Despairing over the huge stock market decline? The economic forecasts that seem to get worse every day?

Think it's too late to save your portfolio? Ready to throw in the towel?

Think again. When an unexpected setback hits in the rest of your life -- a problem you didn't anticipate at work, an arm broken while trying a new skiing technique -- don't you usually try to learn from the experience and move on?

Hurricanes and market storms
Consider this: If you had a house in, say, Galveston, or on North Carolina's Outer Banks, you'd probably take hurricane season pretty seriously. You'd have some canned goods and bottled water and flashlights and maybe a Coleman stove stashed in case you were stuck without power for a few days, and you might have a pretty good first-aid kit tucked away. Maybe you'd also have some plywood sheets set aside, in case you had to board things up in a hurry.

And if you didn't have those things in place, and a July storm blew through and maybe broke a couple of windows, knocked over a tree, and left you without power for a few days, you wouldn't say, "Well, I've missed the worst of it, there's no sense in bothering to prepare now." Would you?

I'm not saying that the Katrina of market storms has yet to come. It's entirely possible that the worst market decline most of us will see in our lifetimes is behind us. But I am saying that it's never too late to learn from experience, find your way through the rough waters that remain, and be ready for the next big storm that blows through.

Here's how.

Step 1: Assess the damage
Unless your portfolio consisted entirely of short positions (note: bad idea), I'm betting that you've taken some losses over the last six months, and for most of you those losses have been pretty severe.

Dig out that statement and take a look. What got hit hardest? Were you holding stocks or funds that you really should have sold long ago? Did you have too few positions, or too many in one corner of the market? Or -- and this is entirely possible -- did you do everything right, holding a well-diversified basket of promising stocks that got clobbered anyway?

Step 2: Turn the page
Starting with a clean sheet of paper (or a clear screen, as you prefer), sketch out the basic foundation of your ideal portfolio. Has your long-term tolerance for risk changed in light of recent events? Your goal is a solid asset-allocation plan that covers all the major corners of the market, includes international exposure, and is consistent with the risk you're comfortable taking. If you need a template, check out the excellent model portfolios maintained by the Fool's Rule Your Retirement newsletter. (Yes, it's a paid service, but you can get no-obligation access with a 30-day free trial, so click without worry.)

Step 3: Start filling it in
For this process, don't think about what you own now. Think about what you'd like to own, the ideal long-term (three to five years or more) investments for each of your asset-allocation categories. If you need a starting point, head over to Motley Fool CAPS and use the excellent stock screener. I just did exactly that, looking for small-cap growth possibilities, and came up with a list of 26 including these:


CAPS Rating

3-Year EPS Growth Rate

Return on Equity

American Oriental Bioengineering (NYSE:AOB)




China Medical Technologies (NASDAQ:CMED)












optionsXpress (NASDAQ:OXPS)




Sadia (NYSE:SDA)




Vasco Data Security (NASDAQ:VDSI)




Source: Motley Fool CAPS.

To be clear, those are just candidates for further research -- you shouldn't buy any stock right now until you have, at bare minimum, a clear understanding of how the company is likely to fare during the recession! -- but there's a lot of promise on that list. The screener is an excellent way to create a focused list of strong candidates for any corner of the market.

Step 4: Move from what you have to what you want
With nearly everything in the market still down sharply from recent highs, it remains an excellent time to sell your existing holdings to buy your ideal holdings. If your portfolio is mostly held in taxable accounts, you should check with a tax advisor before making major moves -- depending on your situation, it may be to your advantage to hold off on some or all of the trades until January -- but if you're working within an IRA, get to it! Forget about trying to recover losses in your current holdings. If you wouldn't buy it at this price instead of buying something on your ideal list, get rid of it!

The takeaway
It is never a bad time to rework your portfolio for maximum long-term performance. If you start with a plan that gives you the proven advantages of asset allocation and fill it in with great stocks, your chances of market-trouncing, storm-defying performance are very high. Why wait any longer?

To learn more about the best portfolio moves for right now:

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.