How to Build a Portfolio When the Market’s Down

It is difficult to be a buyer of stocks when the broader market is going down. Timing the market is extremely difficult, and yet timing is the single most important aspect contributing to outperformance.I think that Dow 10,000 is attractive from a valuation standpoint. I don’t know where the stock market is going to go or how far it has yet to fall.
I do know there are a number of reasonably priced, high-dividend-paying stocks out there that are now solid buys. Without dividends, I think it’s fair to expect that returns from stocks will be lackluster over the next few years.Recently, we considered in this column the incremental returns available from precious metal holdings. I firmly believe that gold, silver and copper are good plays for speculative investors, even though a lot of mining stocks have already gone up in value. Gold in particular has a lot going for it and it’s the kind of holding that encompasses a lot attractive fundamentals.The mining industry in general is very well financed right now, so companies have the resources (pardon the pun) to go out and drill for metals. There’s solid fundamental demand for gold, silver and copper and this is particularly the case in Asia, where economic recovery is
more robust. Gold offers a haven similar to U.S. Treasuries. Governments around the world still have a tremendous problem with growing money supplies, and this is inflationary. Finally, there is a new trend emerging among institutional investors and that is to own more “real” assets, and precious metals do offer a store of value for their owners.I’d be buying large-cap gold stocks for investment purposes right now. I’d be buying small- and mid-tier gold producers for speculative purposes. I’d have both a copper and silver producer in an ideal equity portfolio, and I’d probably have some sort of gold trust or a security that owns and maintains gold bars in a vault. The fact is, I’m bullish on these precious metals and gold has serious potential to appreciate much higher in price over the next 18 months.From my perspective, the ideal equity portfolio would likely be half made up of resource companies. One oil company and a precious metals company. I’d own a high-dividend-paying, integrated oil company, as well as a high-dividend-paying pharmaceutical company. One consumer goods company for sure, and a large-cap technology business. I would certainly be nibbling away at some positions at this time.

I’d be a buyer of Dow stocks in the current environment, because I’m bullish by nature. I do recognize, however, that we aren’t likely to get a runaway new bull market anytime soon. It’s going to be low and slow for the next several years and, with that expectation, dividends and precious metals are a must.