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Investing: Smart Advice In Tricky Times

|Start With A Good Hard Look At Your Portfolio. Here's All You Need To Know.

By Paul Barr

Just because the Nasdaq stock market has been in a free fall lately, that doesn't mean you should be pulling your money out of stocks or stock mutual funds.

As tempting as it might be to move your money into money market funds or CDs to avoid volatile market swings, chances are your investments are doing better than the headlines might lead you to believe. That is, assuming you weren't 100% invested in high tech.

"Anyone who had all of their money in a technology fund, is probably very depressed right now," says Ned Notzon, president of T. Rowe Price's Spectrum mutual funds. "Whatever you do, you don't want to go into just one narrow sector of the market," Notzon says.

The overall market is not doing that badly. While the Nasdaq is down more than 50% from it's peak last March, the broader Standard & Poor's 500 stock index is down just 7%. Mutual funds have performed better than the Nasdaq too, with the average equity mutual fund falling 6%, according to fund tracker Lipper.

Even if you've got some losses in technology, that doesn't mean you should get out of it completely. Notzon says it's common for investors sitting on big losses to sell out completely at the worst possible time.Instead of selling, Notzon says, investors should figure out what they're asset allocation should be given their investment goals. Asset allocation is the overall breakdown between stocks, bonds, and sometimes cash. A common asset allocation is 60% stocks and 40% bonds. What yours should be depends on your circumstances-such as whether your saving for your kids college education or for your own retirement-and your tolerance for risk.

The easiest way to figure your asset allocation is using the free asset allocation and analysis tools offered by a growing number of companies on the Web. You can analyze your current holdings to see if you're veering widely away from the market, total up your mutual fund holdings to see if your funds are all buying the same stocks, and find out exactly how risky your holdings are.

After using one or two of the tools found below, you may want to look for new mutual funds to complement your existing holdings. That process can be a lot easier than you might think, even for people with little interest in becoming the next mutual fund guru. Fund companies have made it easier for investors to make easy and smart decisions.

See What You've Got

There are a growing number of Web sites that can give your portfolio a once-over, and in some cases tell you exactly what to do do reduce risk and possibly increase return. A more established tool called Portfolio X-Ray is offered by Morningstar (, while a newer tool called Portfolio Spotlight is offered by Notzon's company at Both have their strengths and weaknesses. To use them, all you'll need are the stock and mutual fund ticker symbols for your holdings, as well as the number of shares owned.

Morningstar's sorts your holdings by asset class, investment style, sector, or stock type. Importantly, Morningstar reports the same numbers for the benchmark S&P 500 index. If your portfolio looks a lot different in aggregate from the S&P, that's a sign you're taking on a lot of market risk.

If you want to spring for a $9.95 a month subscription to the Morningstar premium service, you can also get suggestions about how to rebalance your portfolio to optimize it for risk and return. The service may well be worth it if you have sizable investments to manage, but you may just want to try it once with the 30-day free trial, and then return to it each year for a checkup.

T. Rowe Price's Portfolio Spotlight delivers similar analysis without the S&P 500 comparison feature. But T. Rowe Price includes a report that combines your fund and stock holdings to tell you which stocks you're most heavily invested in. That way, if both you and your funds own a lot of the same stock, say Cisco Systems, you can see that and cut back on your exposure accordingly.

If your a true numbers geek, then you should visit RiskGrades (, which boils your holdings down to a single number representing riskiness. Using the same information as the sites above, RiskGrades calculates how volatile your holdings have been in the past, and estimates how volatile they'll be down the road. What's great about RiskGrades is you can see how portfolio diversification limits risk. You may own risky investments that in combination create a well-balanced strategy, and RiskGrades can tell you where you stand no matter how complicated a portfolio you own.

Plotting Changes

Once you've reviewed your portfolio's current exposure, you may decide to create a new asset allocation. Of course you can do that on the Web. Vanguard (, and SmartMoney ( both offer free, common-sense asset allocation advice relying on fairly brief online questionnaires.

But you'll have to make your own decisions about which funds-or stocks-you want to use to fulfill that allocation. Direct advice will cost you. Morningstar offers advice as part of its $9.95 a month package, T. Rowe Price charges $250, and Financial Engines ( asks $14.95 a quarter. Each of the services vary in what they can do for you.

But don't feel you have to be told what to do. Most people can put together a basic portfolio on their own, if only using no-brainer index funds or asset allocation funds. Both T. Rowe Price and Vanguard offer solid version of funds that perform the stock picking and asset allocation for you.

Index funds are particularly attractive because the fees are much lower than those for actively managed funds. To find more index fund companies or asset allocation funds, Morningstar can help you through its fund search tool called Fund Selector.

Get Active

For some investors, though, index fund management is downright un-American. Why settle for average when you can get superior returns from an active manager? If that sounds like you, in your search for that primo manager try to avoid some of the common and costly mistakes people make when picking mutual funds.

Don't Chase Return.
The best performing funds in one year are likely to be among the worst performing the next year. What was hot last year is likely to cool quickly. Ask anyone who jumped into technology last year or into emerging markets in the 1990s about how easily high-performance funds can fall to the back of the pack. Instead of targeting winners, spread your money around in a variety of investment styles and fund managers to minimize your risk.

Don't Trade Frequently.
Once you've settled on an asset allocation, you shouldn't rebalance your assets any more frequently than each quarter, and even then you're probably better off doing it just once a year. Even if you don't pay a commission on your fund trades, it still costs you time and effort to move money around. Plus, you're less likely to needlessly fiddle with your allocation if you're not paying close attention to it in the first place.

Don't Put Money Into Sector Funds.
Just like your portfolio shouldn't be weighted too heavily to technology, you should also avoid other funds with a heavy sector tilt, like gold, health care, or real estate. Sector funds are primarily for speculators, not investors, and timing your movements in or out of them is as difficult as trading stocks, if not harder. If you are hot on a particular sector, you might be better off buying actual shares of a company that's the acknowledged leader in that sector. That way you gain better control of the tax consequences of making the trade.

Finally, Don't Invest Until You're Comfortable With Your Decisions.
It's easy to read that a high allocation to stocks is smart in the long run, but if you're not secure about your choices, then don't act. If you have to, hire a financial planner for some guidance (that'll cost about $500). You can also spend time educating yourself on the benefits of investing in stocks. You can find solid articles in the education section of 401Kafe
(, and in the learning center for Strong mutual funds (

Rash decisions based on fear rarely turn out well. Figure out where you're at before you move your investments around and you'll improve your chances of meeting your financial goals.

Paul Barr is senior editor for Online Investor magazine ( and writes about money and investing for

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