How You Can Profit From Market Volatility

Leading money managers share the best strategies for building your portfolio

Fidler also recommends healthcare firms such as Abbott Laboratories (ABT) and Merck & Co. Inc. (MRK) paying annual dividends of 4% and 5%. His reason: The dividends of both companies are sustainable for the long term as their earnings are much higher than the dividends they pay out to investors. (See “Stocks That Pay Dividends,” this issue.)
Treasuries remain among safe investments. Greg McBride, senior financial analyst at Bankrate.com, says the weak economy will keep interest rates low, but the downgrade will raise borrowing costs for Uncle Sam, consumers, and businesses. For example, riskier borrowers may see credit card issuers increase rates, but consumers with sterling credit are unlikely to see the same impact. For home loans, the weak economy is the key determinant of where mortgage rates are, McBride says. Eventually the downgrade will result in higher mortgage rates, but not until the economy picks up some speed.

If Treasury rates keep dropping says Mary Pugh, CEO and chief investment officer of Seattle-based Pugh Capital Management, expect 15-year and 30-year mortgage rates to also fall because those rates typically move in tandem. “If we end up with a very weak economy or in a double-dip situation, we could see mortgage rates dip 25 to 50 basis points below their current levels,” she says.

From a credit quality standpoint, Pugh says Treasuries still offer a risk-free credit investment. For instance, she says a 10-year Treasury note at 2.4% might seem low, but it’s a much better return when compared to a savings or money market account.

Even with the downgrade, investors continued to flock to government bonds as safe havens in the topsy-turvy market. Experts say these securities represent the world’s most solid investment—especially with the nagging European debt crisis. No investor holding U.S. Treasuries is expected to lose principal.

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