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3 Ways to Protect Yourself From a Market Implosion

Several pieces in the last week or two have hearkened back to the good ol’ days of 2007 when the Dow Jones Industrial Average peaked just south of 14,165 points. Some, like the cover story in Barron’s this week, even suggested we soon could be challenging that level now that the market has its sea legs back.

Indeed, there are some comparisons to be made with 2007. But a rational investor might see that as a sign of concern, not optimism.

That’s because the peak of the Dow Jones in October 2007 coincided with a slow crumbling of the economy that resulted in a stock market decline, a contraction in corporate earnings and steep drops in both employment and consumer spending.

So let’s not be so aspirational about that 2007 peak, all right?

Are the Cockroaches Re-Emerging?

In my experience, when you see one or two disturbing indicators — an ugly earnings report or a troublesome economic data point — it’s not necessarily cause for alarm. But when disappointing data comes in fours and fives … it’s time to get serious and proactive.

Think of it like bugs if you’re a homeowner. Sometimes one or two creepy crawlies find their way inside and the situation is easily remedied. But if you see a lot of them, there’s a chance you could have a serious problem that’s allowing critters easy entry. Simply squashing the ones you see under your heel won’t fix the problem.


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Hindsight is 20/20, but check out the cockroaches that started to emerge in 2007 as a preface to the mortgage meltdown. We all know the previous highs of five years ago were fueled by the funny money of subprime mortgages and risky leverage at financial institutions. And those paying attention in 2006 and 2007 should have noticed signs of distress.

It’s true Wall Street sometimes climbs that proverbial “wall of worry” … and it appears that’s what the market was doing in 2007 as it set new highs.

But sometimes the fears are justified. That was the case in 2007, and it could be the case now.

Serious Macro Concerns

Here’s just a few bricks in that wall of worry right now:

In the interest of balance, it’s worth pointing out that a housing recovery does seem to be under way and that headline unemployment is at a four-year low. There’s also QE3 and central bank intervention worldwide intent on propping up this rally.

Still, home prices remain depressed in some areas and related housing jobs are a shadow of what they once were — and while 7.8% unemployment is better than peak levels in double digits, it’s hardly something to crow about considering sub-5% jobless numbers as recently as early 2008.

Slowly improving employment and housing could continue to boost consumer confidence and build a self-sustaining recovery. But color me skeptical.

What Investors Should Do Now

Does this mean you should abandon ship and run screaming for your bunker carrying gold, guns and canned goods? Hardly. I believe in the resilience of the global economy and even have faith that politicians will get things right eventually. While the short-term appears to be rocky, there still are opportunities — especially for those looking many years down the road to retirement.

Three areas of opportunity I see right now include …

Health Care: Few things are certain, but the body breaking down with age is one of them. Thanks to the demographic shift that is coming in America — just 12% of all Americans were over 65 in 2004, but that percentage will almost double to more than 20% in 2050 — health care stocks are a great place to be. Consider that Eli Lilly (NYSE:LLY) might have developed an Alzheimer’s treatment to keep early-stage dementia from worsening. Merck (NYSE:MRK) might have a home run in its new brittle-bone drug that will prevent fractures in the elderly. These are prime examples — and they’re stocks that pay a good dividend, too.

Consumer Staples: We all need to get up, take a shower, eat lunch and clean the house. Life will go on even if the EU disbands, even if China crashes and even if America dips back into recession. As a result, crash-proof consumer stocks provide big opportunity — not just for the stability, but because of the returns they provide. Consider that Coca-Cola (NYSE:KO) is up more than 33% since Oct. 9, 2007, on a share-price basis alone — and when you take into account dividend payments, you have a return of more than 53%. Another good name is cereal giant General Mills (NYSE:GIS), which is up about 37% on a share-price basis and up 58% with dividends thanks to bulletproof brands like Cheerios and Hamburger Helper. There’s a reason these things are called “staples.”

“Almost Cash” Investments: Don’t discount the power of capital preservation. I’m not talking about stuffing the capital under your mattress or settling for one of those 1% “high-yield” savings accounts. There are “almost cash” investments that could serve you well even if the market is dead money for a while — including the recently launched Vanguard Short-Term Inflation-Protected Securities Index Fund (NASDAQ:VTIP), which gives you a low-risk option that is hedged against inflation. Other alternatives include investment-grade bond funds focusing on quality corporate and government debt. One ETF that I particularly like right now is the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE:LQD) from iShares that boasts more than $20 billion in assets and a very reasonable expense ratio of 0.15%. It holds debt issues from companies like AT&T (NYSE:T), Wal-Mart (NYSE:WMT) and other bulletproof corporations that might not pay a huge rate of interest on their borrowing, but almost certainly will pay back investors in full with a modest return on their investment. It’s not as sexy as picking the next small-cap winner, but you could do worse.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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