How to invest in a falling-rate environment
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Utility stocks usually up
Oftentimes when the Fed is reducing rates, the stock market does very well. The reason doesn't have much to do with the rates, per se, and what's going on in the bond market, the reason is because people think the Fed is making the right move to improve the economy down the road. A strong economy is very good for stocks, but may not be very good for bonds. If rates are going down, the bond market will do well, almost regardless of whatever else is going on.

There are certain kinds of stocks that tend to do well in a low interest-rate environment. One group is utilities. Utilities are high-yield in nature and compete a little bit with bonds. When bond rates are rising, utilities don't do so well. But money starts moving into them as bond rates go down because the dividend you get off utilities tends to increase year over year regardless of fixed income.

There's another aspect. Relative to other stocks, utilities on average carry fairly large debt loads. They're always borrowing money, so part of their cost of doing business is paying interest on their loans. So if rates are down, their costs go down.

REITs may be right
We might talk a little about real estate investment trusts as income. REITs have come down; even the ones that are taking advantage of problems in the housing market, such as apartment REITs, have been thrown out with the bath water. They're actually looking quite attractive right now. They also tend to carry big debt because they borrow to finance new acquisitions, and they tend to do well in a falling-rate environment. Add in the factor that a falling-rate environment is often highly correlated with a falling broader economic environment.

REITs have a safety effect to them relative to other stocks because their income is fairly reliable. If you go back to 2001 through 2002 when the stock market was getting hit, REITs really held up well. I like commercial and industrial but especially apartment REITs.

Put money on financial services
In addition to utilities and REITs, I would also say, in general, finance companies do well in a low-rate environment. We're in a weird time for finance companies. Banks are getting hit, everything's getting hit by the mortgage problem, but lower rates going forward will help to save these companies. So, to me, their valuations are looking pretty attractive.

Consumer staples, not to be confused with consumer discretionary, also tend to do pretty well in a slowing economy.

ARM holders benefit
If you have an adjustable-rate mortgage, you should be considering refinancing. A falling-rate environment is a lot better for ARM holders, but mortgages are long term. A lot of people are enticed into ARMs with artificially low beginning rates. Those are the ones that are going to ratchet up regardless of what happens with the Fed. Those are the people who really need to think about getting a fixed-rate loan.

As a general rule, if you have a mortgage and you can get a rate that's about 1 percent better, it's a pretty good time to refinance. That's a very general rule because it depends on how many years you have left, and it assumes you can be efficient in terms of minimizing closing costs.

Diversification and a long-term approach are incredibly key variables and investors who focus on the short term nine out of 10 times are the ones who don't do very well and end up frustrated.

You have to be a little bit brave, but brave investors capture value because some short-term problem is making companies look unattractive.