4 Ways to Protect Your Portfolio During a Bear Market
By Ron DeLegge, Editor
October 28, 2008

SAN DIEGO (ETFguide.com) - As the Dow Jones (AMEX: DIA) has shed about 40%, it wouldn't be a bad time for all diligent investors to take a little time to evaluate the health of their investments. Has the current bear market devoured your money? If it has, it’s time to regroup and go back to the drawing table. 

Know Thyself
What type of investment profile do you have? Many investors don’t know because they haven’t taken the time to find out. Rick Ferri, veteran investment advisor with Troy, MI-based Portfolio Solutions suggests that investors closely evaluate their personal situations.

For early savers (people between their 20s and 30s), Ferri recommends buying stock index funds, holding them and not looking at your account balance for 10 years. Examples of such funds are Vanguard’s Total Stock Market ETF (NYSEArca: VTI), the SPDRs S&P 500 (AMEX: SPY) or the iShares MSCI EAFE Index Fund (NYSEArca: EFA).

How To Profit In Tought Markets >> Learn More

For mid-life accumulators (people between their 40s and 50s) Ferri suggests that you rebalance your portfolio back into equities when it needs to be rebalanced and you will be very happy you did by the time you retire. Lastly, he suggests that near retirees and retirees (people between their 60s and 70s) should live off their cash flows from dividends, interests, Social Security, pensions, annuities, and other sources. They should avoid depleting their principal by making significant withdrawals.

Don't Own Too Much of the Same Thing
Contrary to the view of many, diversification, if properly applied, is not “diworsification.” True diversification is a prudent activity that’s all about having broad exposure to multiple asset classes. These various types of assets include not just domestic and foreign stocks, but bonds, commodities, and REITs.

Even though many people suffer from under-diversification, over-diversification is equally problematic. Owning too many mutual funds, ETFs, or stocks can likewise undermine your financial goals.

If your portfolio happens to be underperforming, there’s a good chance proper diversification is the missing ingredient.

Match Your Portfolio's Risk with Your Tolerance Level
Risk is not just about standard deviations and Sharpe ratios. It’s about making certain that your portfolio’s holdings are compatible with you.

Ask yourself: Do the investments I own truly reflect the amount of financial risk I can handle? Do I know what my maximum level of acceptable risk is? And how can I eliminate the risk of owning individual stocks, underperforming fund managers, and investments that increase my tax bill? Only you can answer these questions, no one else.

Hedge Your Portfolio
Before completely cashing in your investments, think about hedging. For example, if you’re worried that the stock market may continue to decline even further, you can buy ETFs that increase in value when that happens. The Short S&P 500 ProShares (AMEX: SH), Short QQQ ProShares (AMEX: PSQ), and the Short Dow 30 ProShares (AMEX: DOG) are designed to go up in value when stocks fall. Hedging part of your portfolio will help you to avoid the financial danger of making knee-jerk financial decisions like cashing out your entire investment account. 

For pro-active investors, may we suggest the ETF Profit Strategies Newsletter. It has accurately forecasted the extent of this downturn and saved subscribers thousands of dollars. A select few who read our reports knew the full extent of the bear, the five flaws of the bailout package, where the bottom will be and why the bottom will eventually be followed by lower lows. But most of all, the newsletter helps you how to profit from it all with ETFs. >>Learn More