Ride out the storm with portfolio preservation
By Laura Bruce • Bankrate.com

It's hard to remember those days of irrational exuberance when your portfolio is getting bludgeoned.

Every day there's a new headline you'd rather not see. Stocks tumbling. Earnings falling. Consumer confidence buffeted.

How low can the market go? And when it hits bottom, how soon will it turn around?

The questions are frightening, and no one has the answers. The important thing is, what can you do to limit the downside to your portfolio -- and not make any decisions you'll regret six months or a year from now? You'll have to figure out what's right for you because even the experts disagree.

Jason Flurry, a certified financial planner and president of Legacy Partners Financial Group, Woodstock, Ga., is telling clients to use what he calls "these mini false rallies" to lighten up if their portfolios are overweighted in technology and communications stocks.

"Take a quarter out and park it in money markets to wait it out. We're not far from seeing a turnaround, but I think the techs will turn from lower levels. I think we'll grind and grope along the bottom for a while and other sectors will turn first."

To sell or not to sell
Tom Grzymala, president of Alexandria, Va.,-based Alexandria Financial Associates, says he's opposed to selling at this time if someone has a well-diversified, good quality portfolio.

"Selling will make paper losses real losses. If you invested $5,000 in Intel and it's still worth $6,000 and you're thinking, 'I want to get out while it's still good,' what will you do with the money? Assuming it goes into a money market, when do you put it back in the market? Nobody, and I mean nobody, knows when the market will come back. Keep the money where it is for the present time."

Selling portions of your portfolio that may be at rock bottom prices isn't easy medicine to swallow, and, for some investors, it may not be the right thing to do.

Kathleen Day, CEO at The Enrichment Group in Miami, says her company has stopped the quarterly equity sales that would normally provide her retired clients with a monthly distribution from their portfolios.

"We're dipping into the cash cushion and we're selling income. If we have bond mutual funds we'll sell them, or if there's a value fund that's held up well, we'll sell that instead of a tech fund that's been clobbered."

As the market turns
Market downturns are the rule rather than the exception. It's just that we haven't had one this prolonged and this bloody for a while. The main thing is -- don't panic and don't let yourself get sick over it.

Individual investors are not capitulating, according to Grzymala. "Because of past corrections that took three days or three weeks, people hung in there. Now they're starting to worry a lot more."

"If you ever reach the point of saying, 'I can't take it, I can't sleep,' get out of it. Go into the money markets and take your losses," says Morris Armstrong of Armstrong Financial Strategies in New Milford, Conn.

"If you have a portfolio that's suitable for you, sit tight. But if you're 65 and 85 percent of your portfolio is in tech, there's something wrong with the portfolio to begin with. If you have a bad stock and you're down and you say, 'I'm going to hold it until it bounces back,' that's wrong. A bad company may never bounce back. Get rid of the stock and go to a good company that may be getting hammered right now but is still a quality company."

Kathleen Day says she's having her clients double-check their discretionary spending. Consider doing without or delaying that vacation. In her words, "It's time to tighten up a bit." Day's company has scheduled meetings with clients to show them what they can do to help themselves. She says when clients take an active approach to their own portfolios it makes them feel a lot better than when they just sit and watch the market slide.

The need to diversify
Downturns such as this hammer home the need for a diversified portfolio -- the best bet for weathering the storm.

"It's my opinion you should have a predetermined philosophy before investing -- goals, expectations, risk tolerance and time horizons," says Grzymala. "Don't have any money in the market that you expect to need as cash in the next three years. If you depend on an income stream, carve it out and protect it. Then, these fluctuations, as horrible as they are, won't affect it."

That philosophy is helping one of Grzymala's clients get through this mess. Seventy-two-year-old Bob McFarren of Washington, D.C., says his portfolio is taking some bumps, but he can stay focused on the long-term goal because there's enough cash to cover short-term needs.

"We've set up the IRA accounts, done some insurance things, taken a long-term-care insurance plan. If you get these things off the action table and into the safe, so to speak, then there's going to be cash available and then one relaxes considerably. Let's not hit the panic button," says McFarren. "We're alert, open to considerations and we adjust our diversifications as conditions change. We haven't been perfect. We took some hits, we got enthusiastic about the techies. Some of them we're still holding because they have reasonable recovery potential."

It's a tired, old song, but diversification -- a mix of quality stock and mutual fund selections combined with bonds and cash -- can let an investor have some peace of mind while enjoying solid, consistent returns. You may not see the big highs from a high-tech bubble, but you also won't suffer these horrendous lows when the bubble bursts.

Asset managers who subscribe to the diversification philosophy say they get criticized during the good times and looked at as saviors during downturns. Just as surely as the bulls will take back the market someday, so will the bears.

Tom Grzymala says the market has corrected 14 times in the last 55 years, and the average length of the corrections is 13 months. Few portfolios are immune from these stomach-churning drops, but you can limit the damage by following the tried and true steps.

-- Posted: March 21, 2001