Published in Daily Finance (8/5/11)
How to Survive the Stock Market’s Wild Ride
By Sherilyn Nance-Nash
The stock-market roller coaster has been wild enough to make even the most stoic, stiff-necked investors queasy. After falling in 10 out of the last 11 trading sessions, the stock market plunged more than 500 points Thursday, making it the worst day for the Dow since Oct. 22, 2008, the day that marked the beginning of the global financial crisis. On Thursday, the index lost 4.3% — erasing all the gains for the year — to end at 11,384.
“Given the debt deal, the likelihood of another stimulus package is decreased,” says Steve Wood, chief market strategist for Russell Investments.
And that will slow the recovery, says John Liu, president of Firstrade, an online broker. “Without government help, the market is going to get worse before it gets better,” he says. “It doesn’t mean it won’t get better, it will just take longer.”
“Don’t panic, and keep your emotions in check,” says Thomas Yorke, a Covester model manager and managing director of Oceanic capital Management. “These movements should flush out some of the more leveraged players and provide an opportunity to make some selective buys at a significantly lower levels. In situations like this, most investors are more likely to sell their best performers and hold their worst — the trading in gold today being a prime example of that behavior. When you are ready to make some adjustments, make sure you pitch your poor performers and opt for the market leaders who apt to recover more quickly.”This is the time to re-evaluate your portfolio and determine how diversified you truly are, Yorke advises. But keep in mind that the correlations between different asset classes will converge at times like these, when the market is moving downward so strongly, he says. “You should study what classes performed best and plan to increase your exposure to them when things start to return to normal,” he says. “Doing this during high-stress periods will more likely have you buying things too expensively and selling things too cheaply. Your goal should be to create the proper asset allocation and understand that over time this more balanced approach will achieve a better ‘risk adjusted’ return and enable you to sleep better at night.”
If you are a long-term investor, take a deep breath and stay the course, says Mark Fissel, a certified financial planner with Beacon Hill Investment Advisory. From the standpoint of price-to-earnings ratios, or stock prices compared to company earnings, the stock market is the cheapest its been since 1990. So, yes, there’s great uncertainty, but that also means there’s an opportunity to make money. By the time the sky is blue, the market will have already gone up, Fissel says.
Some advisors are slicing off 20%-40% of portfolios into annuities. Depending on the annuity type, it could provide steady flows of income for years — or even for life — and reduce the risk that investors could run out of money. Annuities make sense because just one market loss can change how long your retirement income lasts. Especially for those who are near retirement or already retired, says Jonathan Gassman, a certified financial planner with Gassman & Kolody.
Despite the recent run up in precious metals and related stocks, investors should consider allocating a significant portion of their portfolios to those investments, says James Dailey, chief investment officer of Team Financial Managers. “In my opinion, they remain underowned and have not been embraced by institutional investors, despite being in a bull market for 10 plus years,” he says. “They offer important diversification benefits, as well as protection against devaluing currencies, though they are likely to be volatile.”
Meanwhile, he warns investors against government bonds. “Rushing into bonds is extremely dangerous, in my opinion, given how governments are likely to respond,” he say