The past couple of weeks have provided no shortage of drama: the debt-ceiling debate, a ratings downgrade of the U.S., questions about European banks and wild swings in the stock market.
It all makes for a lot of sleepless nights.
Given all the tumult, how can we add more sheep to our evenings? Ultimately, a smart, long-term investment strategy should enable us to weather -- and even take advantage -- of these kinds of storms.
So, how to get there? A lot of times, sitting tight is the best strategy. Anyone trying to time the enormous swings of the past several days has probably discovered that's not very easy. Still, doing nothing doesn't always make us feel more secure.
Here, then, are five strategies that might give you more calm without upending your portfolio.
Cash
Examine the amount of cash in your portfolio. Having a rainy-day fund when the world is a bit bonkers helps soothe frayed nerves. A good rule of thumb is to have enough cash on hand to handle about four to six months of your living expenses in case you lose your job.
That may sound like a lot of money, but with so much economic uncertainty in the air, having a cushion makes more sense than ever. If you are light on cash, there are three things to consider.
First, you can sell into market rallies to improve your cash position. We've had several big moves up in the past two weeks, along with several nasty moves lower. We can expect more volatility in the future, so take advantage of the upward swings to ensure you have a good cash position.
Second, you might have some large losses that aren't bouncing back with the broader market when it does rally. You can sell those shares at a loss, and use those losses to offset capital gains when you sell your winners.
Third, gasoline prices will be lower in the coming months. Use the difference in gasoline prices to add to savings. Pretend gasoline is still near $4, so that when you are filling the tank at $3, you devote that extra dollar to building your cash position, rather than spending it on something else.
Utilities
These companies aren't sexy, but they are steady. Ensuring that you have exposure to this sector will reduce the ups and downs in your investment holdings. The Dow Jones Utility Average has gyrated, along with the rest of the market, but its moves have been smaller.
Moreover, utilities generally provide strong dividend yields, and unlike the yields of nonutility companies, they are historically very dependable. So, even as the utility stocks swoop and fall like other stocks, you can still count on the dividend income, which can provide a bit of solace.
Other dividend-payers
While a bit riskier that utilities, some very large companies with solid track records are paying nice dividends. Among them are Merck (MRK: 31.34, 0.14, 0.45%) (4.9%), Pfizer (PFE: 17.86, 0.05, 0.28%) (4.5%), Johnson & Johnson (JNJ:63.36, -0.08, -0.13%) (3.7%), Verizon (VZ: 34.30, -0.32, -0.92%) (5.7%) andAT&T (T: 28.22, -0.22, -0.77%) (6%).
Not terribly sexy, and there's a chance these stocks could keep trading in a volatile manner. But as with utilities, you get a little income that helps make the pain more bearable.
Gold
Gold, which usually jumps when stocks swoon, has shot sharply higher during the latest bout of volatility. Gold has usually jumped when stocks have swooned. That inverse behavior provides a hedge for the rest of your portfolio.
Now, some believe gold may have gotten ahead of itself. It fell sharply on Thursday, for instance, as the stock market raced higher. Still, many elements that support gold remain in place. Difficult fiscal challenges in the U.S. and Europe. A weak dollar. The Fed not raising interest rates until 2013. Uncertainty about the economy. All still there. Gold, like stocks and bonds, will probably continue to bounce around, so don't overplay your gold hand.
Vice
If the crazy market and the related economic and political mayhem has you thinking about a drink or grabbing a smoke, you're not alone. It seems that vice does fairly well when everything else is going haywire.
Diageo (DEO: 76.91, 1.75, 2.33%), a big drink company, SABMiller andAnheuser-Busch Inbev (BUD: 54.58, 3.07, 5.96%) have held up better than other stocks, and Diageo pays a decent 2.7% dividend.
Smoke stocks have also done decently. Altria (MO: 25.20, 0.24, 0.96%) is not far off its 52-week high and it sports a hefty 6% dividend. Philip Morris International(PM: 66.63, 1.08, 1.65%), with a 3.7% dividend, hasn't done as well as Altria, but it remains a strong vice play during the current turmoil. The upside may be limited, but they have recently proven their sturdiness.
Lastly, once you feel like you've positioned your portfolio, including your cash position, for a bit more peace of mind, you can then start to think in a more clear-headed manner about opportunities that might present themselves. When panic moves occur, as we've seen on a number of occasions during the past two weeks, values can emerge.
Some stocks with strong prospects that have gotten a lot cheaper include Apple(AAPL: 376.99, 3.29, 0.88%), Caterpillar (CAT: 89.81, 2.56, 2.93%) and General Electric (GE: 15.88, 0.20, 1.28%). It is probably not the best time to be figuring out how to call a bottom in the banking sector, but there are a lot of strong companies that look better than they did two weeks ago.