Protecting your nest egg

The economy is stormy, sure. But with the right moves, and a little patience, you can shield yourself and your investments from the deluge.

Gloomy predictions about the nation's economy may make you want to park your money under a mattress.

Yes, the declining monthly balance of your brokerage account statements is, perhaps, stomach-churning. But selling off investments now could be more damaging to your portfolio than riding out this bear market. So, what should you do with your money?

"Any time there's a financial crisis, it's a good time to review the basics," says Sharon Rich, a fee-only financial planner for Belmont-based Womoney. "It's not time to shift gears, but to review where you are."

Sure, it may also be a good time to bargain hunt for stocks, or take a loss to offset a nasty tax bill. But those decisions may be secondary to beefing up your emergency cash, paying down debt, reassessing your risk tolerance and investments, and generally analyzing your financial health.

The markets aren't the only place to lose money in a tough economy. Job loss or medical crises can be far more devastating than a stock market dive.

Financial planners typically advise that investors set aside a cash emergency fund - enough to cover three to six months of living expenses. But doubling your emergency fund to cover between six and 12 months of expenses is a wise move in the present economy, when job security may be at risk, says Linda Gadkowski, a Centerville-based fee-only financial adviser for Beacon Financial Planning Inc.

"You need money for a rainy day - and when clouds persist, you must have more," she says.

The goal may seem unattainable, especially when gas and food prices are escalat ing. But you could be unknowingly sitting on extra cash, Gadkowski says. Begin by reviewing your stock portfolio for investments you may want to cash in.

"If you have a stock that hasn't been coming back, maybe it's the time to take that loss and convert it to cash," Gadkowski says.

Selling stocks that happen to be doing well right now, such as oil companies, may also be a good move for bulking up your cash liquidity, she says. Gadkowski also advises selling savings bonds that you may have stashed away - an investment many people ignore.

Paying off credit card debt is always a good move - but it's especially beneficial now, says Michele Gambera, chief economist for Ibbotson Associates, a subsidiary of Morningstar Inc., a Chicago-based investment research company.

"Getting rid of consumer debt offers the best return right now," Gambera says.

Outstanding credit card debt totaled about $950 billion as of February, according to the Federal Reserve. Fixed rates for standard credit cards are averaging 13.4 percent this week, according to Bankrate Inc., a financial-services research firm in North Palm Beach, Fla. So throwing extra cash at your principal debt could leave thousands of extra dollars in your pocket.

But if you can't pay your debt off outright and you're a homeowner, fee-only planner Robert Hurley of Stoddard Management Co. in Rockland suggests considering a home-equity line of credit.

Hurley says some lenders are advertising home-equity loans for as little two points below prime - the interest rate that commercial banks charge their most creditworthy customers, such as large companies. However, many lenders are also tightening their standards for such loans as property values decline.

If you don't qualify or don't own a home, pay off credit cards with higher interest rates first and work your way down to lower-interest debt, says Hurley.

The feelings you're experiencing in the current market could be a good indicator of your personal risk tolerance. Are you feeling sick at night? Or are you feeling confident that you'll ultimately recoup your losses?

"Look at yourself and be aware of exactly how you as a person, male or female, can handle it," Gadkowski says.

If you're uncomfortable with trying to hold out a while longer, gradually reduce your exposure in 10 percent increments, Gadkowski says. Take stock of your portfolio and ask yourself which investments you wouldn't buy today.

"If it was a dog then, and it's still a dog, then sell it," she says. Gadkowski cautions strongly, however, about rushing to sell haphazardly because you are nervous.

Teri Pirozzi of Arlington had a taste of risk tolerance in 2000 during the market turbulence following the dot-com collapse. That's when the S&P 500 ultimately declined 24 percent during the 15 months that followed.

"It takes a while to recover from something drastic like that," she says. "We've been extremely careful during the past five years."

Today, Pirozzi, 54, and her husband, Ralf, 61, both Boston area recruiters for the information technology sector, now favor more stable investments, such as government securities and CDs. "In terms of financial investments, we're holding steady now," she says.

Once you've organized your financial housekeeping, you can think about investing. Review your asset allocation. Determining the percentages of equities, bonds, foreign securities, and cash that make up your portfolio is directly related to the timeframe in which you plan to access your investments.

Money you'll need in the short-term - perhaps for buying a car or making tuition payments - should remain in a safe, relatively risk-proof haven, such as an FDIC-insured savings or money market account, or treasuries backed by the US government, says Ted Yoos, a fee-only financial planner in Sudbury .

"But if you're a long-term investor, it's an ideal time to invest in stocks," says Hurley, the Rockland-based planner.

That's because today's bargains will likely grow in value for the long haul.

Financial services companies - many of which have been pounded by their exposure to risky subprime mortgages - are a particularly good buy right now for investors with "nerves of steel," according to Gadkowski, the Centerville-based planner.

"But don't do it if you don't have the stomach," she says.

Gadkowski advises against trying to predict when stocks will recover. Set performance goals instead, she says. For example, if you buy a bank stock for $10 per share, you may want to set a goal to make 10 percent on your investment and hold it until that point.

Sectors likely to perform well during the coming 12 months include consumables - such as drug store and supermarket chains - and companies that produce commodities such as oil and steel, according to Stephen Biggar, director of US equity research for Standard & Poor's. These stocks are doing well because investors figure people still need to get prescriptions filled and buy groceries.

"But if you're worried about employment, don't buy equities," he cautions.

The true success of your investment portfolio, however, depends less on the bargains you purchase now and far more on allocating your assets among different classes to maximize returns and hedge against loss. For example, Sharon Rich, the Belmont-based planner, has been advising clients to increase their exposure to fast-growing foreign markets slightly to offset the effects of declining US markets. She also advises against buying whatever's in vogue.

"Don't chase the market," she says. "Come up with a portfolio that you can live with - whether the market is doing well or poorly."

And history can be a comfort as you ride out the storm. The US stock market, as measured by the S&P 500, has suffered 10 significant three-month declines - 13 percent and higher - since October 1957, according to Boston-based Fidelity Investments. But in eight of instances, the stock market recovered in excess of 20 percent the following year.

"Most of my clients have been through this before - they know this isn't the end of the world," says Hurley of Stoddard Management. "People understand this is just another cyclical downturn and they'll go through many more before they die."