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Time to Work on Strategy, Not Guess the Market

It's never too late to make sure you aren't violating the cardinal rules of investing.


What do I do now?

That question is on the minds of many investors these days as the bear market trashes portfolios and lays waste to dreams of early retirement, vacation homes and high-priced college educations.

After 2 1/2 years of falling stock prices, it's clearly too late to make amends for errors made during the giddy days of the bull market. Investors who put all of their money in technology stocks, or thought bonds were too boring, even when investing for short-term goals, already have paid the price.

And trying to guess where the market is headed from here will set the stage for disappointment. The market has rallied several times since its March 2000 peak--most recently after a sharp sell-off in July--only to fall to fresh lows, trapping investors who jumped into stocks thinking the turnaround had arrived.

But paralysis isn't an option either. In these tough times, it's more important than ever to make sure you aren't violating some of the cardinal rules of investing:

* Match assets with goals:

Make sure your money is invested in ways that match what you plan to do with it. Money for goals that need to be financed within five years--purchasing a house, paying college expenses, etc.--should be invested in short-term assets that are high on liquidity and low on volatility. That means money market accounts, short-term bonds or certificates of deposit that mature before the money is needed.

Medium-term goals, which you expect to fund in five to 10 years, should be financed with a fairly conservative mixture of fixed-income and equity investments.

Long-term goals--those 10 years or more in the future--can be financed with a diversified portfolio that has a majority of the assets in stocks. Even long-term investors need to assess their appetite for risk, however. Some people can't stomach steep losses, even if they don't plan to cash in the investments for years.

* Diversify:

It's tempting to go from being all in stocks to being all in bonds and other low-risk options. But every portfolio needs a mix of assets, at all times.

Moreover, putting money into different asset classes isn't enough. Make sure you've got a spectrum of investments in each major class. For instance, diversify within your stock portfolio by buying either a well-rounded group of mutual funds (or index funds) or by buying stocks in a wide array of industries and with both U.S. and overseas business.

Diversify within your bond portfolio by mixing conservative assets such as government bonds or municipals with more volatile securities, such as corporate bonds and mortgage-backed securities.

Although trying to time the market isn't advisable, keep in mind that interest rates are at 40-year lows. Long-term bonds generally fall in value when interest rates rise, so it may not be the best time to load up on them unless you plan to hold them to maturity.

* Rebalance:

The natural ebb and flow of investment returns is certain to throw off even the most logically formulated investment plan.

Check how much money you have in each asset class in your portfolio at least once a year. If high returns on bonds--or low returns on stocks--have thrown your investment mix off kilter, shift money between asset classes to restore the balance.

People who did that in 1999 probably sold stocks and bought bonds and look like geniuses today. Rebalancing now probably will entail trimming bonds and buying stocks.

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