Tips to Survive the Dow's Wild Ride

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Fortunes are made and lost in volatile markets. To help you avoid the latter, I've compiled some great recommendations on how to maintain your composure, develop an appropriate investing strategy, and apply that strategy. I've even included nine stocks I believe will both survive and prosper in the days and weeks ahead.

Maintain composure
In times like these, fear drives investors to sell stocks and buy seemingly safer alternatives like gold and bonds. As they do, stock prices go down and the price of alternatives up. The net result is that investors sell stocks at the bottom of the market and buy the seemingly safer alternatives at the top.

For this reason, Warren Buffett famously claimed that the most important quality for an investor is temperament, not intellect. To be successful, you need to stay calm and rational during the market's boom and bust cycles and avoid falling prey to the market's herd instincts.

You can soothe your temperament by identifying the type of investor you are. Brian Richards, online managing editor at The Motley Fool, put together an "Investor Policy Statement" to help in this regard. Answer the eight questions contained therein and keep the statement handy. Revisiting it in times like these will help keep your mind clear and your anxieties at bay.

Develop an investment strategy
In almost all cases, great investors pair a steady temperament with a sound investment strategy. The best strategies I've come across recently came from right here at the Fool.

In his guide to recession-proof investing, Joe Magyer advises us to:

  • Write down a strategy.
  • Diversify across a range of asset classes, industries, and countries.
  • Invest only what we can afford to lose.
  • Avoid leverage.
  • Buy quality businesses.
  • Go global.
  • Stay invested.

Sounding a similar theme, Tom Gardner, co-founder and CEO of the Fool, recommends taking a defensive stance by looking for companies with

  • Easy access to capital
  • Substantial future opportunities in foreign markets
  • A stellar history of operating results
  • World-class leadership
  • A steady dividend

Apply your investment strategy
Of course, the purpose of developing a strategy is to apply it. With this in mind, I've picked three categories of stocks that are consistent with the strategies we've discussed.

1. Companies that are everywhere
This category consists of defensive multinational corporations like Procter & Gamble (NYS: PG) , Colgate-Palmolive (NYS: CL) , and Kimberly Clark (NYS: KMB) . These companies produce goods that consumers need in good times and in bad, are diversified across the globe, and have a history of prudent financial management.

Also falling into this category are companies like Coca-Cola (NYS: KO) and PepsiCo (NYS: PEP) . As I noted in "Drinking Pepsi in the Khyber Pass," these are two of the world's best-known and most accessible brands. Not to mention, if a company like Coke is good enough for Warren Buffett, then it's good enough for me.

2. Companies that pay you money
The second category consists of companies with great dividend yields. For some ideas in this regard, take a look at Ilan Moscovitz's list of 10 dividend-paying stocks. My favorite among them is Waste Management (NYS: WM) . According to Jeff Fischer, advisor to Motley Fool Pro and Motley Fool Options:

Waste Management has been thrown into the trash heap over the last month, declining from $38 to $30 on weak trash volume. The country's landfill leader and largest recycler now pays owners a 4.5% dividend. Although competitors are lowering prices to haul away your trash, as a landfill owner, Waste Management still benefits by charging these competitors to use its resources. Earnings estimates for 2012 were just lowered, but the stock trades around a reasonable 12 times consensus estimates. Although recessions lead to lower trash volume, this business should be able to sort through it and come out smelling stronger.

3. Companies that we know and love
The final category is less specific, consisting simply of great businesses. These are businesses we know, love, and use on a regular basis. It includes companies like Chipotle Mexican Grill (NYS: CMG) , Costco (NAS: COST) , and Netflix (NAS: NFLX) . People use these companies now and will continue to use them regardless of what the economy does. And it is this relative immunity to economic downturns that make them great additions to any portfolio, now or in the future.

The Foolish bottom line
Although there is no way to completely avoid the market's turbulence, the strategies recommended here will lessen its effects on your conscience and your portfolio. And remember, we've been through this many times before. Stay calm, proceed with caution, and it'll be over before you know it.

For more recommendations like these, check out our free report "Investing the Stock Advisor Way," which details the seven principles our Stock Advisor Team uses to identify great companies and pick great stocks.

At the time this article was published Fool contributor John Maxfield does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Coca-Cola, Waste Management, Costco, Chipotle, and PepsiCo.Motley Fool newsletter serviceshave recommended buying shares of Procter & Gamble, Waste Management, Netflix, Costco, PepsiCo, Kimberly Clark, Coca-Cola, and Chipotle.Motley Fool newsletter serviceshave recommended creating a diagonal call position in PepsiCo, buying puts in Netflix, creating a covered strangle position in Waste Management, and creating an iron condor position in Chipotle. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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