As the global economy emerges from recession, there are opportunities to spin gold from straw

Oilweek — Last year´s stock market collapse gutted many retirement savings plans and investment portfolios under the care of professionals. Faith in money managers may be at an all-time low, but there is still a certain comfort in entrusting hard-earned dollars to professionals who supposedly understand price-earning ratios, industry sectors, seasonality, inflation, and a myriad of other economic factors. These pros sometimes get it all wrong, but at least everybody else is in the same boat.

But are they?

The nature of the stock market is that for every loser there has to be a winner. That means for every investor now holding a $12 stock that was worth $20 last year, someone cashed out and pocketed the difference. If it wasn´t you under the wise guidance of a professional money manager, maybe it´s time to bone up on investing and take control of your financial future.

Granted, most portfolios have recovered somewhat since the gut-clenching lows of last winter. The S&P 500, an index of 500 large cap commonly traded U.S. stocks, currently sits at about 1,050 points, compared to 700 in early March, but that´s still down from the 1,500 level last summer.

Consider that the average self-directed investor, call him Bob, could have done just as well as almost any professional investor with the ever-popular Warren Buffet buy-and-hold strategy. Investing only in sound companies, and likely avoiding anything that went belly up, Bob´s portfolio worth $50,000 in August 2008 would be worth $35,000 today, after the dip and the half recovery. No special knowledge needed there.

Of course, Bob might have also gotten it horribly wrong on two counts. First, he might have hung on well after he should have cashed out. His $50,000 value shrank to $25,000 in February, all the while his reptilian brain is following the precepts of the "Prospect Theory," which states individuals are much more upset by loss than they are pleased by equivalent gains. So rather than suffer a definite (smaller) loss by cashing out, Bob desperately clung to the hope his picks would regain their losses in the future. But then he abandoned all hope in February, cashed out and stayed in cash till now.

Woe is that Bob.

But more optimistically, consider Bill who decided that he couldn´t stomach more than a 10 per cent backslide in value at any given time on any stock. Bill doesn´t necessarily see himself as an "investor" contributing vital grist to the mill of capitalism. He´s not a buy-and-hold guy at all costs, nor is he a thrill seeker or a gambler, nor does he care if he is right or wrong. He´s simply in the stock market to make money.

So Bill cashed out when his portfolio value shrunk to $45,000. When he saw the market improving in March, he bought into the rally with a mix of S&P 500 companies. Missing only the initial few weeks of the new trend, Bill is now sitting on about $65,000.

Of course, if Bill is this savvy, he might also have picked stronger growth companies than the average S&P 500 fare. Say he invested in Teck Resources Ltd. In the highly unlikely case that he put all his money into this one stock, which went from $2.60 in March to a current $31.43 in October, Bill turned his $45,000 into half a million dollars.

If only stock investing were this rewarding.

Even so, the rally that started in March still appears to be drawing new money into the markets. So if a person missed out on the last six months, there are still opportunities-as there always are. But choosing the right stocks and the right entry is trickier now and if self-directed investors aren´t up to figuring it out for themselves, here´s some help from…well, a professional.

"One strategy is to look at sectors that have lagged the rally since March," says Kevin Dehod, vice-president and portfolio manager at McLean & Partners Wealth Management Ltd. "So look at sectors that aren´t up 50 per cent from March."

The big gains have largely been concentrated in three sectors: technology, financials, and consumer discretionary/retail, according to Dehod. Telecommunications, on the other hand, health care, and consumer staples have seen nowhere near that lift. By investing into these laggards, you are at least not jumping in after 50, 60, or 70 per cent gains.

"These sectors are more defensive," Dehod admits, "but in the case of telecom, you also have a 3.9 per cent dividend yield."

Considering that a one-year Government of Canada T-bill earns 0.55 per cent interest and a five-year Government of Canada bond earns about 2.55 per cent. In contrast, a telecom, health care, or consumer staple investment with a four or five per cent dividend yield looks pretty appealing and stands as incentive to invest in itself.

"So if investors commit some money to pipelines, utilities, telecom, health care and other sectors that have lagged, maybe they won´t participate fully if this rally continues to be explosive, but at least they will participate at a lower-risk level and will get a good dividend, which makes up for that cash yield," Dehod says.

Another strategy he suggests is dollar-cost averaging. That is, some investors have been watching from the sidelines for the current rally to pull back before jumping into the market only to be disappointed in August, then September, and October has yet to produce one.

"Rather than try to make this big market call, and wait for this pullback, maybe the investor should consider committing a third of his money now, a third in three months, and another third in six months," Dehod says.

This strategy removes some of the emotion and stock timing out of the game and protects against market volatility, particularly if an investor is taking a longer view of the market.