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Comfort Zone Investing: The glass isn't half empty -- it's half full

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Summertime....and the livin' ain't easy. The economy's in worse shape than the administration thought, even after pumping hundreds of billions of dollars into it. More people are losing their jobs. Unemployment's at 8.5% and according to many economists will go higher, maybe above 10% before the layoffs stop. Gas at the pump has gone above $3 again, even with the price of oil starting to show some weakness. Home prices are still going down and foreclosures continue to rise. Defaults on consumer credit is at all-time highs. When will it ever end?

Don't know. No one does. But that isn't a reason to stop investing, to quit preparing your portfolio for the next big upward move that will surely come. You doubt that? Just look at a price chart for the Dow Jones Industrial Average over the last 100 years. It's full of periods where the line is going down, only to be followed by large increases on the upside. Unless the whole capitalist system is gone forever, history will repeat. There will be an upward swing to this market, and it's more likely sooner rather than later.


That's because everyone knows about how bad it is. Investors are assuming the worst, demanding that some good news, some specific data prove that things are getting better. When investors get to that "I'm from Missouri....show me" mindset, they've done a lot of selling. They're positioned for even worse news. They've put money in the bank, sold all their most speculative issues and are hoping for the best. When they see the numbers, they're ready to pounce.But they'll be late to the rally.

The stock market doesn't give away money. If it were that easy, we'd all follow the crowd. Remember, the crowd doesn't make money on Wall Street. The contrarians do, the investors with the intelligence to move before the rest of the world does. Think of George Soros or Warren Buffett.

Buffett has been an advocate of buying certain stocks in this market for months. Some of them he bought at much higher prices (see General Electric (NYSE: GE) as an example), but he's positioned his portfolio for the future, not for the current mess. The prevailing gloom is already priced into GE. There's no hope left in the stock price. But when the general economy starts to improve, GE will have moved well above its current levels because stocks discount the future by six to nine months.

As with all smart investors, Buffett doesn't own just GE. He's got a wide range of investments. He's diversified his risk. He's even sitting on a lot of cash because he knows the lights aren't all green, that there's lots of problems left to solve. But that hasn't taken him out of the market. He's just more cautious.You can do well to follow his example. Look for stocks that have solid earnings, even in these rough times.

An example: Lancaster Colony Corp. (NASDAQ: LANC), a specialty food maker and candle manufacturer. (Written up at The Online Investor) It's increased the dividend every year for the last 46 years and odds are good it's going up again this year. Coca-Cola (NYSE: KO) comes to mind as well. And IBM (NYSE: IBM). These are all solid stocks with good, growing earnings that would make a strong basis for any portfolio, once the economy recovers.

The depressed investors won't agree. They lost so much money in 2008 that they've given up, sold their stocks, and are hoping interest rates for deposits go higher because they're sitting on cash, waiting for the real recovery to show itself before they invest. It's a human reaction, flight to safety. But smart investors will only go so far with that thinking. They know this is a temporary state of affairs, that there are good stocks at great prices, that a prolonged growth period will once again be part of the economic cycle. They're the ones buying while many others are selling. But they're tempering their enthusiasm. Only a fool would not be diversified or fully invested at this point.

Ted Allrich
is the founder of The Online Investor, founder of Allrich Investment Management, LLC, as well as the author of the book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.

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Last updated: November 26, 2009: 05:34 AM

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