Weathering turbulent markets with prudence and patience

Average investors can cope with occasional rainy days in the markets. Enduring constant thunder and lightning is not so easy.

The extended weather forecast for investments indicates no let-up in turbulence. There will be stormy days and sunny days depending on political debate, government data, sentiment surveys, corporate earnings and surprising news events here and abroad.

Combined with lingering bad memories of the 2008 downturn, this uncertainty underscores the need for a diversified personal portfolio that is long-term in nature with a logical time horizon. Cautious investors had already begun carefully pulling back their overall stock holdings before recent turmoil.

"I'm seeing clients who want to sell off stocks and others who want to buy stocks," observed Andrew Fitzpatrick, CFA and director of investments for Hinsdale Associates in Hinsdale, Ill. "The biggest mistake would be to make short-term, herky-jerky moves, since investors must have a sense of perspective and time frame."

Average investors should not buy or sell stock based solely on daily news or market events. While it can produce some bargains, active trading in gyrating markets is suitable only for professional traders — and they too make mistakes trying to predict twists and turns.

The upcoming election year can't be depended upon to bolster markets, Fitzpatrick said. Campaigns will include endless restatement of the nation's economic woes and heated arguments over how to solve them. This provides more headwind than tailwind for the markets, he believes.

"In our fund, we try to mitigate downside risk by including cash, which is why our returns are not down as much on down days as the overall market is," said Tom Forester, portfolio manager of the $168 million Forester Value Fund. "This market can be a buying opportunity for a professional investor, but if you're not in the market every day, you won't know when it is about to make a turn."

The downgrade of the U.S. debt rating was an event that will eventually work its way through and out of the markets, Forester said. The longer-term issue of the U.S. deficit will not disappear because it removes the nation's financial flexibility.

"If the U.S. wanted to do a $1 trillion stimulus plan or lower interest rates, just forget about that happening," he said. "We were previously going down a bumpy road with shock absorbers, and now we're going down a bumpy road without shock absorbers."

Forester Value Fund (FVALX), up 5 percent over the past 12 months, has as its largest holdings major stocks that have the wherewithal to withstand turbulence. These include Chevron Corp., Altria Group Inc., The Travelers Companies Inc., Microsoft Corp. and Bristol-Myers Squibb Co.

"Risk-averse investors should already have a fairly conservative portfolio in place going into this," observed David Kudla, CEO and chief investment strategist for Mainstay Capital Management LLC in Grand Blanc, Mich. "You don't want to make a knee-jerk reaction to any big market move, but rather see what, if anything, has changed in the market fundamentals."

U.S. Treasurys are still one of the world's safest investments, and Kudla has been putting some money into bonds as well. Yields are low, yet they provide some certainty in the waiting game.

Since gold has remained a haven, he has been adding gold bullion to portfolios over the past several months.

In an exchange-traded gold fund, he likes SPDR Gold Shares (GLD), up 48 percent over the past 12 months. Its shares are backed by actual gold bullion and it does not invest in equity or derivative securities. Each share represents about one-tenth of an ounce of bullion at current market prices.

Keep in mind that precious metal is volatile and should therefore not comprise more than 5 or 10 percent of an individual's portfolio. It goes up quickly but comes down quickly, too.

In the stock market, there are long-term investment positions worth taking in technology, industrials, energy services, consumer staples and health care, according to Kudla. He recommends "dollar cost averaging," in which a set amount is invested on a regular basis to smooth out the effect of fluctuations.

"There's a tremendous amount of fear out there, and people must remember that fear is not an investment strategy," Kudla said. "This is a gut-check, in which you must ask yourself if you're comfortable with your portfolio allocation in light of your long-term goals, time horizon and risk tolerance."

Risk must be taken into account in selections, but fear and panic must be avoided. Either have someone handle your investments for you or, handling it on your own, set up a portfolio with the amount of risk that lets you sleep at night, Fitzpatrick said.

Even though we've been experiencing severe market movement lately, a 10 percent correction happens almost every year at some point, he said. Investors must be prepared in their minds and their portfolios because no one wants to repeat their 2008 missteps, he said.

If you don't want your life to consist of panic and euphoria on alternating days for the foreseeable future, think seriously about the investments you will hold for the long term. If you will need money sooner than later, however, play it conservatively so you don't get caught in the wrong place at the wrong time.