Monday, February 23, 2009

Ways to weather stormy markets

What you can do, and what not to do, to whip your investments into shape

Stocks today are more volatile than they've been in years. January's wild weeks and February's broken-heart start are signs that new market leadership is emerging and old mainstays are losing steam. It's time for you to change with the times.

But how? Change is tough enough to imagine; it's even harder to do, especially when the market's direction isn't clear and buyers are grasping at straws. Adapt to changing conditions by adopting rules that can carry your investments through these turbulent times -- and beyond.

“Too many people get distracted by benchmarks, well-meaning friends, media reports or information from people that know nothing about them," says Dan Moisand, a financial adviser at Spraker Fitzgerald Tamayo & Moisand LLC in Melbourne, Fla. "They forget why they are investing in the first place. The clearer and more specific one is about goals, the better."
Here's what you need to do with your investment portfolio now, and what you don't want to do -- especially now.

Time horizon

Do see the big picture: When confusion reigns, you don't necessarily have to stay the course, but you'll want to stay above the fray and keep perspective on long-range goals and plans.
Always keep an investment portfolio that fits your personality and objectives. It's probably hard to believe now, but if you're planning to retire in 10 or 15 years, today's gyrating markets won't even register. If your money is appropriately divided among stocks, bonds and cash, any direct hit to stocks -- and your pocketbook -- will be cushioned.

All this makes it easier to tolerate the market's inevitable swings and stumbles, and to use these downturns to your advantage with prudent bargain-hunting.

Don't be short-sighted: Toss your monthly brokerage statements. Time in the market, not timing the market, is ultimately a more profitable strategy.

Longer time horizons make losses less likely. That's because stocks usually go up.
So show those market-timing gurus and gizmos the door. With investing, you don't have to join the party at just the right time; you just have to show up.


Do stay diversified: Smart investors are exposed to various types of stock funds, government and corporate bonds, cash, and maybe a smattering of real estate, commodities and natural resources. Portfolio diversification may be old hat -- don't put your eggs in one basket and such -- but cliché or not, it works.

Don't speculate: "It's more important to avoid the big mistake than to hit home runs," says Ellman, the New Jersey adviser.

We all love stories, especially Cinderella stories where the little guy or gal triumphs over injustice and lives happily ever after. The stock market is full of those get-rich-quick stories. Mostly, though, it's brokers who are getting rich off the little guy's quick trades.

If you think one stock will be a lottery ticket, ask yourself this: If you were given $100,000 today, would you put it all into that stock? Remember, Cinderella's bubble burst at midnight.


Do keep your portfolio in balance: Many investors react to the moment, buying near tops and selling near bottoms, making hasty decisions based on rumors and hunches.

The best plan is simple but challenging: Trim winners and add to losers. This is known in portfolio-speak as "rebalancing." Do it religiously once a year, and be sure to wait an extra day so your sales will qualify for favorable long-term tax rates.

Don't get pushed to act: In turbulent times like this, it may seem that you have to do something, anything, to stop the shaking. In bull markets the opposite is true, and you'll do anything just to get on board. After all, everybody likes volatility when stocks are going up.

If you feel compelled to make a move, take a lesson from the pros. Big institutional investors and money managers contemplate "what if" scenarios and have a plan of action in place when they occur.

Don't chase hot performance: Everybody loves a winner. Among mutual funds last year, for instance, trophies went to natural resources, energy, Chinese stocks and other emerging markets. This year, who knows? But it's unlikely that these same sectors will enjoy another round of turbocharged results.

While it's tempting to follow the crowd, investing is never that easy. "Don't take needless risk," Levin says. "Stick to your investment plan and rebalance back to your target levels for U.S., international, small and large stocks, as well as bonds."


Do invest with confidence: "Smart investors pick an asset allocation that is consistent with their risk tolerance," says Jim Peterson, a vice president at the Schwab Center for Financial Research. "They don't chase performance in hot areas of the markets and they don't panic when certain areas of the market do poorly."

Be flexible as well. In addition to boosting bond allocations, many investors have shifted into U.S. and international growth stocks in anticipation of an economic downturn. Growing companies with lots of cash and a broad, global customer base are better equipped to withstand chaotic times.

Yet even proven defensive measures might not be so effective this year for stock investors. Come December, you may find that the stock portion of your portfolio is below your target range. After a brutal year, you won't be in the mood to buy, but that's exactly what you want to do. The more comfortable you are with your plan, the easier that decision will be.
Don't get overconfident: Know what you don't know. Believing that you know the inner workings of a particular stock or business sector can be dangerous, even -- maybe especially -- if you work for that company or industry. Think Enron.

"You have to understand that the market has a way of doing what you don't think it's going to do," Kays says. "That's why you have certain rules in place to protect yourself on the risk side, and when people get overconfident they break those rules."

Overconfidence is prevalent when stocks are soaring, but even in this market downturn there are bargain-hunters who are convinced they're catching the bottom. They may be in for a rude and costly surprise.

"You're better off missing the bottom on the way up than getting in and things dropping another 20%," Kays says. "There's an old saying in the investment field that the pioneers get the arrows and the settlers get the land. You don't have to be the hero."

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