5 Ways to Manage Market Turbulence

Here’s a solution to the made-in-Athens financial mess: Let’s pass a collection plate and take it to the Acropolis. It would be much cheaper and easier than suffering a series of stock-market crashes. That’s a joke, but the subject is serious. So please read on.

Greece owes banks in France and Germany 83 billion euros, or $105 billion. All told, the Greeks owe the world $200 billion. On May 6, the total market value of all U.S. stocks plunged by more than $1 trillion. By the close, according to the Dow Jones Total U.S. Market index, America’s shareholders had lost $462 billion. And in a replay of 2008’s meltdown, Treasury bonds and gold rose and oil prices dropped sharply. Together, those events imply flagging investor confidence about the robustness of the economic recovery. And it is investor perception about the health of the economy that will ultimately determine whether the bull market that began in March 2009 resumes, settles into a sideways pattern or ceases to exist.

Yes, we could easily join hands and bail Greece out of debtors’ prison, at least for now. On May 10, European Union officials took a huge step, agreeing to provide nearly $1 trillion. The Euro rescue plan is similar to the $700 billion package that the U.S. extended to its shaky financial institutions in 2008.

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But there are reasons on this side of the Atlantic to explain why stocks have gotten wobbly again. Oil prices got puffed up and now are deflating. That’s good for drivers but not so sweet for investors in energy stocks. Pimco’s co-chief investment officer, the influential Mohamed El-Erian, made negative comments on CNBC while stocks were falling mildly on May 6. Sure enough, the selloff intensified. And let’s not forget that from the 2009 low through April 23, Standard & Poor’s 500-stock index had vaulted 84% without so much as one 10% correction. The market was due for a breather.

The most frantic minutes of the May 6 plunge, during which stocks of a few perfectly healthy and solvent companies were briefly quoted at zero, appear to be a trading accident. But the day’s final score -- a decline of 3.2% -- was legit and maybe even defensible. And as the big swings on May 7 indicate -- the Dow ended the day at 10,380.43, off another 1.3% -- the calmness that had marked the market’s ascent for much of the past year appears to be history. So here’s a refresher on how to manage market turbulence.

Don’t panic. I don’t mean you should never sell anything that’s skyrocketed and is now coming back to earth, especially if you have some hard evidence that the company or the sector it’s in faces real problems. Real estate investment trusts are a good example. The stocks have performed extraordinarily well over the past year-plus, but the actual commercial properties that REITs hold are still performing poorly. Or consider Apple (symbol AAPL). If you’re a longtime holder, or even if you bought the stock anywhere near the March ’09 bottom, you’re probably sitting on a big gain. If you own the stock in a taxable account and you think capital-gains tax rates are heading up -- not an unreasonable assumption -- this might be a good time to lighten up.

What I do mean about not panicking is that you shouldn’t be glued to your computer screen and breaking into a sweat with every downward tick in your stock holdings. If you do, odds are you’ll end up selling a perfectly good stock or fund.

Do rebalance. Even after the early May losses, stocks are likely to be a higher percentage of your overall portfolio than you intended. You may decide to lighten up some more, beyond whatever lightening the market’s done for you, by cutting your allocation to stocks from, say, 75% to 60%, or from 60% to 40%, which is sensible if you’re nearing retirement. Think which stocks and funds you want to keep, which ones may have exceeded your price target and which ones are duds. Then rejigger your holdings in an orderly way, trying to avoid being unduly influenced by the chaos on Wall Street.

Stick with stocks, but don’t be a hog. In the depths of the bear market last year, my colleague Manny Schiffres bravely encouraged readers to hold on to their stocks, noting that markets always bottom -- and bull markets always begin -- in an atmosphere of deep and pervasive gloom (sound familiar?). Manny also reminded us that stocks must be part of a long-term investment plan. The bankruptcy of a small European nation does not mean that our economy, and the economies of most of the world, will stop growing or that stocks will lose more money than they make over the long haul. Take some gains and rebalance, but don’t stop those monthly contributions to your retirement plans.

Stay liquid. Global financial stress is just another reason to stay away from investments that cannot be bought and sold quickly. Avoid things like limited partnerships and private REITs. You want to know where your money is, what your investments are worth and when you can expect interest and dividends. Your bank account or money-market fund may earn next to nothing, but cash is king when others are selling indiscriminately and offering you their goods at fire-sale prices.

Quality. If this really is the start of a new bear market and a precursor to another recession, you’ll want to invest in companies with solid business models that have plenty of cash and little debt and pay a good dividend (although you shouldn’t forget that old joke about the stock market having predicted nine of the past five recessions). Hundreds of companies fit that description, which is one reason the stock market shouldn’t fall apart.

I found it amusing that one of the stocks that collapsed on May 6, apparently because of a trading glitch, was Procter & Gamble (PG). P&G, one of the healthiest and most-durable companies on the planet, is arguably the last stock anyone would sell during a panic. To the contrary, this is exactly the kind of stock you want to own in periods of fear, uncertainty and doubt. Even if the Greeks (and others) can’t afford to buy any more cars and take vacations, they’ll still have to brush their teeth and wash the clothes they soiled in their latest anti-government demonstration.