Put your money where the profit is

Within the last two weeks, we've trounced through financial hell and back: The stock market's down by almost a half -- yes, half -- of what it was one year ago, more people are unemployed and homeless to boot, credit lines are dwindling, the sky is falling, and so on and so forth.

But the question on everyone's minds (besides "How am I going to afford these groceries?") is "Where should I put my money?" And if you're not asking yourself this question, you probably should be. Even in these fearful times, there is money to be made -- or at least fabulous opportunities to position yourself in to profit when things get better economically.

Why? Even the most "recession-proof" stocks -- such as Johnson & Johnson, McDonald's and Procter & Gamble -- are gravely discounted right now, but not necessarily because their business is crippled or they're two steps away from bankruptcy. Usually the bruise of bad earnings or a limping stock price in a company like Wal-Mart is merely a residual effect of the downtrodden market, and not representative (in this market, at least) of the company's operations. Which means that if you can buy into a company that you know will weather the current storm (say General Electric or Amazon.com) while it's down near it's low price, that is the equivalent of finding $850 Manolo Blahniks on clearance for $50 at The Nordstrom Rack. Well, it's even better than that equivalent, actually, because your Manolos will never make you loads of extra cash, but buying up good companies at discount prices will.

Unfortunately I know that most of us don't have ancillary funds that aren't being used to pay off debt and/or create some sort of emergency fund, but for those of you who have the means, I highly suggest getting in when the theoretical gettin's good.

That being said, the Motley Fool spoke with a handful of "all-knowing" analysts on Friday about what they think you should do with your money. The tips include:

• The only reason to cut your losses and sell stock right now is if you have money in the market that you planned to live on in the next five years.
  

Categorize your money -- You need to know (1) what you need for the next three months, (2) what you need for the next year, (3) what you need for the next three years, and (4) what you don't need for a good long while.

• What goes to (1) is your emergency fund. Make sure you have it in a FDIC-insured savings account that you can get at when you need it. For (2) or (3), get a better yield, but still protect the principal, by buying a CD or TIPS. For (4), that's money you should be averaging into the stock market at today's low prices.

One analyst commented that "we're in a 'save-to-buy' environment."

• He says that you'll want to make sure you're saving your pennies as we go into a period of true economic uncertainty. That's not to say you need to turn into Ebenezer Scrooge, but do keep in mind how much you're earning and spending. That way, you can judiciously put some of this money to work in high-quality, cheap stocks, and we're starting to see some serious values out there. Berkshire Hathaway, one of the most stable companies around, is down almost 20% since the beginning of the month. That's incredible, he remarks. (Granted, Berkshire Hathaway is at a current $3,700/share, but its slight flicker into the negative is a testament to its solid footing, especially compared with many other companies. My kingdom for $3,700 to buy in!)

Stick to the plan you had before any of this started happening, says another analyst. "And if you didn't have a plan beforehand? Get one -- get the one you should have had all along (more on that in a minute), and commit to memory, 'I will never spend another day investing (or not investing) my money without a plan.' "

• Money that you'll need to spend in the next year or two for a house, car, in case of losing a job, and so on, that shouldn't have been in the market, shouldn't be in there now. Nothing about that has changed in recent days.
• Money that you're setting aside for retirement, if that retirement is 10 years or more away, I believe, should be fine. If you're closer than 10 years to retirement, and aren't diversified into bonds, Treasury bills, etc., start doing so -- regardless of whether you think the market is going to trade at a higher or lower price next week, next month or next year. If you're properly diversified, you'll be sleeping fine.

And finally, says a fifth analyst, if academic research is a guide, individual investors will pull out of stocks near the bottom (usually due to panic and irrational pessissism). If history is a guide, this will create marvelous buying opportunity in stocks, as I mentioned earlier.

• But now, more than ever, investors need to consider their risk tolerance, wealth and time horizon when investing. Beaten-down banks may be a great investment for someone OK with risk, but someone who wants to play it safer should look at utilities or a maker of cheap consumables, such as Procter & Gamble, Coca-Cola, or PepsiCo.

• In the tech bubble, risk and return was expensive: Investors had to pay for the privilege of investing in risky companies. Now, it's practically being given away. This means that folks selling out of stocks to buy safer investments will pay dearly. They're getting a terrible deal. Those who absolutely need the money soon may need to do that, but for the rest of us, the long-term chart says that we probably want to be in stocks now, not out of them.

I couldn't agree more! [Motley Fool]