Keep long-term perspective amid volatility

Amid a crashing U.S. dollar, a roller-coaster stock market, a massive takeover of one of the nation’s largest brokerage firms and an economy teetering on the brink of recession, what’s an individual investor to do? What should you expect in today’s troubling market? Are there wise moves to make now? Some questions and answers:

My portfolio has lost almost 20% of its value in the last couple of months. I don’t think I can handle more losses. Do I sell?

That depends on why you feel you can’t handle further losses. If you need your stock market money for expenses in the next six months to one year, you should sell, said Ken Kamen, president of Mercadien Asset Management in Princeton, N.J. That’s because that money should never have been in stocks in the first place.

But if you have long-term money invested in a variety of stocks and you simply hate the discomfort of the financial turmoil, hang tight. “The biggest mistake people make is making rash decisions,” Kamen said Monday. “I have been telling my clients today that they need to shut off their computers and go for a walk.”

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Everybody says “hang tight,” but I remember that in 2000, after the market’s initial jolt, the slide continued for two years. Wouldn’t it have been smarter to sell before all the bloodletting? Wouldn’t that have saved the long-term value of my portfolio?

If you managed to sell before the bloodletting, and get back in before the boom, sure. But no one manages that consistently. Over the last 10 years, 75% of the best days for the Standard & Poor’s 500 index have come within two weeks of the worst days. No one knows when either is going to strike. You don’t want to get out on the worst day and miss the best.

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I feel like I should take some action. Where should I start?

Two things. First, if the market volatility has seriously disturbed you, write out a “worst-case scenario,” suggested Brent Kessel, author of “It’s Not About the Money” (HarperCollins, 2008) and co-founder of Abacus Wealth Management in Pacific Palisades.

People often panic because they dwell on the worst that could happen without taking the next step and asking what they would do if the worst actually happened. If your portfolio dropped in value by 50%, how would it affect your life? Would it derail or delay your retirement? Does it mean that you would have to scale back your plans a bit? If you think through the next step after that worst-case scenario, you might find it’s not that scary, Kessel said.

Second, consider rebalancing your portfolio. That would likely prompt you to sell some bonds, which have probably increased in value as interest rates have fallen, and buy some stocks. That’s precisely the opposite of what feels comfortable, but it’s age-old wisdom: Buy low, sell high.

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I’m not as concerned about the value of my portfolio as I am about the safety of my stocks. I know Bear Stearns is getting bought out by JPMorgan Chase. Are other brokerages likely to fail? And if they do, are my stocks safe?

Brokerage firms’ stock prices plunged in recent days, which indicates that the market is nervous about this sector. But as long as you invest with an SIPC-insured firm, you shouldn’t have to worry about the brokerage going belly-up and taking your stock and mutual fund shares with it.

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What’s SIPC?

SIPC stands for Securities Investor Protection Corp. This entity, created by Congress in 1970, does not insure against investment losses, but it ensures that investors get back the stocks, bonds, mutual fund shares and cash that were in their brokerage accounts before a brokerage failure. To find out whether your brokerage is insured by SIPC, visit .

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How does SIPC coverage work?

SIPC ensures that customers of a failed brokerage receive all the non-negotiable securities that were registered in their names or were in the process of being registered. After that happens, funds from the $1-billion SIPC reserve are available to satisfy remaining claims, up to $500,000 per customer. But only $100,000 of that amount can be a claim for cash.

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I’m retired and very nervous about whether I will outlive my savings. How should I handle this market?

One rule of thumb is that in retirement, you can safely withdraw about 4% of the value of your portfolio each year and have an excellent chance of not outliving your nest egg, even if you live past 100. But note: If your portfolio has dropped in value, 4% might be significantly fewer dollars than even six months ago. If the new calculation leaves you with less than what you are currently living on, Kessel said there are two options: Get a part-time job to boost your income or learn to live on less.

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A few years ago I considered my risk tolerance to be fairly high. But with inflation rising, the value of my home falling and increasing insecurity about jobs, I’m wondering whether I was too aggressive. Should I revisit my investment mix?

Yes. You should review your mix every year with an eye to the things that have changed in your life. If your job isn’t as secure as it once was, you need more emergency money to handle a potential stretch of unemployment. That’s likely to affect the percentage of assets you have in every investment class.

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I always hear the term “diversified portfolio,” but what does it mean?

It means that you have money in a variety of investment “classes” -- i.e. stocks, bonds, cash (such as Treasury bills and bank deposits), real estate and international securities. And it means that you have a variety of different investments in each of those classes.

For instance, your overall portfolio may be 50% in domestic stocks; 10% in international stocks; 20% in bonds; 10% in real estate investment trusts; and 10% in cash.

The stock portion of that portfolio should be made up either of broadly diversified mutual funds or stocks of individual companies operating in at least 10 different industries. Likewise, your bond portfolio should consist of bonds with different maturities and different levels of risk -- or a bond fund or two. You can diversify your real estate and international holdings by buying mutual funds too.

The only part of your portfolio that doesn’t have to be spread among a lot of different types of investments is the cash portion. That’s because cash investments, such as bank deposits, Treasury bills and money market mutual funds, are low risk and low return.

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kathy.kristof@latimes.com