After all the big-picture forecasts and stock picks for the year ahead, it's time for something else: the A-list of timely strategies and tactics that can be a framework for your investment decisions. My objective -- and everyone's hope -- is that investing in 2012 can be less of a bother and more of a pleasant diversion.
We all deserve a quieter ride. This past year was stomach-churning, starting with the tragic Japanese tsunami, then a summer marred by fear that the U.S. Treasury would default, and now the euro mess. Frankly, it's a victory that 2011 ended with stock prices close to where they began. You're still that much closer to retirement or to the tuition bills -- but, alas, no further along. Yet a bank account, money market fund, Treasury note or Treasury inflation-protected security still pays you little more than zero interest. Stocks, bonds and funds have to be part of your life. What to do? Here are five recommendations for 2012. (All prices and related data are as of January 9.)
1. Invest in Energy
Crude oil is sticking around $100 a barrel despite sluggish world economies, a surplus of cheap natural gas, falling U.S. oil imports and dissension within OPEC that has nations such as Iran and Venezuela desperately pumping every drop of crude they can to raise cash. Yet oil prices, and oil-related investments, won't crash again as they did in 2008 for this sound reason: It costs more and more to find and physically produce oil and replace reserves. Despite all the attention on natural gas and alternative fuels, gasoline, diesel and jet fuel aren't close to obsolescence.
So I think you should put oil ahead of all the new-age alternatives, earmarking 5% to 10% of your stock portfolio for energy-related investments. I would favor investments that pay high distributions, such as royalty trusts or master limited partnerships. Shares of stocks such as Chevron (CVX; $109.49; yield 3.0%) pay a decent dividend and certainly are safe. Even a simple exchange-traded fund, such as Energy Select Sector SPDR (XLE), would be a good place to invest.
2. Unlock Rental Real Estate
Dead-in-the-water home values have their opposite number in rentals, specifically fancy apartments in prosperous cities and their upscale suburbs. These dwellings are gaining value as rents rise, vacancies stay low, and the residents (who make good salaries and could afford to buy) stay because they don't want to tie themselves to a mortgage or commit to a location.
You don't have to become a landlord to benefit from these trends. If you devote a reasonable 5% of your stock portfolio to real estate investment trusts, be sure to include one or more of these rental REITs. Leading names include Avalon Bay (AVB; $126.95; 2.8%), Camden Property Trust (CPT; $61.06; 3.2%), and Equity Residential (EQR; $55; 4.1%).
There are plenty to choose from, including REITs of self-storage space to hold all these apartment-dwellers' extra stuff. Apartment REITs have had three wonderful years of shareholder returns in a row, which could be a turnoff. But apartment REIT shares still trade at a narrow discount to the net asset value of the properties. By contrast, health care REIT shares change hands for 25% more than the trusts' underlying assets are worth.
3. Trust the Greenback
The euro's predicament has unquestionably cemented the U.S. dollar's position as the world's go-to safe haven, trumping even gold. This explains why the international exchange rate hasn't declined despite all of the Treasury's borrowing. It also argues against an aggressive anti-dollar move.
You may have logical or ideological reasons to dislike the dollar, but the financial markets continue to reject all of those arguments. One practical effect of this: buoyant demand for U.S. corporate and municipal bonds, both of which are odds-on to have another profitable year in 2012.
4. Be Cautious With Emerging Markets
If you travel abroad, you'll see new cars, sleek high-rise construction and ever-fancier places to eat and shop. There are opportunities in emerging markets.
But be careful with stock markets in what once were called developing, second and third worlds. They can soar: Late in 2011, there was a nice rally. But, and this is scary, the sizzling-economic-growth story isn't permanent. Brazil registered no growth in the third quarter of 2011. Russia is verging on political upheaval, which is good for the cause of democracy, but financial markets get spooked. Inflation in India and China is easing, which indicates weakness, by their standards anyway.
Bank of America/Merrill Lynch sees way more chance for emerging economies to tank in 2012 than soar. If so, emerging-markets funds -- and the stocks they hold -- will be under immense pressure as investors pull more money out than goes in. These aren't very liquid markets, and they lack home-grown defensive stocks because multinationals such as Procter & Gamble (PG) and Unilever (UN) make and sell much of the daily necessities. So the local companies are at a disadvantage.
5. Be Smarter With Your Armor
All signs point to another year of sideways trading closely tied to headlines, political and financial stresses, and herky-jerky market reactions. This makes even the soundest portfolio subject to damage from one-day or weeklong panics. The stocks in the Standard & Poor's 500-stock index currently have a 75% correlation, which is a nerdy way of saying all stocks are way more likely to rise and fall together.
So here's how to soften the volatility: One, if you plan to buy or sell a specific stock or ETF and you can wait for a certain price, enter a "stop-limit" order. This protects you from a deeper loss if the price goes into free fall or still lets you buy at a good price. The trick is to keep adjusting your buy and sell price points by closing and opening orders regularly, rather than making a mental note that you'll buy and sell at a certain price. What if you are unavailable to do the deed in time? A stop-limit order better protects you.
Next, explore the sale of covered call options. If you don't care to learn about options, no sweat. But you don't have to trade them personally. Lots of funds, including closed-end funds with shares available at a discount to the net asset value of the fund's investments, use covered calls to supplement dividend income. For example, First Trust Enhanced Equity Income (FFA), whose shares sell at a 12% discount, distributes income at a rate of 8.1% -- part of it is a return of capital, but you're getting your capital back at full net asset value though you can buy the assets for less -- largely because of proceeds from selling options. An options-based fund won't work in a strong bull market because you forgo gains. Likewise, in an actual bear market, call options aren't worth much. But in range-bound periods, the formula works.
Finally, if you're going to buy a corporate or municipal bond fund, this is a good time to spice up your returns with a leveraged fund. I like DWS Municipal Income (KTF), Nuveen Enhanced Municipal Value (NEV) and BlackRock Muniyield (MYD). Interest rates are low and going to stay that way, so the funds that borrow to reinvest in higher-yielding securities have a good thing going. Instead of bemoaning the low rates on investments, buy safe investments with the help of low rates. It's the same reason why, with gasoline still over $3 a gallon, it's smart to invest in oil-powered income funds.