Don't Push the Panic Button

by Alan Lavine and Gail Liberman

During the most recent market tumbles, a friend called us in a panic.

His wife was fearful that the stock market could be crashing.

His question: Is it a good time to buy because prices or down, or should he sell more because stock prices could go lower?

Bottom line: You can’t let the news dictate your long-term investment plans. Otherwise you end up buying or selling all the time. The only people to benefit from a strategy like that are the taxman and your broker, who rakes in commissions on your trades.

Better idea: Review all your assets. Calculate how much you have invested in stocks, bonds and cash. Overall our friend had about 60 percent of his assets in stocks and the rest in bonds and cash.

Instead of attempting to trade the market—as frightening as a downward slide may be--a systematic investment strategy often is a wiser move.

This means that every six months, check your holdings. Make sure, for example, that you continue to have your 60 percent in stocks and 40 percent in bonds and cash. If you have more in stocks, sell the excess stocks and buy bonds or put some money into cash. If you have more in bonds or cash, do the opposite--put more in stocks.

Of course, be sure to consult with your accountant about the tax consequences of your moves.

But by doing this, you’re automatically investing more at lower prices and/or taking your profits in overperforming investments.

Adjust your mix of bonds and cash, based on the market. If interest rates are rising, as they are today, it pays to put more into money market mutual funds, short-term CDs or U.S. Treasury bills. This way, as rates continue upward, you can reinvest your maturing funds at higher rates.

When rates hit the sky, lock into higher long-term yields. Our late grandfather wouldn’t invest in anything that had to do with Wall Street. But we always admired the good sense he had to lock up money in a five-year bank CD when rates skyrocketed in excess of 12 percent!

Why is 60 percent stocks and 40 percent bonds and cash such an attractive investment mix?

It’s the middle-of-the-road. Historically, a 60 percent-40 percent stock-bond mix has grown at an 8 percent annual rate. Yet, on the downside, it has lost about half as much as a 100 percent stake in stocks.

Stocks perform well during economic growth. Bonds typically perform well during recessions. Meanwhile cash earns higher yields when interest rates rise.

Want to get a little fancy? Add investments in precious metals mining stocks or gold bullion as inflation hedges.

Your mix of stocks, bonds and cash, however, truly should depend on how long you have to invest and your goals. Younger people can keep more in stocks. Those who are older need to preserve their wealth and typically should keep less in stocks.

Want to see how the investment mix you’ve selected will hold up in a stock market decline?

Go to RiskMetric’s Group website, www.riskgrades.com. After signing on, you can enter your stock, bond and cash investment mix into an online calculator. The calculator tells how much you could likely lose in a stock market crash.

Once you know the worst-case-scenario, you can make better investment decisions and heave a sigh of relief.

But don’t shortchange yourself either. You need stocks for some long-term growth. Otherwise, inflation could prevent the income from your bond or CD from going very far.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.