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How to ride out the storm

Make sure your portfolio has a mix of assets and don't rush your decisions, financial planners advise.

July 27, 2007|Kathy M. Kristof | Times Staff Writer

As the Dow Jones industrial average was plunging 311 points Thursday, Richard Riggs was working and unworried.

The owner of a small collection agency in the San Fernando Valley, Riggs, 52, says he has about 25% of his assets in stocks -- an amount that won't make or break him.

"Confidence in your basic strategy is everything," he said. "We live within our means, drive paid-off cars and travel well. We are content and unafraid."

Jerry Hurley, a 69-year-old retired schoolteacher in Redding, says he's not selling his stocks either -- but he's becoming increasingly uneasy with recent market gyrations.

"I'm not selling, but I'm not saying that I'm doing the right thing, either," he said. "The domino effect is scary when we have all these sub-prime companies going under and crude oil prices rising."

What to do when the market goes mad? Financial planners say people should invest for the long haul and not be panicked by short-term swings. But they also advise regular checkups to ensure your portfolio is healthy.

Here are some questions to ask as you review your investments.

What's your overall mix?

Just as a smart diet includes a mixture of food groups, a healthy portfolio requires a mixture of assets. Every portfolio ought to include a mix of stocks, bonds, cash and international investments, said Ed O'Hara, a financial planner in Silver Spring, Md.

The right percentage of each will depend on factors including your age, wealth and ability to tolerate risk. The younger and more risk tolerant, the more you can handle a larger percentage of stocks.

Now what does your close-up look like?

Breaking investments into broad asset categories is just the first step in diversifying a portfolio, said Brent Kessel, chief executive of Kubera Portfolios in Pacific Palisades. You need to look closely at your specific investments, especially your stocks, to make sure you are not too heavily weighted in one sector, such as technology or financial services.

In other words, it's not enough to just eat vegetables -- you need dark greens, orange carrots, yellow corn and other varieties to ensure a balanced diet.

There are many ways to diversify within a stock portfolio. Some experts suggest that you have investments in a wide array of market sectors. However, for those who invest through mutual funds, Kessel suggests they look at "style."

Morningstar Investments, a Chicago-based investment research firm, denotes where each fund falls in nine different style categories, ranging from large company "value" to small company "growth."

"What's important to us is that investors have substantial allocations in each of the four corners of the style box," he said.

If your portfolio moved as dramatically as the market Thursday, that's a sure sign that you are not as diversified as you ought to be, Kessel said.

When was your last check-up?

Even if you have different asset classes and a wide array of investments in each class, you need to make sure that the percentage of assets that you have in each category remains consistent with your plan, said Mark Brown, principal with Denver financial planning firm Brown & Tedstrom.

Investors who are just a few years from retirement, for example, might decide that they want 60% of their assets in stocks, 30% in bonds and 10% in cash. But, when one market soars -- or plunges -- those percentages are likely to get out of balance.

Unfortunately, when times are good, investors get complacent and forget their periodic portfolio checkups. If you haven't looked lately at whether your asset mix suits your plan, do.

How are your fundamentals?

If you invest in individual stocks, it might be time to take a look at whether you would buy the same shares today, Brown said.

That means taking a look at fundamentals, such as the company's stock price compared with its earnings; its growth prospects; and its dividend yield. Are these ratios in line with historic levels for this company and this industry? If not, is there some fundamental reason why they should be off-kilter?

If a company's market price is high compared with its earnings -- both relative to its historic P/E and to its peers -- it may be time to sell. (Value Line Investment Survey, available at most public libraries, can provide the historic levels.) It also makes sense to sell if the company's growth prospects have diminished more than its stock price.

On the other hand, if a company's stock price got hit in the recent market meltdown and is now selling cheaply compared with its growth and earnings prospects, it may well be time to buy.

Are you rushing your investment decisions?

Market experts are nearly unanimous in their one bit of closing advice: Don't act fast.

There's no reason to buy or sell in a rush today. And, in fact, acting in a hurry is a recipe for disaster.

"It's a great time to look at your portfolio, but don't make any changes for a week," advised Kessel. "People tend to make bad decisions when they act quickly."

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