Welcome to a buyer's market without buyers

Joe Investor, the Markets Are All Yours Now
By JASON ZWEIG
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The tables have turned.
For the past couple of decades, the markets have been dominated by institutional investors who devoured bargains so fast and in such bulk that individual investors were usually left, at best, with a few scraps.
But pension funds, hedge funds, mutual funds and other institutions are under siege as their portfolios implode and investors redeem their shares, forcing the fund managers to raise cash.

Advantage Goes to the Individual Investor

Personal Finance columnist Jason Zweig explains why individuals have a big advantage over institutional investors in the market right now. (Nov. 14)

Virtually every investment that carries any risk is on sale. Stocks and bonds, at home and abroad, have had their prices slashed by up to 45% this year. Yet at the very moment when bargains abound, many of the giants who normally would buy can do nothing but sell.

Welcome to a buyer's market without buyers.

This is a huge change for the little guys. Rob Arnott, who oversees $35 billion at Research Affiliates LLC in Newport Beach, Calif., puts it this way: "The question that hardly anyone ever thinks about is: Who's on the other side of my trade, and why are they willing to be losers if I'm going to be a winner?" Ever since the 1970s, the person on the other side of your trade has almost always been someone who manages billions of dollars and has millions of dollars to spend on gathering more information than most individuals ever could. Now, however, as Mr. Arnott says, "You can -- and probably do -- have a counterparty on the other side of your trade who absolutely has to sell, perhaps at any price."
You would be very wise to give these distressed sellers a little bit of your cash, which they overvalue, in exchange for some of the stocks and bonds that they are undervaluing. Sooner rather than later, institutions will no longer need to beg for cash, they will regain the upper hand over individuals, and the tables will turn again.
While blue-chip stocks are still cheap, as I've said many times lately, there are some areas where the liquidity drought borders on desperation.

Corporate bonds.

A year ago, corporate bonds outyielded Treasurys by 1.6 percentage points; now, the spread is more than five. Top-quality corporate debt is yielding 7% and up. Consider cheap, well-run funds like Harbor Bond, Loomis Sayles Bond or . Convertible bonds are yielding 12% and more; here, the easiest choice is Vanguard Convertible Securities.

Municipal bonds.

The tax-free securities issued by state and local governments have gotten so cheap that in many cases you would have to earn 7% or 8% before tax to match their yield. Vanguard, T. Rowe Price and Fidelity offer a wide range of muni funds at low cost.

Emerging markets.

Stocks and bonds in the developing world have been decimated. Emerging-market stocks have fallen nearly 60% in 2008. The bonds have dropped about 20%, producing the highest yields in about a decade. For stocks, Vanguard Emerging Markets ETF is a good choice; T. Rowe Price Emerging Markets Bond fund is a solid way to play the debt.

TIPS.

Larry Swedroe of Buckingham Asset Management in St. Louis recently bought 8-year Treasury Inflation-Protected Securities with a yield of 3.7%. "That is crazy," he marvels, since the same day the 5-year TIPS yielded 2.6% and the 10-year yielded 2.7%. Such fat yields in excess of inflation on a risk-free investment are a rare opportunity. Put TIPS in a tax-free retirement account; learn more at www.treasurydirect.gov.

Closed-end funds.

These neglected fund/stock hybrids are at their cheapest in years. Closed-ends often trade at a discount to the market value of their holdings. In many cases, you now can get $1 in assets for 85 cents. That augments the yield on funds that hold corporate or municipal bonds. A handy starting point for research is www.closed-endfunds.com. Be sure the fund is "unleveraged," meaning that it does not borrow money, and avoid any fund with annual expenses over 1%.

Real estate.

REITs, or real-estate investment trusts, have been gutted in the housing crisis, losing more than 40% so far this year after an 18% drop in 2007. Many REITs are now priced as if people and businesses will never again want roofs over their heads. The safest choice: a basket holding dozens of real-estate bundles, like Vanguard REIT Index fund.

Finally, if you have cash and courage, consider a vacation property or second home. Nearly two-thirds of the condominiums built in and around Myrtle Beach, S.C. during the boom remain unsold as of June, says the National Association of Home Builders. A similar supply glut has clogged markets in other getaways like Tampa, Fla., and San Diego. With due diligence, you could get both a high financial and a high psychic return.
Email: intelligentinvestor@wsj.com.