Text size: increase text sizedecrease text size Diversity in investments vital in turbulent economy

Experts recommend health-care and consumer staples stocks, among others

For many investors debilitated by the economic and financial downturn, rebuilding a portfolio is taking a back seat to avoidance mode.

"Folks won't even look at their investment statements because they're so worried and upset about the market, and that is a mistake," said Marilyn Capelli Dimitroff, a certified financial planner and president of Capelli Financial Services Inc. in Bloomfield Hills, Mich. "Stop thinking about history and where your investments were a year ago, because what you have now is what you have."

Although investment values may well revive at some point, your projections for the future should consider current figures. In particular, go over 401(k) and other retirement accounts to see how your retirement prospects look.

Determine how much you need to save and invest regularly to get your overall assets back on track. Deferred spending is still the major component in wealth-building.

"Decide if your pool of assets is still enough and, if not, take action either by doing more saving and investing, or by cutting your spending," Capelli Dimitroff said. "With U.S. equity markets down more than 30 percent, you have to ask yourself if you could sustain another loss like that, because, if not, it is time to start ratcheting down equity exposure by selling some stocks."

For the fixed-income component of your portfolio, she recommends Treasury inflation-protected securities, known as TIPS, whose returns are indexed to compensate bondholders for inflation. And brave investors should at least consider some discount-priced stocks.

"There's less risk in the stock market now than when the Dow Jones industrial average was at 14,000 and everybody loved it," said Capelli Dimitroff, who recommends a portfolio diversified among U.S. and foreign stocks, large- and small-cap stocks, and growth and value styles in order to reduce risk. "The price-earnings ratios of stocks are more in line, expectations are low and valuations are low."

More than ever, you need a budget you can follow and a regular plan to put your money to work. "Handling this market is akin to trying to lose weight, because to lose a pound you must burn more calories than you take in," said Paul Larson, editor of the Morningstar StockInvestor newsletter in Chicago. "Similarly, you must save more money than you spend."

Another danger is panicking and dumping everything you own. Although money-market funds and bank certificates of deposit provide a safe underpinning for your portfolio, their low returns mean you'll eventually need the longer-term inflation hedge that stocks historically have provided.

"Resist the urge to sell everything that dropped in value, for this market isn't going to persist forever," Larson said. "Yet if you do have too much in equities, this would be a good time to lighten up because you will need balance and diversification."

Larson sees potential in health-care stocks, especially if the market downturn is prolonged and favors reliable industries. Johnson & Johnson and Novartis AG are solid companies with good balance sheets, cash flow, industry positioning and discounted stocks, he said.

Consumer staples stocks should also hold up relatively well versus the rest of the market, he predicts, with Coca-Cola Co., PepsiCo Inc. and Diageo PLC his favorites.

Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney@tribune.com.