Riding the Street's Seesaws and Slides

Yes, the market is more volatile than ever. But conservative and aggressive investors alike have ways of getting off the sidelines

By Amey Stone and Amy Tsao

Tired of being told not to touch your portfolio? That has been the conventional wisdom during this turbulent week following the terrorist attacks of Sept. 11 (see BW Online, 9/18/01, "Watch Out for Whiplash"). But perhaps that advice is already starting to feel a little old. The market has turned down three days in a row. Sept. 19 brought another hair-raising sell-off: The Dow Jones industrial average closed down 144 points after recovering from a more than 400-point mid-afternoon slide.

Holding steady is still probably the best idea for individual investors, for whom the biggest risk remains selling out at the bottom. The markets will probably swing wildly over the next few weeks, if not months, but investment strategists are divided over whether stocks will end higher or lower when the economic and political outlook clears. "There aren't many things you can do that make sense in this stock market," says Peter Boockvar, equity strategist at brokerage firm Miller Tabak & Co.

SICK, OR TEMPTED?

  Financial planners always advise investors to take on no more investment risk than they can comfortably handle. If these wild market swings are making you nauseous, there are ways to protect your portfolio from more downside. Or, if cheap stock prices are tempting you back into the market, go ahead and do some limited buying. The following are alternatives for turbulent markets.

First of all, you probably should get out of the hardest-hit areas of the market. That doesn't mean engage in panic selling. But if your portfolio is packed with second-tier insurance companies, airline, hotel, retail, or other consumer cyclical names, consider paring back. You've probably already borne the brunt of the selling, but that doesn't mean these names won't fall further. It's going to be ugly in these sectors for a while yet. If you can't stand the heat, get out of the kitchen.

Look for buying opportunities. Among the hardest-hit sectors, some stocks get taken down unfairly with the rest. "There have been opportunities created," says Richard Moroney, editor of newsletter Dow Theory Forecasts. "Keep looking. Don't just turn off your screen." Southwest Airlines (LUV ) is one name he likes now. "In the long haul, it will come back," he says.

Opportunities also exist in financial services, says Alan Hoffman, senior portfolio manager at Value Line Asset Management. Be cautious about buying insurers, which face billions in claims related to the World Trade Center attacks, he warns. Instead, he suggests considering banks and mortgage companies. "Stocks like Citigroup (C ) don't have a whole lot of exposure to things that will trouble the banking industry, and they've been pummeled," he says.

EARNINGS ABOVE ALL.

  Think about buying some defensive names. The goal here is to find stocks whose earnings can perform well regardless of the economy's health. Miller Tabak's Boockvar mentions consumer-products companies, like Colgate-Palmolive (CL ) and Gillette (G ), as well as the beverage and food sectors. "From a business standpoint, these companies are going to be able to weather a downturn better than most other businesses," he says. But watch out if they become overvalued. "When the dust settles, these will be the first ones that are sold," he warns.

Drug stocks are another defensive play. They aren't cheap, but Pfizer (PFE ), American Home Products (AHP ), and Bristol-Myers Squibb (BMY ) are worth considering, says Mark Sellers, editor-in-chief of newsletter Morningstar Stock Investor. A defensive name Moroney likes: Questar (STR ), a natural-gas company.

Diversification is especially important now -- maybe more than ever. Mark Loftus, managing director at the Loftus Group of First Union Securities, based in Itasca, Ill. is a big proponent of spreading investments over a range of asset classes. He says it's probably the best way to weather a faltering economy and political uncertainty.

If your equity portfolio is clustered in a handful of stocks, consider dollar-cost averaging (buying small amounts on a monthly basis) into a mutual fund (such as a Standard & Poor's 500 index fund) to get broad diversification across the stock market.

BONDING EXPERIENCE.

  Take a good look at bonds. Good old munis are definitely worth exploring -- especially if you haven't done so before. If you buy and hold, you get a dependable income stream (which might come in handy if the economy sinks) that's also tax-free. Going with a mutual fund will give you some diversification among issues.

If you want to add some bonds to your retirement portfolio, corporate bond yields are attractive, says Margaret Weinblatt, portfolio manager of the USAA Income Fund (USAIX ). "I hate to say this," she says, "but the bond market loves a weak economy."

Also, you might want to turn to cash. Moroney's recommendation is that investors keep 35% to 40% of the amount of money they would normally have in stocks in cash. Not only can you earn what might seem like a decent return of 3% or so on a money market fund, you'll have it handy to invest in stocks when the economic and political outlook improves.

Rosemary Sagar, managing director and head of global investing at US Trust, is expecting global stock markets to experience a sharp downturn over the rest of 2001 -- but she also expects an increased chance of a stronger rebound next year. Says Sagar: "We're trying to hold a little more cash than we did before."

LEAPS OF FAITH.

  Look at some options strategies. Options trading can be highly speculative, or it can offer a way to reduce some risk in your overall portfolio. While these strategies can be tricky at first for the uninitiated, they can work well in this environment, says David Kalt, president of OptionsXpress, an online stock and options brokerage.

For example, if you don't want to sell a stock but are concerned it may fall, you can buy a "put" option, which basically limits downside risk. "You still have unlimited upside," says Kalt. Or if you're bullish on a stock that got hammered but think it may take years to rebound, Kalt suggests buying a long-term call. With LEAPS (long-term equity anticipation securities), you need to put down only a small amount of cash to make a fairly sizeable bet that a high-quality stock will eventually rebound from here.

A time of great national crisis is never the ideal time to reassess your stocks, and you shouldn't undertake a wholesale revision of your portfolio. "I'm a big believer that investors should stay away from trying to invest based on world events and instead should focus on real fundamentals of companies," says Morningstar's Sellers. But investors tired of staying on the sidelines will find no shortage of investment strategies worth exploring.

Stone and Tsao Stone and Tsao cover financial markets for BW Online in New York

Edited by Beth Belton