Jittery fund investors should keep focus on basics

Now that war in Iraq has begun, financial pros say an investor's best strategy is to maintain the conservative approach many have maintained for much of Wall Street's three-year slide.

"The war could get worse or not go according to plan. The market could have a significant selloff. But you have to remind yourself that you are in stocks for the long, long term," said Eric Tyson, author of "Mutual Funds for Dummies." "Even if things are bad for a few years, you are buying for 10 and 20 years out."

That means avoiding the impulse to dump stocks or mutual funds when the market is sliding or going on a big buying spree only when Wall Street is surging -- and instead thinking about the more distant future.

But being committed to the market can be tough, especially with round-the-clock war coverage on news networks that has the power to immediately move the market sharply higher or lower.

"Don't do market timing. That is the first thing," said Jordan Goodman, author of "Everyone's Money Book." " It is very easy, when you have wild swings up and down, to buy high and sell low. ... It is just very easy to be emotionally swayed."

Dollar-cost averaging

Goodman advises investors to dollar-cost average, which means investing a fixed amount every month or from every paycheck no matter the direction of the market.

Often, such investments are made by automatic withdrawals from checking accounts into individual retirement accounts or from paychecks into 401(k) accounts.

The idea behind dollar-cost averaging is that over time, the stock market's advances more than compensate for its losses, producing a healthy return. It is also considered a safer strategy than investing or selling a huge chunk of assets all at once and at the wrong time.

"Buying high and selling low is what dollar-cost averaging should prevent you from doing," Goodman said.

Tyson recommends skittish investors take some other simple steps, including examining their risk tolerance and diversifying their portfolios.

"I don't want to say that all people that all people should hang on, because events like this can be a wake-up call to say, 'Gee, I really can't handle this emotionally or financially,'" Tyson said.

Nervous investors might also consider increasing their bond holdings. But bonds are considered to be high right now, having been in favor throughout the bear market. Therefore, investors should choose carefully.

Bonds and bond funds are considered safer because they are basically loans to companies, governments or municipalities, while the fate of stocks is tied to profits. People who invest in bonds or bond funds, also known as fixed income assets, do so with the idea they will recover their investment along with interest by a specified maturity date.

Safer havens

Another move investors might consider is reallocating their stock holdings to safer havens, such as value-oriented mutual funds, which over the very long term have outperformed their growth-focused counterparts due to their focus on steadier blue-chip issues.

"Taking a more value approach is a safer way to go, because you are going to share in the upside, but your downside should be more limited," Tyson said.

Even some professional investors are focusing on the more stable value strategy. Matt Kelmon, portfolio manager of the Kelmoore Strategy Funds, said he recently purchased shares of General Motors, saying it had an attractive stock price -- in the low- to mid-$30 range -- and a healthy earnings yield of 6 percent. That yield is the premium investors receive for each share of GM they own. It is modest by the standards of the booming late 1990s bull market, but after three years of declines, modest yields are quite enticing.

"The blue chips are the first place where people put their toe back into the water. ... And, if the turnaround takes longer than expected, these yields are hard to come by," Kelmon said.

But putting everything into blue-chip or bond funds is not a good idea for most investors. Investors should strive to have diverse portfolios, Tyson said.

Diversification means having an array of assets, including stocks, bonds, real estate and cash. It also entails owning shares in companies of varying size and industry and shares of international companies as well as domestic ones.

The idea behind diversification is to reduce risk by spreading it out over a variety of sectors, industries and asset classes.

"There are risks everywhere," Tyson said. "But the risks are different, and that is where the diversification comes from."