Bear lairs in a troubled market

REIT funds: These funds essentially invest in commercial real estate. "Everyone should have at least a 5 to 10 percent position in their portfolio for REIT funds, just for proper diversification," says Alan Papier, an analyst with Morningstar.

REIT funds have been down the past few weeks, along with everything else. But the funds are still outperforming the broader market. The average small-cap value fund, this year's top-performing US stock category according to Morningstar, is down about 16 percent for the year. But the average REIT fund is down only 4 percent.

There are some 70 REIT funds that carry various types of real estate. Mr. Papier likes Security Capital US Real Estate Fund (888-732-8748), Morgan Stanley US Real Estate Fund (800-869-6397), and Columbia Real Estate Equity Fund (800-547-1707).

Since REITs are big on dividends, you will get a hefty annual tax bill unless the funds are in tax-sheltered accounts, such as a 401(k).

A good REIT fund for a taxable account, Papier says, is Third Avenue Real Estate Value (800-443-1021), which buys real-estate-operating companies. They tend not to crank out dividends like actual REITs – which by law must pay out 90 percent of earnings as dividends.

Bear funds: These are "contrarian" funds that use hedging strategies to profit from a falling stock market. Most of the top-performing funds are currently bear funds. But some market watchers wonder whether bear funds have run their course.

"It's late getting into a bear fund now," says Sheldon Jacobs, editor of the No-Load Fund Investor, a market newsletter. "These funds bet the market will continue on down. But we don't know if that will happen. At some point it will turn back up and these funds will lose money."

"Yes, we would lose money if the market goes back up," says a spokesman for the Prudent Bear Fund. (888-778-2327). "But we believe that we are in a bear market that will go on for some time now."

If you don't want a fund that seeks to earn money from a falling stock market, how about from a falling dollar? Check out the Prudent Safe Harbor Fund, which makes money from a slumping greenback. Maybe not patriotic, but profitable.

Government bonds and government bond funds: OK, you won't make much money with them, given low yields. Still, government bonds are uber safe and come in various packages, from $25 for US Series EE savings bonds, $50 for I bonds, and $1,000 for US Treasury bonds.

You can also buy municipal bonds, issued by cities and states, which kick in slightly higher interest earnings and are often free of federal income taxes, thus boosting your returns if you are in a high tax bracket.

Cash: Investors are now plowing money back into bank savings accounts, despite their lackluster yields.

An estimated $200 billion has reportedly gone into money markets and savings accounts since Jan. 1.

Experts agree, for liquidity, mutual-fund money-market accounts make better investments than bank CDs. When buying either, look for highest possible yields through a reference service, such as www.bankrate.com.

Pay down debt: "This is a perfect time to pay down your credit-card debt, if you have extra cash that you don't want to invest now," says Ric Edelman, who heads up Edelman Financial Center, in Fairfax, Va.

"You should always get credit-card debt out of the way before investing in the stock market anyway," he says. "It doesn't make much sense to earn 7 percent to 10 percent on your investments, if you are paying out 12 percent or more on credit cards."

But Mr. Edelman would not pay off the home mortgage. Mortgage rates are currently very low. "Keep that low mortgage," Edelman says. "The house will continue to earn value, even if you don't pay off the mortgage loan now."

Page: 1 | 2