant Capital Management, an Atlanta-based firm that manages the RidgeWorth Small Cap Growth fund, agreed that beaten-down companies with little debt could be rewarding investments.

And he also thinks there are opportunities in consumer-oriented stocks. Two he likes are engine and transmission maker BorgWarner (BWA, Fortune 500), despite the gloomy outlook for auto sales, and warehouse retailer BJ's Wholesale Club (BJ, Fortune 500).

Now before the Dow 4000 believers out there flame me, please keep in mind that I'm not suggesting you put all your money in these stocks...or the stock market in general.

Although it does seem like there are now several good bargains in stocks, a mix of bonds and stocks as well as a good cushion in savings is what investors should be sticking to during these tumultuous times.

If we've learned anything from the past few months, it's that there is no such thing as a truly "safe" investment, which is why diversity pays off.  To top of page

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