By remaining calm, investors can generate some healthy and relatively easy profits, writes The Motley Fool.
The past several weeks have probably left most investors licking their wounds and scratching their heads, attempting to make some semblance of sense out of the market (not to mention their portfolios' precipitous declines).
In many ways, it seems investors' future expectations have shifted dramatically. And since those future expectations appear quite bearish, the markets have been throwing a temper tantrum of their own. It seems we all need an intelligent way forward. Below, I hope you'll find some much-needed advice to help you better position your portfolio for the long haul.
Whammy!
The last week alone produced enough news to age investors beyond their years. According to credit rating agency Standard & Poor's, the United States now carries greater risk to lenders than at any time since credit risk became a metric. The market then proceeded to positively fall off a cliff, recording some of its ugliest hours since the post-Lehman bankruptcy death nosedive.
Investors need to develop some kind of sensible game plan to not only survive, but to actually benefit from Mr. Market's schizophrenia. Before panicking or acting rashly, consider the following advice. It could make all the difference for your portfolio's future.
Be contrarian
The oft-quoted Warren Buffett once implored investors: "Be fearful when others are greedy, and be greedy when others are fearful."
The recent glut of negative economic data has investors panicking at the growing possibility of a double-dip recession. Times like right now, where fear starts to drive selling, represent the perfect opportunity for more clear-headed investors to start looking for intriguing opportunities.
Intrepid investors have a number of key inherent advantages by utilising this "fish where others won't" approach. Fewer investors present often means less competition, which can lead to certain stocks being overlooked and – hopefully – underpriced.
With natural disasters hammering insurers and volatility in global markets, investors have fled the insurance fishing pond. QBE Insurance Group (ASX: QBE) appears to be substantially undervalued. With a 9% dividend yield investors should be nicely rewarded while they wait for investor sentiment to turn positive.
Similarly patient investors should be well rewarded for taking a position in Telstra (ASX: TLS). Telstra's results showed strong business momentum in the second half and with 2 million new mobile subscribers in 2011, they should be able to meet their low growth guidance. A 21% gross yield over the next 13 months is very attractive.
Maintain a long-term perspective
Here at The Motley Fool, we invest for the long-term. We also look at stocks as shares of real businesses, not just pieces of paper.We realise markets typically operate at some degree of sub-optimal efficiency. Anyone that disagrees should look at the last three days' trading activity.
However, these wild swings create tremendous opportunities to buy into your favourite companies at levels below their actual worth. Since we feel confident the market will recognise its error over time, holding onto those once-cheap shares as the market recognises their true value can generate some healthy and relatively easy profits.
Buy as prices decline — and don't try to call the bottom
Unfortunately, investors have to navigate the markets without perfect information.
We'd all like to only pay the single lowest price we can for a stock, of course. However, in the absence of your crystal ball, you'll never see a stock price reach that point until it becomes too late. If you find a stock you like for the long-term, you can start slowly purchasing it as its price decreases.
The banks come to mind here. Despite National Australia Bank (ASX: NAB) and Commonwealth Bank of Australia (ASX: CBA) posting strong results, investors are still not attracted by gross yields that have been over 10% this week.
Buying moderately on the way down will help to drive your overall price basis to a lower point. That way, when the stock price starts to recover, you've already established your position. From there, it gets pretty easy. Sit back and watch that stock price rise.
Remember: Everything else being equal, cheaper is always better.
Foolish bottom line
We don't know what the future holds. However, we do know that a share of the same companies you liked at the start of July will cost you between 10 to 20% less now.
And while we think the U.S. and global economies have a lot of messes to clean up, we feel confident they eventually will.
In the meantime the Australian economy will remain the envy of the developed world. Balance sheet recessions typically require a decent amount of time before a proper recovery ensues. Homeowners need to regain their confidence, companies need to continue to invest, and the housing market needs to remain stable for investors to be rewarded for being greedy while others are fearful.
And if the recent bearishness has you spooked, The Motley Fool has another valuable free report: Read this before the market crashes (it's never too late). It's completely free to access. Just click here to get your free copy today.
Motley Fool staff and freelancers may have interests in any of the stocks mentioned in this report. These interests can change at any time. The Motley Fool has a living, breathing disclosure policy.
