Whether you've made money or lost money over the past couple of years, the markets have taken just about everyone's finances on the roller-coaster ride of their lives. Now that the dust has settled somewhat, it's anyone's guess which way stocks and other investments will move next. Yet no matter whether stocks keep rallying or the bear market starts up again in earnest, you can take steps right now that will help you avoid panicking the next time the market starts dropping.
Where we've been and where we're going
It's hard to believe that it's only been a year since the worst of the financial crisis started to take root. Since then, we've seen some huge market extremes. We've suffered through horrific plunges that caused panic and fear. We've also seen a historic rally that bailed out many investors from the worst of their losses, and gave bottom-hunting opportunists the profit opportunity of a lifetime.
The lesson that investors have had drilled into their skulls is that stocks are risky. And while you may have seen your portfolio recover substantially over the past six months, you still might realize that you can't afford to bear that risk. If so, then now's a great time to make changes to your investments that will get your risk level under control.
Don't put all your eggs in one basket
When stocks perform well, it doesn't seem to matter much what you invest in. During the last bull market, the vast majority of stocks performed extremely well. Of course, some stocks did better than others, with Monsanto (NYSE:MON), GameStop (NYSE:GME), and Apple (NASDAQ:AAPL) all seeing their shares rise tenfold or more from the beginning of 2003 to the end of 2007. Yet nearly half of the current members of the S&P 500 saw their shares double during that period -- and the vast majority earned at least some gains.
Last year's losses, though, showed just how valuable a diversified portfolio can be. Although some companies managed to post gains last year, many others -- even huge ones that many thought were completely safe -- saw their shares crash downward. Just look at these well-known names:
|
Stock |
2008 Return |
|---|---|
|
McDonald's (NYSE:MCD) |
8.3% |
|
Wal-Mart (NYSE:WMT) |
19.9% |
|
Boeing (NYSE:BA) |
(49.4%) |
|
Dow Chemical (NYSE:DOW) |
(57.5%) |
|
Apple |
(56.9%) |
Source: Morningstar.
If you owned the wrong stocks last year, you got burned badly. Yet while even those diversified portfolios didn't escape without significant losses, they weren't as bad as what some experienced.
A portfolio that will let you sleep at night
No investments can both protect you from losses and give you the growth potential you need to reach your long-term goals. But if you want to tone down your risk level to something that's more comfortable, consider these four moves:
- Buy some bonds. Fixed-income securities have historically given investors a winning combination: portfolio income and returns that tend to offset stock losses. Last year, Treasury bonds made big gains, while so far this year, high-yield bonds have offered both attractive interest rates and strong price rises. Bonds can help you reduce your portfolio's overall volatility quite a bit.
- Don't forget banks. Money-market mutual funds pay next to nothing right now, but small investors can capitalize on some good deals from banks. On a fully insured savings account, some banks are paying as much as 2%. That's not much, but it beats the pants off the 0.13% you'll get from short-term Treasury bills.
- Should you own REITs? After nearly a decade of strong returns, REITs hit the skids last year. Many still see commercial real estate as a potential red flag for recovery, but prices are relatively low and yields look attractive. With so much pessimism, now might be exactly the right time to consider this option.
- Get some commodity exposure. You've missed the bottom earlier this year for many commodity prices. But compared with where energy and food prices were at the top of the commodities boom, commodities still look pretty good.
Lastly, make sure you understand all of your investments. Many investors who lost money during the financial crisis were shocked to see the risks that companies took. Right now, you can't afford to take those risks with your stocks.
If you stuck with your investments throughout the past couple of years, you've caught a lucky break from the rally. Make sure you make the most of it by making the changes you want before the next market correction comes. You'll sleep a lot better if you do.
