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Bulletproof your portfolio
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January 31, 2000: 6:59 a.m. ET
Weathering the storm may mean sitting back when the market drops
By Staff Writer Jennifer Karchmer
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NEW YORK (CNNfn) - When the stock market plunged in October 1987, Clyde Black, a New York State forest ranger, left his retirement portfolio in good hands - his own.
While other people rushed to sell their stocks when the Dow shed 508 points, Black decided to do nothing. And today, a few months from retirement, his $50,000 portfolio has more than tripled in value.
"Nineteen eighty-seven didn't scare me at all," said Black, 55. "I knew it wasn't going to last forever and that things were going to come back."
Marketplace jitters
With Wall Street facing more volatile trading days, bull market investors familiar with 20-percent returns are a little wary. Last Monday, the Dow posted its tenth-biggest point plunge. Some experts say the market is correcting after a stellar 1999.
Historically, the stock market has posted positive returns over the long haul. But what can an investor do when signs of a slump are on the horizon?
"Anyone can swim in shallow water," said Paul Levis, a certified financial planner and president of Summit Financial Consultants. "If you're used to smooth flying, now there's some turbulence."
Riding out the storm
Surfing the wave of a market downturn by leaving your portfolio untouched is certainly one option, and experts agree. However, many investors find it difficult to watch as their portfolios take a hit.
Checking your investments quarterly and re-allocating twice a year is a good idea, according to Levis. If you're moving your portfolio around more often than that, you're not taking advantage of the long-term benefits of the markets.
"Buy good stuff and leave it alone," said David Speck, a managing director at First Union Securities. "It's boring but it works."
But your age will also influence what you should do if the market turns sour.
If you're 30 years old, you should have virtually no money in bonds, suggests Levis. At that age, an investor has another 30 years until retirement.
An aggressive approach, Levis suggests, is to allocate about 15 percent into each of the following areas: international stocks, large-cap growth, and mid-cap growth.
Broaden your horizons
Other experts think you should spread out your risks. You've heard it time and time again: diversify your portfolio, and that's during the good times. Especially in a market downturn, you don't want to limit yourself to one or two sectors even if they're considered less volatile.
A good way to measure your sector risk is to compare your portfolio to a benchmark such as the Standard & Poor's 500 Index or the Wilshire 5000, according to Morningstar analyst Russell Kinnel.
Despite some periodic fine-tuning, you want to create a portfolio that works in both bull and bear markets.
"If the market goes down 10 percent tomorrow, you're not jumping out the window," Kinnel said.
A traditional portfolio may include 55 percent stocks, 35 percent bonds, and 10 percent cash -- short-term securities such as money market funds or certificates of deposit.
If you're in your 30s and don't need to dip into your retirement savings for a few decades, you might want all of your account in stocks with a cash cushion on the side.
Don't just focus on a fund's annual return. Check out the fund manager's background and how long he or she has been in the business. Even if a fund isn't performing so well, if it's among a stable, well-known family of funds, the portfolio may bounce back.
Other ways to cushion a fall
Some investing pros recommend "hybrid" or "balanced" mutual funds, which invest in a mix of stocks and bonds. The funds might not be at the top of the performance charts in good times, but they're less likely to take a pounding if the market turns sour.
One good alternative among balanced funds is Invesco Balanced Fund, which earned 16.8 percent in 1999 and beat almost 90 percent of its peers.
There are other types of funds that have the sole strategy of cushioning the hit of a bear market, said Ed Rosenbaum, director of research with Lipper Inc.
"These funds are for people who believe the market will end tomorrow," Rosenbaum said. "These are not for the faint of heart."
The Rydex Ursa Fund (RYURX), for example, is designed to perform well in a bear market and poorly during bullish times. That explains why the fund's annual return for 1999 was down 11.3 percent, according to fund tracker Lipper Inc.
The fund, which invests in complicated derivatives and options, can be a good hedge against bad times in taxable investment portfolios, according to Morningstar.
But investors like Black, the upstate New York ranger, are not easily jarred. He's as steadfast in his investment decisions as he is fighting forest fires and overseeing search and rescue missions.
"If I had dumped my portfolio in 1987, when would I have gotten back into the market?" he said. "The investors who go in and out [of the market] tend to miss stuff." 
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