Panic-Proof your Portfolio – Part 2

Yesterday we started to “Panic-Proof” your portfolio so that you can better weather the stormy investment landscape. To reiterate: the most important thing is to remain calm and not to panic. One way to absorb the barrage of bad news is to rely on your game plan (assuming you have one!) to help navigate.

But here is the dirty secret of the planning process: you can’t create a plan and walk away! We have learned time and time again that if you are going to manage your money, you need to actually do something. A good start is staying abreast of trends in the economy, reevaluating holdings in portfolios on a frequent basis and investing with an unbiased eye. One five start suggestion here: never execute a trade intra-day that you have not been considering previously. If you still think the idea is a good one after a good night’s sleep and some thoughtful analysis, then go ahead and do it—one day will not make or break the trade.

The particular assets included in your portfolio should shift depending on where we are in the economic cycle. The ability to both buy and sell is imperative, especially during volatile times. Keep your strategy active and monitor your portfolio frequently, making changes as economic and market conditions indicate. Of course attempting to time the market can be a disaster, but careful ongoing reviews of your asset allocation, level of diversification and the strength of your individual holdings can enable you to respond both to changing economic conditions and to the continued appropriateness of any particular asset within your portfolio.

If you had truly believed that the US economy was headed into a recession last year, then it would have been smart to reduce your overall risk exposure. The easiest way to do that is by beefing up your cash position and steering clear of credit risk. That would have put you out of harm’s way when the high-yield and mortgage-backed bond markets collapsed. Of course the amount by which you reduce risk depends on your specific asset allocation plan.

But now that we are in the midst of a slowdown, should you peel off risk? The answer depends on your specific situation. For some, the time may have passed to make significant changes. In fact, now may be a good time to start thinking ahead and considering what your portfolio should look like when the economy recovers. After all, recessions/slowdowns are time limited and yes, it will get better. Your job is to maintain a clear mind as you survey the investment landscape before you.