5 Ways to Protect Your Portfolio

AS A TECHNOLOGY analyst for a market-research firm, Robert Gray had doubts about the market's euphoria in the late 1990s. But even he got swept up in the tech bubble, diving into the funds talked up by his adviser. The entire market couldn't be wrong, he reasoned. Of course, it was, and Gray lost almost half his retirement savings.

1. MIND YOUR MIX

When the market drops, investors often question the mix of stocks, bonds, cash and other assets they had carefully crafted to meet long-term goals. But the way money is divvied up is responsible for more than 90 percent of a portfolio's performance — not stock picking or even selecting the right fund manager, according to a landmark 1986 study that has been confirmed by several subsequent ones. In other words, getting that allocation right — and sticking to it — plays a bigger role than most investors realize. If the recent volatility has thrown off that mix, pare winners and add to losers that still show promise. Experts say at least 20 percent of longer-term investors' stock holdings should be overseas, and the drop in foreign markets makes many of these stocks more affordable. Although it might seem counterintuitive to add U.S. stocks, many planners suggest doing just that if the market's decline means your domestic allocation has fallen. Take comfort: These companies are much healthier than in past downturns, flush with more than $611 billion in cash. Plus, the ratio of insiders selling company stock to those buying is at its lowest in several years — and that could be a bullish sign for the stocks.

2. WATCH THOSE FEES

With investors feeling so unsettled, planners are telling clients to beware of anyone using fear or emotion to sell products — whether they're variable annuities or ETFs. Investors sometimes focus on promises instead of examining the costs. But think twice about high-commission, high-cost products. A 2005 study found that funds sold by brokers have inferior returns compared with those sold directly by fund companies — even before accounting for fees. ETFs started out as low-cost products, but expenses have been rising. Try not to pay more than the median annual expense of 0.6 percent, says Morningstar ETF newsletter editor Sonya Morris.

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