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Preserving capital
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November 16, 2001: 11:13 a.m. ET
How do I keep my capital during a recession?
MONEY columnist Walter Updegrave
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NEW YORK (CNN/Money) - What's the best way to preserve my capital during a recession?
I hate to tell you this, but the time to preserve your capital is before a recession sets in, not after. You see, stock prices generally start to drop before we enter an economic downturn. So by the time everyone is reasonably sure we're actually experiencing a setback -- which appears to be the case now -- the damage to stock prices has already been done.
Timing the market means you might miss it
Of course, that doesn't mean that you won't find plenty of personal finance publications, websites and putative pundits out there recommending that you stick your portfolio in safe havens like money market funds or bonds or gold or defensive stocks. On the whole, though, I think that advice is counterproductive, if not outright dangerous. Why? Because stocks also tend to recover about six months or so before a recession ends. So just as you're throwing in the towel on your stocks and funds and diving for cover in one of those safe havens, you run the risk that you'll be missing the initial explosive rally when stocks recover from their recession lows.
So what does this pundit suggest? Well, my feeling is that since you can't predict the timing of recessions, market downturns, economic recoveries and new bull markets beforehand -- after all, if that were possible, you wouldn't be asking me this question -- then the best thing we can do is arrange our portfolios so that we can ride out economic and market turbulence.
Go with a balanced approach
To me, that means each investor must decide on a mix of stocks and bonds that makes sense for his or her risk tolerance and financial goals. The longer you have until you plan to tap your investment portfolio, the more you should tilt your mix to stocks. An investor in her 30's or 40's who's investing for a retirement that won't begin for another 20 years or longer, for example, should probably have 70 percent or more of her money in stocks and the rest in short- or intermediate-term bonds. The stocks will provide long-term capital growth. Even accounting for the hammering stocks have taken over the past 18 months, equities still gained an annualized 12.8 percent for the 10 years through October 31 vs. just 7.9 percent for bonds. Bonds, on the other hand, will provide some short-term stability. While stocks dropped almost 25 percent over the past 12 months, bonds have gained nearly 15 percent.
Creating a diversified portfolio certainly won't immunize you from losses during market setbacks. But it can limit them, and perhaps prevent you from selling in a panic during the market's recession lows. If you think you'd prefer this approach rather than engaging in a vain attempt to jump back and forth between stocks and safe havens -- and in all likelihood getting whipsawed in the process -- I suggest you check out our asset allocation tool since it can help you arrive at the right mix of stocks and bonds for your circumstances. 
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