3 Ways to Prepare for a Falling Market

Protect your portfolio from falling markets
Protect your portfolio from falling markets

The U.S. economy is weakening, and investors aren't prepared for that news. Just look at the market's free fall last week after Chairman Ben Bernanke said the Fed sees "significant downside risks to the economic outlook."

Will the Federal Reserve's so-called "Operation Twist" bring back the buyers? No way. Warning signs are coming through loud and clear that the trend is down. That said, investors don't have to sit idly, waiting for better days.

Here are three concrete moves you can do today to prepare for and take advantage of the market's inevitable volatility.

1. Raise cash
Cash is king in today's uncertain environment. It provides the safety of a good night's sleep as well as the flexibility to take advantage of opportunities in the future. Sure, those near-0% interest rates at banks don't look very appetizing, and human nature being what it is, we have trouble selling stocks after prices have already fallen. But it's easier on the psyche to raise some cash today -- sell some stocks, curb some spending, go after that raise -- in the hopes of putting it to use tomorrow.

2. Look for income-generating stocks
Blue-chip stocks with hefty dividend yields are the comfort foods of the stock market. The older giants of industry can provide safety today and cash tomorrow. There are many quality names out there with great businesses and attractive yields. Here are three:

  • Waste Management (WM) does a dirty job for millions of folks. The market may go up or down, but the company will be there every day to haul away the trash. Its services are always in demand and its 4.4% dividend yield is very attractive.

  • Intel (INTC) is the largest chip maker in the world. If you've got a computer, chances are that Intel made the chips to run it. The company has a strong business, a great balance sheet, and a huge desire to share the spoils with shareholders. Today, its stock yields a fantastic 3.8%.

  • Johnson & Johnson (JNJ) touches our lives every day. Got a boo-boo? It supplies the Band-Aid. Got a migraine? It makes Axert. Need a strong company with a healthy dividend for your portfolio? Johnson & Johnson pays a 3.7% dividend yield.

These companies are strong and their dividends will continue to grow. Their solid foundation and income streams can dampen ups and downs, making the ride a little smoother.

3. Look for companies with huge long-term growth potential

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While blue chips can help portfolios get through near-term rough patches, it's young companies with huge potential that can generate incredible long-term returns -- if you can ignore the ups and downs and focus on owning the business.

For instance, SandRidge Energy (SD), an oil and gas exploration and production company, looks like a long-term winner. It's made all the right moves recently, shifting its focus from natural gas to acquiring oil rights and drilling new oil wells. Selling oil should generate higher returns relative to natural gas, positioning the company perfectly for the next decade. Investors who can think 10 years down the road, versus 10 weeks, should be amply rewarded.

Be Prepared

The signs point to rough sailing in the market's waters. So we have to be prepared. High-quality companies that pay big dividends provide support for our portfolios. And raising some capital today will allow investors to cash in on opportunities for companies that can grow over time -- as long as we're willing to think in decades, not days.

To see more of David's thoughts and how he's investing his "Trends and Trades" portfolio in this difficult environment, follow him on Twitter at @trendsandtrades.

David Meier is an associate advisor at The Motley Fool and does not own stock in any of the companies mentioned. The Motley Fool owns shares of Johnson & Johnson, Waste Management, and Intel, and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Netflix, Waste Management, Intel, and Johnson & Johnson; creating diagonal call positions in Johnson & Johnson and Intel; writing a covered strangle position on Waste Management; and creating a bear put spread position in Netflix.