Well, that was ugly.
Despite signs of nascent economic recovery, the stock market pretty much fell apart in May, taking a roughly 8% header for the month. Rattled by concerns over Europe's financial health, indexes of foreign stock markets in developed countries fell by more than 10%, while emerging markets lost approximately 9% of their value. Investors have responded by yanking billions of dollars out of the stock market in May alone. No doubt folks are jittery, fearing a repeat market crash. But fleeing the market completely probably isn't the right answer. Here are a few tips for managing your portfolio in the coming months:
1. Expect more volatility and sluggishness
If market volatility keeps you up at night, you'll be in for a rough ride in the near future. Events in Europe have sent a chill through global markets, and investors are likely to remain on edge for some time to come.
That means you can expect more 300-point daily drops and gains from the market. Short-term volatility shouldn't be as much of an issue for long-term investors. But if you've been left tossing and turning at night lately, consider shifting some money into lower-beta areas of the market, like consumer goods or utilities. The Consumer Staples Select Sector SPDR
Likewise, don't expect the back end of 2010 to serve up any meaningful gains for the equity market or the economy. As the effect of government stimulus fades in the second half of the year, the economy will likely struggle to stand on its own two feet. Don't be surprised if economic data turns soft in mid-to-late 2010 and the market responds in kind. That doesn't necessarily mean we're headed for a double-dip recession. Just keep your eyes open for some softness ahead – and be willing to wait it out.
2. Don't chase alternative investments
There has been one clear beneficiary of all this uncertainty and fear – gold, that safe haven in times of crisis. The SPDR Gold Shares ETF
Likewise, think twice before stocking up on other investment products that you think might give you an edge today. Bear market funds and long-short funds typically get a lot of interest in volatile markets. And while funds like these can theoretically protect your portfolio on the downside, over the long run, the vast majority of these funds have failed to deliver meaningful returns. In other words, they can work well in downturns, but they aren't good long-term wealth builders. In addition, they also usually cost quite a bit more than your run-of-the-mill mutual funds or exchange-traded funds.
3. Use volatility to prepare for the next rebound
It's not surprising that investors fled the scene in response to May's market drop. Given what we've been through in recent years, the thought of sitting through another severe bear market is pretty unsettling. And while the easiest thing to do is to head for the hills when the going gets tough, it's been proven time and time again that the real money is made in difficult times. That means buying on the dips when no one else wants to – at least in select pockets of opportunity.
If you're looking for safety and stability in today's uncertain market, dividend-producing stocks should be at the top of your list. Look for financially healthy blue-chip names with sizable market share in stable industries. Consumer names are a prime source for desirable dividends, with Kraft
Also keep an eye out for firms with a long history of raising dividends. Coca-Cola
While there are small adjustments you can make right now to help you slog through what promises to be a tough and volatile time in the market, the biggest asset investors have right now is a long-term outlook. Keep focused on your long-run goals, and what the market does in the meantime shouldn't make or break you. It's not easy to hang on when the market acts like it did last month, but when things do finally take a turn for the better, at least you'll be in a position to reap those rewards.
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Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. At the time of publication, she did not own any of the funds or companies mentioned herein. Procter & Gamble is a Motley Fool Income Investor recommendation. Coca-Cola is a Motley Fool Inside Value and Motley Fool Income Investor recommendation. Philip Morris International is a Motley Fool Global Gains choice. The Fool owns shares of Proctor & Gamble and Coca-Cola. The Fool has a disclosure policy.