5 Creative Ways to Invest During a Weak Market

By Silicon Valley Blogger on 23 September 2009 (Updated 30 May 2014) 10 comments
Photo: Photos8.com

With the stock market finally recovering this past month, even closing at highs for the year, a lot of investors may be breathing a sigh of relief about their stock investments. You may have checked your online broker recently and discovered your balance looking a bit healthier than it did several months ago. But given the volatility we've seen over the past year or so, can we really trust that the markets are reflecting a true recovery in our economy, or is this just a technical bounce?

A lot of armchair market pundits I've been reading are keen on predicting that we're going to see a double dip recession. And interestingly, market insiders are also making defensive moves right now, apparently bailing out of their equity positions while the market registers this year's highs. This caught my attention, given that these very same insiders were known to be buying heavily when the market was carving out a bottom (at DJIA mid 6000).

So if you're worrying about what you should be doing with your investments right now, you're certainly not alone. But instead of wondering whether you should hang on tight or abandon everything for cash, I'd like to suggest that we think outside of the box a little and investigate some alternative approaches to investing. Here are 5 creative ways to invest right now.

1. Invest in lending notes.

While I've known of peer to peer lending for a while now, it's only recently that I've looked into it earnestly as an investor. I was particularly intrigued by the potential returns you can make by investing in notes (between 7% to 9.6% as an annual average). For more details, you can check out my Lending Club review and evaluate this particular lender's personal loan rates to gauge what you can earn as an investor.

2. Explore foreign currency investments.

Are you interested in adding some foreign exposure to your portfolio beyond owning traditional international equities? Then you may be interested in foreign currency CDs which are certificates of deposit that are invested in various world currencies. There are variants of this product that may give you downside protection (most currency CDs do expose you to currency risk): for more information, check out my EverBank review, which discusses such products in more detail.

3. Ladder your cash instruments.

Short term cash reserves aren't the most exciting things these days, given the low yields they've got right now. So for the short term reserves I have, I've opted to use a CD ladder, which requires staggering the purchase of certificates of deposit of various terms so that they reach maturity at various times. Laddering allows you to diversify across CDs of differing rates thereby giving you a chance to enjoy a higher average rate of return. They also grant you some level of liquidity because of the different maturity dates represented in your CD portfolio. Here's are some of the best CD rates I've found, which you can explore for this strategy.

4. Diversify into precious metals.

For further diversification, consider delving into other asset classes such as precious metals, and in particular, gold. Investing in gold has paid off for long term investors over the last decade, but like any other investment, can be subject to volatility during certain periods. A good rule of thumb is to put only a small portion of your funds (say 5% to 10%) into this category for diversification purposes. Investors normally flock to precious metals when there's fear in the markets and the streets.

5. Diversify into commodities.

Aside from putting a small portion of your funds in precious metals, you may also want to investigate the possibility of buying a commodities fund, index or ETF. Relatively speaking, commodities are not a very popular asset category and are not widely found in the average investment portfolio. The truth is, they are meant to represent only a very small part of your holdings due to their volatile nature. However, if you are looking for one way to hedge your core equity portfolio (e.g. against inflation), then you may want to put a little bit of money in a commodity index fund like the PIMCO Commodity Real Return Strategy Fund (PCRDX).  This particular type of investment has both its champions and critics, so do your best to learn about it before investing.

So what about investing in the obvious? Now that stocks and real estate are down from their price peaks, you may start feeling tempted to move the lion's share of your portfolio into these weakened areas. I would caution you from making such radical moves though, since outright market timing can be a dicey game (you can be wrong, after all!). Instead, look into rebalancing your investment portfolio if you haven't done so already, in order to keep to your original asset allocation (by shifting your funds accordingly, you're actually buying low). Or if you really want to invest in real estate, make sure you study the local markets. Alternatively, you can simply go for REITs, which are so much easier to manage. But if you're thinking about buying a house to live in, I believe that now is a good time to buy!

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Guest's picture
andys

If one had actually invested in the above, they would be sitting pretty now!

Silicon Valley Blogger's picture

Even dollar cost averaging during a fluctuating market such as the one we're experiencing could yield pretty good results.  I just wrote an article today about the one year performance of the stock market.  It's been pretty much flat (year to year), but if you invested regularly in the past year, you'd have made a decent return.

As for other investments, you can take a look at them as "diversifiers" for your core portfolio which would best be in the traditional areas such as stocks, bonds and cash.  These would be adjusted according to your age, circumstances and risk profile. 

Everything is always in hindsight, but I wish I had followed my gut and dared move a little more in stocks when it was in the 6000 - 7000 range.  Who knows, with the volatility, history can always repeat itself!

SVB @ The Digerati Life

Guest's picture

SVB, after this massive run-up, I believe you will get your chance to follow your gut soon enough. Possibly not at 6 - 7000, but certainly below 10,000!

RS

Guest's picture

The investment are short-term money market instrument that mature in a year or less than that. The purchase price is less than the face value. At maturity the government pays the Treasury Bill holder the full face value. The Treasury Bills are marketable, affordable and risk free. The security attached to the treasury bills comes at the cost of very low returns.

Certificate of Deposit: The certificates of deposit are basically time deposits that are issued by the commercial banks with maturity periods ranging from 3 months to five years. The return on the certificate of deposit is higher than the Treasury Bills because it assumes a higher level of risk.

Advantages of Certificate of Deposit as a money market instrument are
1. Since one can know the returns from before, the certificates of deposits are considered much safe.
2. One can earn more as compared to depositing money in savings account.
3. The Federal Insurance Corporation guarantees the investments in the certificate of deposit.

Disadvantages of Certificate of deposit as a money market instrument:
1. As compared to other investments the returns is less.
2. The money is tied along with the long maturity period of the Certificate of Deposit. Huge penalties are paid if one gets out of it before maturity.

Commercial Paper: Commercial Paper is short-term loan that is issued by a corporation use for financing accounts receivable and inventories. Commercial Papers have higher denominations as compared to the Treasury Bills and the Certificate of Deposit. The maturity period of Commercial Papers are a maximum of 9 months. They are very safe since the financial situation of the corporation can be anticipated over a few months.

Banker's Acceptance: It is a short-term credit investment. It is guaranteed by a bank to make payments. The Banker's Acceptance is traded in the Secondary market. The banker's acceptance is mostly used to finance exports, imports and other transactions in goods. The banker's acceptance need not be held till the maturity date but the holder has the option to sell it off in the secondary market whenever he finds it suitable.

Euro Dollars: The Eurodollars are basically dollar- denominated deposits that are held in banks outside the United States. Since the Eurodollar market is free from any stringent regulations, the banks can operate at narrower margins as compared to the banks in U.S. The Eurodollars are traded at very high denominations and mature before six months. The Eurodollar market is within the reach of large institutions only and individual investors can access it only through money market funds.
Repos: The Repo or the repurchase agreement is used by the government security holder when he sells the security to a lender and promises to repurchase from him overnight. Hence the Repos have terms raging from 1 night to 30 days. They are very safe due government backing.

Repurchase agreements - Short-term loans—normally for less than two weeks and frequently for one day—arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.

Federal Agency Short-Term Securities - (in the US). Short-term securities issued by government sponsored enterprises such as the Farm Credit System, the Federal Home Loan Banks and the Federal National Mortgage Association.
Federal funds - (in the US). Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.

Municipal notes - (in the US). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues.
Money market mutual funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors.

Guest's picture
some guy on the internet

I just gonna continue investing my money in the incandescent bulb market. Great time to buy. Prices are down near historic lows and when this global warming thing is over , I'll be living the good life!

Guest's picture
imeem

Playing and winning online is much more easier than this! :) More dollars, more fun!

Financial Samurai's picture

Keep your liquid assets in low beta, safe investments. Don't get greedy in this market!

Keigu,

Financial Samurai
"Slicing Through Money's Mysteries"

Guest's picture
Jehnavi

Have any of you guys heard of off shore banks? Ways to invest money  I live in the Bahamas and the fixed deposit rates here range from 5% to 8% and ge this its tax free so it safe and headache free but i don't know what the Feds would do to curtail Americans from having fixed deposits down here.

Guest's picture
Jehnavi

I’m a little disappointed you didn’t mention an alterntive to paying brokerage fees. Money savings tips  Discount brokers fees are still fees. I own shares in about a dozen companies, which I purchased directly from the companies. All pay dividends, which are reinvested in their stock. Periodically, I send in additional mony to each one to purchase more shares. No fees (some companies do have fees, usually a few pennies per purchase). These kinds of ‘reinvest dividends for owners of stock’ are often called Direct Reinvestment Programs (DRIPS). Some have similar names.

Guest's picture
IlyceGlink

Thanks for the advice!
It's funny that you mentioned the volatility. I was just reading an article that explained that the volatility does not impact long term investments that much. So, if you have time to invest and not sell more than 20% of your investments in say, the next five years, you should be safer.
Check it out for yourself: http://bit.ly/bpOdIx