One of the areas that I have had much success with are energy funds, particularly those who support the development of natural gas, which is a clean burning fuel.

Investing in the stock market can be as dangerous to your portfolio as hurricanes are to your home. However for those who learn to navigate the security seas and chart their course appropriately, investing can be smooth sailing. The Neptune of this ocean is the Federal Reserve. Currently the Fed is applying pressure to reduce the inflationary “high pressure system” by increasing the cost of funds and other policies to slow the economy, and, in turn, investments by corporations, which can cause many investments to falter. But not all investments!

There are several investments that tend to do better than others in deflationary times, and several strategies that you can implement to protect yourself to ride out the storm. The first one everyone knows, however rarely applied, is to diversify. Simply stated, spread your money out into several different investment vehicles. Experts universally agree that placing all of your money in real estate, the stock market, precious metals or money market instruments is NOT a good idea. No financial authority gets it right all the time, including me. However, by spreading your investment out over several categories of investments you can protect yourself from the sinking the whole ship. Moreover, as one goes down others may go up. A safer strategy may be to shift more of your money into those investments that are getting better returns while keeping your money spread out amongst many investments.

Keeping liquid is another successful hedging strategy. There is tremendous comfort knowing that if an investment of yours is starting to sink, you can sell it in a day. One of my favorite investment types are funds. Funds pool investor’s money and then invest that pool out across numerous investments. There are funds that invest in stocks, in money market instruments, such as, CD’s, Notes, T-Bills or Bonds, and then there are precious metals, real estate or a combination of investments. Mutual funds have the added benefit of having “experts” analyze and track the companies, or assets, that they invest in so you get another set of astute eyes watching over the investment. Most “smart money” or “institutional money” invests largely in mutual funds, and so do I.

Within the giant world of mutual funds you can get lost. TD Ameritrade, where I happen to have my online brokerage account, lists over 10,000 funds. Interestingly enough, most of these I would not put a penny in. As an economist I feel the strength of an investment lies in a number of factors ::

1. What has the fund manager done in the past? Although past performance is not an indication of future returns, it does indicate that the fund manager has done something right. To get a complete picture, I look at year-to-date, 1 year, 3 year and 5 year track records.
2. What is the rating? I feel much better knowing that someone in the business of analyzing mutual funds and fund managers, such as Morningstar, has looked at the fund and considers it to be well managed.
3. As an economist I put a particular emphasis on market sectors. What countries, what industries and what niches appear to be growing and what are the likely needs for goods and services in these sectors in the future?
4. What individual companies or assets is the fund investing in? You can research most funds through Yahoo finance or your brokerage account. Within the ‘fund summary’ you will see that they list the top 10 to 20 investments the fund makes. Here it’s a good idea to look at each of their top investments and see what they do, how they have done, and consider their prospects for continuing to do well.

Fishing for a fund involves a lot of work, but the payout can be big. Last year my funds provided over 40% return on my investments, which made my family, Investment Club friends and me very happy. This success was not a result of what I did; rather it was what I didn’t do. I didn’t listen to any stockbroker who wanted to sell me something. I didn’t listen to the advice of the pundits who work for stock brokerages either. I didn’t listen to a financial advisor, of which I am required by law to tell you that I am not a financial advisor. Technically I am “supposed” to tell you to seek the advice of one, but won’t. But I will tell you what sectors I invested in if you promise not to just run out and buy a sector fund without learning more about it.

One of the areas that I have had much success with are energy funds, particularly those who support the development of natural gas, which is a clean burning fuel.

We know the need for energy is growing, and all signs point to this continuing into the foreseeable future.

Hopefully they will start making cars that use clean burning fuels, but for now we need petroleum and a lot of money to find it, develop and support the infrastructure to extract it, transport it, refine it and bring it to market. Energy funds have traditionally done well over all but there are plenty of ways to get burnt here too so don’t invest until you get all the facts.

Another area that has been good to me are growth funds, particularly those in Russia and China. Being a child of the Cold War era, it warms my heart to know that I am helping to develop the markets of those we thought of once as enemies and now are our friends sharing in building a brighter and safer tomorrow. The world of commerce is becoming flat; this has helped to not only stabilize our economy but also our politics. Placing money in the wrong foreign growth fund could still be sticky however, the markets in Russia and China are growing very quickly, and that brings much in the way of opportunity. With billions of dollars being invested in both markets the long-term prospects look good.

People often ask me about gold and gold funds. Personally, I think if you got in a few years ago you would be sitting pretty right now, but the prices of the stocks have since gone up therefore I would hold out buying until the prices come down a little. Knowing when to buy is as critical a decision as what to buy.

I also have had great success with real estate funds. People gasp when I say this given the recent drop in the residential market, but funds that invest in commercial REIT’s (Real Estate Investment Trusts) that invest in income earning assets, such as, hotels, shopping centers, self storage units or apartments tend to do quite well. Again, it depends on the fund’s individual investments and when you buy into them.

A general good rule of thumb is; funds that invest in companies backed by solid assets tend to do better during turbulent times. Many studies have been done that indicate most people buy at the worst time and sell at the worst time. A day trading mentality will sink you in fund investing. My suggestion would be to find a good long-term prospect and hold it. Think long-term. Let your money work for you and then go surfing. I’ll be out there with you during the next storm.

Steven S. Sadleir is a retired economist, fund advisor and Director of The Leading Edge Investment Club and can be reached at www.TheLeadingEdgeInvestments.com This is not a solicitation for a security. Synergistic Solutions, its editors or myself are rendering financial planning advice and make no representations, warranties or guarantees. Please speak to a financial adviser before making any financial decision. All investments are risky.