Protect Your Investments With a June Prune

Here are three reasons -- and three ways -- to play a little defense during this historically slow period.
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You've probably heard the adage "sell in May and go away."

Driven by logic and some 50 years of stock market history, the professionals (and a lot of journalists) suggest taking some money off the stock-market table for the summer, starting in May.

So what should

The Millionaire Zone

investors do, or should they have done already?

First, the case. According to Standard & Poor's, 60 years of past performance suggest a 2% market decline in the third quarter. September is the weakest month of all.

Then there's Wall Street's summer-vacation schedule. Wall Street is just a bunch of guys and gals like you and me who like to take summer vacations. So market activity traditionally slows down as Wall Street traders head off to the Hamptons.

The only thing is, this model hasn't worked the past two summers. We got a dip in May 2006 which carried through most of July, but the markets came roaring back in August and stayed strong through the minicorrection in February 2007.

And this year? There was no dip in May, as the markets (as measured by the

Dow

and

S&P 500

indices) surged to and then through record levels. Maybe those traders have learned how to use their BlackBerries to stay active.

So here we are in June, sitting at the top of the stock-market mountain. What's going on? The takeover frenzy, stable interest rates and an absence of anything else good to invest in has kept the markets moving higher.

It's been helped along by improving profits, especially for companies with strong exports (see my recent

article), and tons of liquidity -- cash -- sitting on the sidelines both in investor and corporate pockets.

Click here for the video version of this story from Jennifer Openshaw.

We've come this far and have done well. Some of you may want to play a little defense, pocket a few gains and breathe easier for the summer. The risk/reward balance is starting to shift, and here's why.

  • Overvalued, despite the numbers. The current S&P 500 P/E ratio looks reasonable at just under 18. But it's what's under the surface that bothers me.Such megaprofitable energy companies like Exxon Mobil (XOM) - Get Report, Chevron (CVX) - Get Report and BP (BP) - Get Report weigh the average down. The Integrated Oil & Gas sector as a whole has a P/E of 10.4. Since the index is market-cap weighted, the more these companies rise, the more they weigh on the index.Further, the company-share-buyback boom has artificially boosted earnings per share. In fact, about a third of the double-digit earnings growth reported this year comes from buybacks.
  • Late summer and fall risks. Recent hurricane history and a weak consumer economy suggest more seasonal risk than before. Hurricanes have always been a threat, but now markets are more sensitive. And a weak consumer could drive slower home and big-purchase sales as well as weak preholiday buying. Such news items now seem more likely to trigger a selloff.
  • Business cycle not on your side. The typical business cycle suggests that we're long in the tooth. First consumer, then manufacturing, then financial sectors are strong. But now what? To rely on capital goods and business-to-business sales when consumer demand is weakening seems risky.

So here's what I recommend:

  • Partial sells. This is one of my overriding sell rules: Don't sell a complete position unless the facts really warrant it. Sell 20%, 40%, half a position to raise some cash and increase margin of safety, but to also maintain a position and a foot in the door when the climate improves. If you've picked the right investments in the first place this strategy will work.
  • Stay on the value side. Look for earnings growth and stability, strong export businesses, cycle-resistant businesses and dividend-paying stocks. GE (GE) - Get Report, Citigroup (C) - Get Report and Johnson & Johnson (JNJ) - Get Report fit well.
  • Park cash wisely. The idea is to raise cash and get some return while waiting for the markets to catch a breather. So you should park cash in T-bonds or money-market funds. Longer treasuries have ticked up to near 5% while most money market funds yield just below that. And don't just let the cash sit in a low-return broker sweep account, as you might get less than 1%. I'll be back with more on that investing trap soon.

So just remember that investing is not only about picking the right investments, but also about defending against the bad times.

A little caution now might help you breathe easier during your summer vacation.

Jennifer Openshaw, a passionate advocate for helping Americans improve their finances and build their personal fortunes, is author of the hit new book

The Millionaire Zone

founder of

The Millionaire Zone, and

AOL's Personal Finance Editor. In addition to appearing regularly on such shows as Oprah, CNN and Good Morning America, Jennifer is host of ABC Radio�s

Winning Advice and serves as an adviser to some of America's top corporations. Visit her at

www.themillionairezone.com