Watch mix of stocks in a low cycle but stay invested

The Baltimore Sun

Should you bolt from your stocks and stock mutual funds?

Perhaps you've been tempted as the stock market has plunged repeatedly since mid-July. Virtually everything you own - whether you invest in U.S. stocks or those overseas - has probably plunged during the past four weeks. The average mutual fund that invests in U.S. stocks has lost about 7 percent, and the average fund that invests around the world is down about 8.7 percent, according to Lipper Inc.

Some analysts think the worst is over and investors will calm down as they see the end of missteps with exotic mortgage-related securities. Others think the housing recession, and the strain on lenders, will weigh on the global economy well into 2008.

So what do you do with your investments? Financial advisers say that if you have a well-conceived mixture of stock and bond mutual funds, you should be fine over time. The idea is that the economy and the stock market go through cycles, and always come through scary periods.

So here's how to think your way through them.

Start by focusing on the money you will need during the next year. Maybe it's saving for a house down payment, a car, this year's college tuition, or spending money if you are retired. That money should not be invested in stocks or stock mutual funds. It should be safe in a money market fund, CDs or U.S. Treasuries that will mature by the time you need to get your hands on it.

In fact, Ross Levin, a Minneapolis financial planner, tells his retired clients to keep three years of spending money available this way so that they can tap it even if the stock market sours for a couple of years.

It has been rare for the stock market to stay down for more than three years, but it has happened. Between 2000 and 2002, the Standard & Poor's 500 - which is roughly referred to as "the stock market" - fell 49 percent and didn't recover completely until this year. But investors who had put about 60 percent of their money in stocks and 40 percent in bonds would have recovered in about two years. That's the reason for a thoughtful mixture of stock and bond mutual funds.

But what's a thoughtful mixture?

The 60:40 mixture is a classic approach for a person who is moderately conservative. A person in his 20s and 30s can take more chances with stocks in retirement savings because he has 30 or 40 years before he will need to tap the money. Financial advisers often suggest young investors invest 80 percent to 90 percent in stocks as long as the person doesn't panic at times like the present and yank the money out of the stock market.

The fear is that if they do, their money won't get a chance to heal when the inevitable upturn comes.

Instead of fleeing from bad times, advisers suggest keeping a constant mixture of funds so that one or two are rising while others are falling.

Since winners and losers are always changing, it's the total mixture that works over time.

Besides using stock and bond funds, advisers often suggest dividing up the stock portion - perhaps putting about 75 percent into U.S. stock funds and about 25 percent into international stock funds. Within the U.S. stock portion, investors can put about 70 percent into a large-cap stock fund that invests in large companies like Microsoft Corp. or General Electric Co. and divide the remaining 30 percent half and half - half into a fund or funds that invest in small companies, or small caps, and the other half into medium-size companies or mid-caps.

Then they suggest keeping the portions constant through good times and bad in the market.

Gail MarksJarvis writes for Tribune Media Services.

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