So has the storm passed? Or are we just in the eye?
If I had to guess, I'd say we're in an eye, but maybe not the only one we'll see in coming months. While I do think we're unlikely to see another week like last week anytime soon, I suspect we're in for a period of ups and downs -- rallies that fade, in other words -- and we may not have seen the final bottom of this bear market.
That's my two cents, anyway. Others will disagree -- and truth is, as you can tell from the weasel words I used above, none of us really know. Predictions give us a feeling of certainty, but the reality is uncertain. We just don't know.
It's prudent, then, to be prepared for anything. Not necessarily in a buy-gold-coins-and-head-for-the-hills sense, but in the sense of positioning your portfolio and your mind-set to get through the rest of the storm as well as possible.
The game plan
If you're sitting down to do some work on your portfolio, here's a game plan to keep in mind.
- Secure any money you'll need in the next five years. Money you'll need in the next five years shouldn't ever be in stocks, but a lot of us fail to heed that during bullish times. Now is as good a time as any to get your near-term needs covered. Look at money market funds (yes, they're safe) for near-term needs; bond index funds for money you won't need for a year or more. I know that selling at these levels might be hard, but selling at lower levels -- or running out of money -- will be harder. Trust me, you'll sleep better.
- Review every stock you own. Fool Alex Dumortier explains how. As he says: "For every stock you own, ask yourself: 'If I didn't own this stock today, would I want to own it at its current price?'" To that, I would add, "Would you still want to own it in a rough recession and if further banking troubles arise?" If not, sell, but ...
- Don't sell without a good fundamental reason. I hope we're through the worst of the panic-selling, but I don't rule out the possibility of more big scary drops in the days and weeks ahead. Investment decisions made in panic almost always prove regrettable a few years down the line. If you feel tempted, turn off the computer and go for a walk.
- Take advantage of others' panic -- carefully. In times like this, when a recession is looming and surprises could be lurking on a lot of balance sheets, there's a good case for buying at the sector level via an ETF, rather than buying individual stocks. For instance, if you think pharma is a good bet in a recession (I do), but aren't sure about the prospects of, say, Bristol-Myers Squibb (NYSE: BMY ) versus Forest Labs (NYSE: FRX ) , consider buying a pharmaceutical ETF instead.
An ETF like SPDR S&P Pharmaceuticals contains both of those stocks -- along with Barr Pharmaceuticals (NYSE: BRL ) , Johnson & Johnson (NYSE: JNJ ) , and other segment leaders. You get the exposure to pharma that you want, with much less risk of getting clobbered if one of those companies blows up. Sure, the very best stocks in that sector will outperform the ETF over the long haul, but if you're not completely sure you can identify them, skipping that risk and buying the sector makes sense.
- Mind your asset allocation. If you don't have an asset-allocation plan for your long-term holdings, get one, and start following it now. Yes, now. As Fool Tim Hanson said last week, it's time to use this sell-off to your advantage by tuning up your portfolio.
- Keep contributing to retirement plans. Experts debate the pros and cons of dollar-cost averaging, but there's no doubt in my mind that buying shares when they're cheap works out well over the long haul. This is not the time to cut back on those contributions -- if you need to trim the household budget, look elsewhere first.
Look at the huge haircuts that stocks like Monsanto (NYSE: MON ) , Apple (Nasdaq: AAPL ) , and Best Buy (NYSE: BBY ) have taken recently. There are excellent long-term arguments for all three companies, yet they're priced at big discounts to where they were a few weeks ago. Do you want to buy them -- or the funds that hold big stakes in them -- at current prices, or wait until they go back up?
In short, don't be afraid to take some risk. Just be even more cautious than usual of the possible downside of anything you buy, and make sure you're adhering to your long-term plan. Investments with a built-in margin of safety -- a cornerstone principle of value investing -- are worth seeking right now.
If you're looking for bargains to buy today, take a look at the stocks that the Fool's Inside Value analysts are recommending to members right now. They specialize in finding stocks with a margin of safety and high upside potential, and they've found some shining possibilities in the recent market wreckage. See their best picks today with a 30-day free trial.