1. Archive

Keep on playing, but play it safe

Should you sell?

Wrong question. Nobody knows where the market is headed, but most experts agree that stocks are your best bet for the long haul. So forget about selling, unless you need the cash in the near future, and instead think about what you can do to ensure you stick with your stocks. Here are four strategies:

Do it again, Sam

Dollar-cost averaging _ investing a fixed amount in stocks on a regular basis _ can make a market drop not only more tolerable, but also more profitable.

Lately, however, this technique has received some bad press. One academic paper noted that since 1926, you would have achieved better results 64.5 percent of the time by throwing everything into the market right away, rather than investing in dribs and drabs over the next 12 months.

But for most investors, this statistic is irrelevant. After all, you put money into the market in dribs and drabs because that's how you receive it. This makes many investors more tenacious. Sure, the market may be down today. But at least you have the comfort of knowing your next monthly investment will buy shares at cheaper prices.

And because you buy at cheaper prices, you boost your long-run results. Indeed, if you invest gradually in a portfolio that eventually doubles in value, you may sleep more soundly if the portfolio marches steadily upward. But you will get far better results if the portfolio takes some big hits along the way. Because of the dips, you get to buy shares at lower prices.

Mix it up

Owning a broad mix of U.S. and foreign stocks won't stop you from losing money in a bear market. But it may help to cushion the fall.

In recent years, however, U.S. shares have performed so well that diversifying abroad just hasn't seemed that smart or necessary.

But in the securities markets, yesterday's dolts often turn into tomorrow's heroes. Whether stocks sink further or resume their climb, foreign markets could well outperform U.S. shares. Consider putting between 20 percent and 35 percent of your stock portfolio into foreign stocks, not only because of the long-run return potential, but as a way of mellowing the price swings in your U.S. stock portfolio.

Spread it around

If U.S. stocks get hammered, foreign stocks may not fall as much. But they almost certainly will fall. An unbearable thought? Try adding other investments to your portfolio, including bonds, gold and "cash" investments, such as CDs and money-market funds.

Your best bet may be money funds, short-term bond funds and similar investments. Money funds aim to maintain a stable $1 share price, so you shouldn't ever have a loss. Meanwhile, the potential for large losses with a short-term bond fund is small. Thus, either investment should provide a reliable shock absorber for a stock portfolio. By contrast, longer-term bonds and gold can post horrific short-term losses, and thus neither investment may provide a haven if the market crumbles.

If you add other investments to your stock portfolio, make sure you focus on the entire portfolio's performance and not just the results for the stock portion. On days when your stock-market losses seem painfully large, tote up the value of all your investments. You may find that your portfolio's percentage loss isn't that great.

In addition, if you own other investments, make sure you rebalance. Rebalancing involves establishing targets for how much of your portfolio is in key financial assets, such as stocks, bonds and cash. Then, every year or so, buy and sell securities to get back to these target percentages. The main aim is to control your risk level, but in a market correction, it can also bolster your long-run results.

Time heals all wounds

How soon do you need your stock market money? If you will have to cash out in the next few years, you should probably cash out now, because money that you will need within five years or so really shouldn't be in stocks anyway.

But in all likelihood, you won't sell your stocks for years, so there is no need to fret about the market's gyrations.

How long will you have to wait? If you purchased stocks just ahead of the 1973-74 market crash, the worst bear market since the Great Depression, you had to hang on for 3{ years to recoup your losses.

_ Jonathan Clements writes for the Wall Street Journal.