News Column

Six Things You Can Do to Ride Out a Turbulent Market

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The markets have taken a beating in the past few months and chances are so has your portfolio. Predictions are the markets will remain choppy in the near future, and the question on a lot of investors' minds is what should I do now? Seeking answers, we recently talked to some top financial experts from around the country. While there's no one-size-fits-all approach, all offered solid advice well worth considering.

1) Turn Off CNBC

Bill Cram

Watching the stock market in a free fall can send even the most experienced of investors into a panic. Bill Cram, an analyst and portfolio manager at Reed, Conner & Birdwell in Los Angeles, advises steering clear of the scary news by staying off your computer and turning off the financial news shows. "It will drive you crazy," Mr. Cram says. "You can end up making very bad long-term decisions." Instead, he says, consider looking at some high-quality stocks in which to invest. "To borrow a quote from Warren Buffet, 'When the market is greedy be fearful, and when the market is fearful be greedy','" notes Mr. Cram. "Th is is the time when you could find some great opportunities; what we're seeing is a lot of high quality, high-cap stocks trading at pretty deep discounts."

2) Shift Your Portfolio - Look to Health Care

Margarita Perez When the going gets rocky, look for safe havens, says Margarita Perez, president and founder of Fortaleza Asset Management Inc. in Chicago. "We're seeing the downside of tech and financials so it is a good time to upgrade your portfolio to include such things as health care and consumer staples," Ms. Perez says. "We all need health care and we all need to eat so shifting into these kinds of stocks is a solid idea." While elective health measures, such as plastic surgery, may be postponed during turbulent financial times, more basic medical services are always in demand, she says. "Plain, vanilla health care services are enjoying some nice growth right now. Th ere is always some risk, of course, but the growing and constant need for medical services gives you a safety cushion."

3) Invest in Cash

Robert Rodriguez Robert Rodriguez, CEO at First Pacific Advisors Capital in Los Angeles, advises investors to maintain liquidity (cash and short-term investments) for most of the year, or until the crisis shift s into a more severe phase. "Too many smart people are trying to take advantage of the crisis and I believe they are too early," says Mr. Rodriguez. "If investors do not have liquidity or do not want to have liquidity, I would focus on high-quality investments." Mr. Rodriguez also advises staying away from investing in financial services companies until later this year or maybe even next year. "The consensus believes the Fed's recent lowering of interest rates will stabilize the economy and the financial services companies," Mr. Rodriguez says. "I believe this is an optimistic expectation and that the second half of this year will likely prove very challenging from an economic and credit viewpoint."

4) Remember You Are in the Market for the Long Term

Martin Cabrera "The most important thing when the market drops is not to panic and remember that you invested for the long term," says Martin Cabrera, CEO of Cabrera Capital Markets Inc. Cabrera's firm, based in Chicago, handles accounts from cities, states and larger corporations. "Remember that while some of the financials have been significantly beaten up, they will recover at some point as the subprime crisis goes into the rearview mirror." Mr. Cabrera suggests there are good values available in the municipal bond market, although he recommends vigorously researching the field to find stable municipalities before investing. He also warns that this is not a good time for retail investors to be day trading or trading on short-term investments. "The life will come back into the market, you just have to wait for it and don't second-guess yourself," he says.

5) Foreign Bonds, Covered Calls, and Preferred Stock

Luis Maizel "Three things I'm recommending right now are international bonds, covered calls and preferred stock," says Luis Maizel, senior managing director for the San Diego-based LM Capital Group LLC. The company plays an advisory role for some of the largest public funds in the nation, including CalPERS, and it also services private investors. "I'm encouraging our investors to diversify into bonds, particularly international currency-related bonds because I believe the U.S. dollar will continue to be in trouble." Covered calls are an intriguing part of the huge option market that operates as a giant shadow to the stock market and the NASDAQ. Buyers purchase a stock and then sell the stock to a buyer who takes possession of the stock at a predesignated time in the future at a lower price. Buyers must pay a fee for purchasing the stock. "Th e buyers of the stock are the gamblers, but you don't really gamble much if you are the seller," Mr. Maizel says. For sellers, the maneuver can be a hedge against the unknown aspects of a down market, he adds. At the same time, institutions are finding that selling preferred stock, which is like a hybrid between a stock and a bond, is an attractive way to raise capital. "Some are paying as much as 8 percent on their preferred stock, making it a safer and lucrative way to protect your investments in volatile markets," Mr. Maizel says.

6) Rebalance Your Portfolio

Lloyd Kurtz If you can tolerate a moderate level of risk, Lloyd Kurtz, a senior portfolio manager at Palo Alto-based Nelson Capital, believes the best strategy, but also the hardest to do, is to rebalance your portfolio back to your original asset allocation targets. "For example, if you have decided on a policy of owning 70 percent stocks and 30 percent bonds, chances are the recent market activity left you underweighted in stocks and overweighted in bonds," says Mr. Kurtz. "To stay true to your targets, you should add to your stock position and reduce your bond position." This rebalancing has historically been helpful for both performance and risk management but can be tough psychologically, he says. "It requires that you buy things that haven't been working and sell things that have. People are oft en reluctant to do that." Reluctance, anxiety, and frustration are the hallmarks of turbulent markets, and it may be a while before the captain turns off the "fasten your seat belts" sign, but hopefully these tips will allow you to relax a little and seize the opportunities that do emerge.

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