5 Ways to Rescue Your Investments

Washington's long-awaited rescue plan appears to be dead for now. If you want to guarantee your own financial security, you're going to have to bail yourself out.

Investors have felt powerless to do much in the wake of the financial mess we've been slogging through over the past year. The good news, though, is that there are several things you can do to shore up your finances. Rather than giving up and accepting a gruesome financial future, implement your own financial rescue plan. Even if you don't immediately see dollars flowing back into your portfolio, the boost to your confidence will help keep you on the road to long-term success.

1. Lower your expectations.
The recent troubles have emphasized the risk part of the risk-reward equation of investing. Stocks earned nearly 13% annually from the beginning of 2003 to the end of 2007, making some believe such returns were sustainable indefinitely.

Yet even the long-term historical average return of 10% may well be out of reach for the near future. Consider how Microsoft (Nasdaq: MSFT  ) and Wal-Mart (NYSE: WMT  ) have each averaged less than 3% annual returns over the past five years, while DuPont (NYSE: DD  ) returned just 4.4%. By making more conservative assumptions about returns, you'll avoid planning mistakes that may force you to take more risk later on.

2. Don't kneejerk.
With up-to-the-minute news flashes and one-click brokerage trades, it's tempting to think that a quick decision is the best one. Indeed, this sometimes works: If you owned Research In Motion (Nasdaq: RIMM  ) and sold on Friday's bad news at the open, you got over $6 per share more than someone who waited until the close to sell.

Yet often, early morning panic turns to late-afternoon relief, making opening prices some of the worst of the day. Consider the way some shares reacted on Sept. 18, when the entire market recovered from multi-year lows to post a big gain:

Stock

Opening Price

Closing Price

First Solar (Nasdaq: FSLR  )

214.50

223.39

NVIDIA (Nasdaq: NVDA  )

10.12

10.89

NYSE Euronext (NYSE: NYX  )

38.38

41.00

Source: Yahoo! Finance.

Those who shot from the hip ended up doing worse than those who were a bit more patient that day.

Whatever direction prices are moving, trying to trade at the open is always a bit of a gamble. Order imbalances and other challenges in getting trading started often lead to wild price swings. It's often better to wait until the dust settles a bit before taking action.

3. Look abroad.
International stocks, which delivered outpaced returns for years, have been on the skids lately. Yet if other countries respond to U.S. troubles by developing and relying more on their own financial systems, their capital markets could finally decouple from that of the U.S., providing more diversification.

4. Demand transparency.
More than anything else, financial stocks got into trouble because they became incomprehensible, even to experts. When times were good, people happily bought high-yielding investments without understanding the slightest bit about how they actually worked. Now, they've gotten a rude awakening.

If you don't understand how a business makes money, don't buy its stock. Find one you do understand. Buying what you know helps make you less uncertain about your portfolio and its long-term prospects.

5. Have an egg basket.
Whether it's technology in the late 1990s or financial stocks before the housing bubble burst, there will always be some sector of the market that looks most attractive. Just as inevitably, though, those hot sectors will eventually fall out of favor. Keeping a diversified portfolio is the best way to ensure that you never have everything riding on whether or not a promising market trend continues.

The government plan may not rescue your finances, but you can. By knowing more about your investments, you'll make smarter decisions and avoid some of the mistakes that got us into this mess.

More on rescuing your money:

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Fool contributor Dan Caplinger is doing his best to rescue his portfolio. He doesn't own shares of the companies mentioned in this article. Wal-Mart and Microsoft are Motley Fool Inside Value selections. NYSE Euronext is a Motley Fool Rule Breakers pick. NVIDIA is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is a lifesaver.


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  • Report this Comment On September 29, 2008, at 5:00 PM, madmilker wrote:

    People in America need to realize jus what got America in this shape..."cheap" yes so-call cheap items from a foreign land and now the largest company in America wants to make everything "green" but at the same time they put 95% made in China in their stores in China and support Chinese export...don't take my word...its on their China web page quote*Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote! Now! if there be 182 country's making items for the world to buy and they have only 5% of the pie in China...duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there.... but with the "yuan" going up in value and the US dollar going down...all the foreign items that the American consumer buys thinking it is cheap has went up in price. People...its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the "we the people" have to turn to the "second" largest employer in America(Uncle Sam) to sell "we the people" debt in order to get all them dollars back! 50 years ago a foreigner would had given their left nut for a US dollar or a Hershey's chocolate bar and today the same foreigner has got Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico. Wake up! America and think "MADE IN AMERICA."

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