by Joseph Hollak

If the ups and downs of the stock market have you concerned about preserving your wealth, you’re not alone.  You can protect your capital by selling weaker securities in your portfolios, replacing them with high-quality stocks which offer the potential for consistent growth and solid fundamentals—typically defensive stocks such as selected electric and telephone utilities, food and drug companies.  In addition, consider the following strategies that could help you smooth a bumpy ride.

Use dollar cost averaging.

Invest a fixed amount on a regular basis without regard to market fluctuations.  This way, you will buy more shares of an investment when the price goes down, and fewer shares when the price goes up.  As a result, your average price per share may be lower over time.

Adopt a more defensive strategic asset allocation for your portfolio. 

Market fluctuations may have caused your portfolio’s asset mix to diverge from its original goals.  Asset allocation is simply the process of diversifying funds among various asset classes, including stocks, bonds, and cash equivalent investments (the asset mix).  Adopting a more defensive asset allocation strategy generally means decreasing the proportion of assets invested in, say, stocks, and reallocating those funds to a more risk-averse investment class, such as cash or shorter-term bonds.  Keep in mind, however, dips in the market may offer an opportunity to buy higher quality stocks at more affordable prices.

Make fixed-income part of your strategy. 

If you are looking to reallocate a portion of your assets into a relatively stable sector of the bond market, you might consider high-credit-quality bonds offered by large-capitalization companies.  Choosing high-grade corporate bonds could enhance your portfolio’s stability and liquidity, and provide a substantial yield over comparable-maturity Treasury notes.

Consider convertible securities. 

Although convertible securities prices rise and fall as other securities do, they tend to be more stable than most equities.  Like a bond, convertible securities provide a competitive yield.  But unlike most bonds, convertible securities can be converted into the common stock of the underlying company at a predetermined ratio.  When markets are declining, the convertible security’s yield provides some degree of protection.  When markets are rising, you may exchange your convertible securities for the greater growth potential of the issuer’s common stock.

The best strategy for investing in volatile markets should be based on your individual financial needs, investment goals and attitudes toward risk.  No investment strategy, however, can truly guarantee a profit or protection against loss.  It is important to maintain a long-term perspective and avoid investing emotionally.  And, don’t forget that volatile markets may also offer investment opportunities. 

Dollar Cost Averaging does not guarantee a profit nor protect against loss.
                  
  
Joseph Hollak is an investment consultant with Salomon Smith Barney   Mailing address: 121 SW Morrison Street, 16th Floor, Portland, OR 97201  Telephone: 503-221-6680   email: Joseph Hollak 

Copyright 2001 Joe Hollak