This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

Tactical Defense for a Volatile Market




By Mark McLaughlin, special to CNBC

NEW YORK (CNBC) --The stock market volatility of the past several months looks like it could stick around for a while, forcing investors to be ever more vigilant about how to position their portfolios.

"Stay defensive, be in low beta stocks, and achieve returns through dividends," counsels Mark Tepper, a financial advisor with Strategic Wealth Partners in Seven Hills, Ohio.

Dividend-paying stocks are one of the more popular recipes for coping with uncertainty. U.S. companies are hoarding cash, making quarterly dividend payments to shareholders currently a much more reliable source of returns than capital appreciation.

Yet rapid sentiment shifts and potential bursts to the upside could leave buy-and-hold dividend investors flat-footed, says Ben Sullivan of Palisades Hudson Financial Group in Scarsdale, N.Y.

"High dividend stocks may be seen as more stable, but they will not grow as quickly in a recovery,'' Sullivan says. "[If you] try to defend against one thing right now, you position yourself for future failure."

More from CNBC
Getting the Best of the Markets After the Meltdown
3 Ways to Temper Portfolio Volatility
Shopping for Inflation Hedges

The better course is to be tactical in your stock allocation, say analysts, taking tax losses in cyclical sectors that suffer the most in a bear market and investing the proceeds in more defensive sectors, such as health care and consumer staples. Stocks in these sectors tend to have lower betas, a measure of how closely an investment's return matches that of the market.

The S&P 500, for instance, has a beta of 1.0, while General Mills (GIS), one of the few stocks to eke out a gain on Sept. 22, when U.S. markets fell more than 4%, has a beta of just 0.22. Low-beta stocks tend to be established, blue-chip companies with the market leadership and steady cash flow to weather economic downturns.

Low-beta stocks tend to produce smoother returns and better downside resistance during difficult markets, according to a 2008 study by the Schwab Center for Financial Research. While having a low beta doesn't protect against losses, Schwab found it to be a valuable tool in helping investors gauge the expected risk of individual stocks and stock portfolios.

Wall Street appears to be giving more credence to beta. The first exchange traded fund (ETF) Goldman Sachs plans to roll out will focus on lower beta stocks, according to paperwork filed last month with the Securities and Exchange Commission.

Stock quotes in this article: GIS, SPLV, BMY, MO, ESV, NE, RDC, DUK, PBJ, PGN, ACI, D, VZ, T 

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 +2.54 0.14%
NASDAQ 4,095.5160 +9.2910 0.23%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs