Finding the right investment mix in a tumultuous market
Here are ways to make your portfolio safer without giving up on growth.
Amid the stock market's sharp losses and wild volatility in the first quarter, some investors may have discovered their true threshold for pain.
So what do you do if that threshold turned out to be a lot lower than you'd thought?
There are steps you can take to reduce your risk of serious portfolio losses should stocks be headed for something worse than what they've already experienced.
Of course, paring back on equities is a knee-jerk reaction many people have when prices fall. And when emotions rule investment decisions, the odds go up that you're making the wrong decision for your long-term financial health.
For all anyone knows, the stock market already has hit bottom, ending a decline that began last fall.
Still, some investors may have legitimate reasons for wanting to lower the risk in their portfolios, given the uncertainty facing the economy and the markets.
If your tolerance for risk has changed, here are three strategies that could make your portfolio safer:
Cut your stock weighting
The easiest way to reduce your risk of loss is to cut back on stocks in favor of less risky assets, such as bonds or short-term cash accounts.
The average domestic stock fund fell 10.6% in the first quarter, according to Morningstar Inc. By contrast, the average government bond fund gained 2.8%, while long-term California municipal bond funds slipped 1.9%.
For anyone whose assets primarily are in a 401(k)-type retirement savings plan, shifting the mix is easy enough.
But think about the next 10 years, rather than the next 10 weeks, before making a move, financial advisors caution.
Norman Boone, head of Mosaic Financial Partners, a San Francisco-based advisory firm, says shifting your asset mix is justified only if your long-term goals or your life circumstances have changed -- for example, you will be retiring earlier than expected.
In either case you might decide that capital preservation has become more important than capital appreciation.
If you opt to shift money from stocks to high-quality bonds (such as government, corporate or municipal issues), you can expect to reduce your risk of serious loss. Compared with stocks, bonds are inherently less risky because they are interest-bearing IOUs.
Consider what happened in the last stock bear market: From March 31, 2000, to Sept. 30, 2002, a portfolio of 80% stocks and 20% bonds dropped 32.7% on average, according to data from Vanguard Group.
