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Financial planners urge calm amid storm

A long-term view and a diverse portfolio can help investors survive a stock slump, experts say.

February 28, 2007|Martin Zimmerman and Kathy M. Kristof | Times Staff Writers

As the stock market plunged Tuesday, Clyde Barton happened to be sitting down with his financial planner for a review of his investments.

The Dow Jones industrial average ended down 416 points, but Barton wasn't flustered.

"I don't like to see the market drop, but on the other hand, this isn't the time to do anything," said Barton, a 75-year-old retired oil company manager who lives in Orange. "The market went down, but it'll come back. It's just a question of when."

Barton was following the advice that many financial planners were giving their clients Tuesday: Don't panic.

"It's best to try to take the emotions out of market decisions," said Victoria Collins of Keller Group in Irvine, who is Barton's advisor. "If your asset allocation is clear and you're confident about it, you should be able to ride out market fluctuations like this."

Collins and other financial planners say people can survive a market downturn like Tuesday's by following a few time-tested strategies, including:

* Keep a diverse portfolio of investments. As a general rule, advisors recommend that people invest mostly in stocks until age 50, and after that gradually shift more money into safer investments such as Treasury bonds and money market funds.

* After a downturn, assess the damage. If your portfolio was decimated by Tuesday's moves, you may have too much of your money in one sector, such as technology stocks or funds focused on companies in emerging economies such as India.

* Take the long view. Unless you're investing the rent money, day-to-day swings shouldn't matter. Put the rent money in the bank and your long-term assets in stocks.

It's not always easy to stick to a long-term strategy, especially when memories of the recent bear market are still fresh. The Dow has been setting records since October. But the Standard & Poor's 500 index, a broader barometer of the stock market, still hasn't topped the high-water mark it hit in March 2000. And the technology-heavy Nasdaq is 52% below its peak.

Planners habitually tell clients to stick with the program, even when the market is on the verge of a meltdown, acknowledged Mark Wilson, a certified financial planner at Tarbox Group in Newport Beach.

In 2000, when the U.S. stock market turned sour after a long bull run, most planners told their customers to hold on all the way down.

So why listen now?

Over the long haul, Wilson and others say, stocks provide the best method of building your financial security. Historically, investments in the stocks of large U.S. companies have appreciated by an average of 10% a year, according to Ibbotson Associates, a Chicago-based research firm.

At the same time, however, stocks are subject to wild swings, which is why people are advised to shift to conservative bond and cash funds as they get older.

Planners often recommend that investors roughly match their portfolio's weighting of bonds and cash to their age. For example, at age 65, the mix should be 65% cash and fixed income and 35% stocks.

This mix of stocks and bonds can provide a needed margin of safety when there's a stock-market sell-off. For example, while stocks were suffering around the world Tuesday, U.S. government bond investors were enjoying a banner day. The Pimco Total Return bond fund shot up 0.7%.

Investors shouldn't rely on diversification alone, however, but should also look at the stocks and sectors in which they've invested, said Vitaliy Katsenelson, a portfolio manager at Investment Management Associates Inc.

The big sell-off in the Chinese stock market that helped trigger Tuesday's meltdown is a signal for investors to review their own holdings for linkage to the Chinese economy, Katsenelson said.

"They should look at how much of their companies' sales come from China," Katsenelson wrote in a research note. "You don't want to have a portfolio full of companies that sell only to the Chinese."

He also warned that commodity stocks, such as oil and metals producers, could suffer if a weakening Chinese economy dents demand for energy and raw materials.

Some experts worry that the China boom -- the Shanghai index zoomed 109% last year -- could be a replay of the U.S. tech stock mania of the late 1990s. The plunge provides fresh evidence that investors should never put a disproportionate share of their assets in any one stock, sector or international market.

"Days like today can be scary for people, but the focus on the long term and building a portfolio is still important," said Paul Herbert, senior mutual fund analyst at Morningstar Inc. "And on days like this, people get a reminder of just how important they are."

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