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.

3. EXTRA CREDIT

A good credit score can help save money on products like car insurance and mortgages. What's more, banks have raised the bar on what constitutes good credit. Some of the best rates — once granted to anyone with a score of 650 or above — are now reserved for those scoring at least 720, says John Ulzheimer, president of consumer education for Credit.com. Not quite there? Paying bills on time isn't always enough. Keep outstanding credit card balances below 10 percent of the limit. The reward for homeowners with high scores and substantial equity is access to cheap home-equity lines of credit. Tim Higgins, a Marlborough, Mass.-based financial planner, says it could be a smart move to open an equity line to augment emergency reserves or pay for college, since interest is tax-deductible. With rates around 6 percent, they're often a better option than federal college loans charging an 8.5 percent interest rate that's not deductible for high-income taxpayers.

4. CHANCE OF A LIFETIME?

If you've been holding off on buying that first home or the vacation home you've always dreamed of, opportunities are opening up. Mortgage rates are at their lowest since 2004, and home prices in major markets are down 9 percent from highs — twice that in Florida. "Now is the time to offer something sellers would have laughed at in the past," says Ken Kamen, president of Mercadien Asset Management. Monitor sales activity, and check county records to find out what the seller paid in order to gauge how much negotiating room exists. Plan to stay put for more than five years? Consider refinancing if the new rate is at least one to one and a half percentage points lower than your current one. That will free up money for a rainy day or for investments that will pay off when the clouds part.

5. DON'T PANIC

Considering all the fear in the air, it's easy to make a classic investing mistake — like selling stocks at a low point and plowing the proceeds into cash. Forget about trying to pick the perfect time to get in or out of the market. A longer-term view will give you the strength to stay the course and even pick up battered stocks that could pay off handsomely down the road. About 98 percent of the time, buy-and-hold investors came out ahead of market timers, according to a 2001 study of more than 70 years of data. Of course, it's worth keeping some cash handy — financial planners often recommend enough to cover three to six months' worth of expenses. But don't stash it in an account paying peanuts, a move that can take a heavy toll over the years, especially if inflation rises. Average rates for certificates of deposit are slipping quickly, but Bankrate.com still shows some banks paying as high as 4 percent in recent weeks.

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