Develop defense against wild stock market

BOULDER – If you get sick on roller coasters you might want to avoid looking at the stock market for a while.

It’s been a wild ride for Wall Street recently, including a one-day 600-point swing on the Dow Jones Industrial Average and a near bear market, which is officially classified as a 20 percent correction.

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While most financial planners stress patience in a choppy market there are ways to play defense for your investment portfolio.

First check your tolerance for risk.

“It’s always good to make sure your portfolio is in line with your risk levels,´ said Robert Pyle, president of Diversified Asset Management Inc. in Boulder. “It should let you sleep at night.”

Lowering the risk level of your portfolio doesn’t mean abandoning all tech stocks or small caps. Pyle said the portfolio should remain diversified in its investments. You might need to change specific stocks or mutual funds within a sector, but keep the sector represented in the portfolio. For example, an investor could replace one volatile tech stock with another more stable one.

Big swings in the market might also provide a good time to rebalance your portfolio, Pyle said. Take some of those big gains from last year – such as commodities and emerging markets – and redistribute them throughout your other investments.

If you’ve already suffered a big loss (such as from homebuilding or banking stocks) this could be a good time to rebalance those sectors as well. You could sell those losers, providing a tax loss for 2008, but immediately replace them with other down-beaten stocks in the sector looking for a recovery.

You never want to completely exit the market, Pyle said.

“If you jump out of the market at the bottom you’ll miss the run up, and that detracts from the purpose of investing.”

Pyle’s generally optimistic about the market. Another local financial planner, Dan Bereck with Financial Consulting Associates in Boulder, said he is more bearish.

“We may get some kind of bounce in the near term, but I think we’re still heading lower,” Bereck said. “I feel like we’re in a secular bear market until at least 2015.”

Bereck said there will be some up years along the way, presenting opportunities, but the overall trend will be down. He said investors need to be careful where they’ve seen recent big gains.

“The emerging markets have been on a great run – you need to be careful, there’s a lot of risk. But there may be some opportunities after these drop a bit. I wouldn’t have more than 5 to 8 percent of a portfolio in the emerging markets.”

If the emerging markets in Asia and South America slow that could also put some near-term pressure on commodities, Bereck said. He still sees energy and raw materials as a good long-term investment.

“The rest of the world wants to live like us,” Bereck said. “The demand will continue.”

Sometimes, the best defense is a good offense. If you think the economy is heading for a recovery now could be the time to pick up stocks that have been beaten down. If you think the economy is just beginning to fall then look to bet against some of last year’s high-flying stocks. You can short a stock or invest in inverse funds, which bet against a sector more as an entire index of stocks.

Getting back to defense, Bereck said a good investment in down times could be paying down your home mortgage with any new cash that comes your way. If your investments can’t outperform the lending rate on your loan, then you’re losing money. At the same time don’t raid all your investments to pay off your mortgage, he said.

The safest investment Bereck can recommend is a government treasury.

“They don’t pay as much, but the government can always print money,” he said.

Contact David Clucas at 303-440-4950 or dclucas@bcbr.com.