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Market Pros Say It's Time to Diversify Your Portfolio--Slowly

Scott Reeves
Monday, 5 Mar 2007 | 3:50 PM ET

Investors watching the market's wild swings over the past week may well be wondering what--if anything--they should do about their portfolios.

While market pros advise against making any major changes right away, they say now is a good time to start adjusting your investments.

Because stocks are likely to see further declines, they say you should avoid putting any new money in the market for now. Instead, start shifting your existing investments to make sure you're well diversified.

“Stocks are expensive," says Ty Nutt, large cap value portfolio manager for Delaware Investments in Philadelphia. "It would be healthy if we had a corrective phase and got more reasonable valuations. When that happens, we’ll be looking for bargains, but we’re not there yet.”

The market downdraft underscores the importance of diversifying your portfolio. You can reduce risk by distributing your investments among different markets, sectors, industries and stocks, bonds and certificates of deposit. This will protect the value of your entire portfolio against a drop in a single security, sector or market downturn.

Grandmother's Advice

Your grandmother said it best: Don’t put all your eggs in one basket. How your assets are invested among different classes may be more important than the individual stocks and bonds you hold.

"We urge people to be disciplined and take their emotions out of the market,” says Warren Pierson, senior portfolio manager with Baird Funds in Milwaukee. “We think that’s how investors win in the long run. Asset allocation gives you both an anchor and a rudder and is a good way of winning the investment marathon.”

So what sectors should you look at right now?

Delaware Investments' Nutt likes selected stocks in technology, healthcare and financials. The prospect of weaker retail spending has soured many investors on consumer discretionary stocks, but Nutt is keeping an eye on specialty retailers, and even autos and homebuilders for possible purchase in the future.

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He looks for cheap stocks in proven sectors with established names. His fund holds Intel, Gap, Pfizer, Safeway, Morgan Stanley, R.R. Donnelley and Xerox.

“Look for less popular stocks with good balance sheets and good dividends,” Nutt says. “Hold on-–don’t panic. Be concerned about risk. The essence of management is how you handle risk, not return.”

Staying on Sidelines

Others urge caution. Thomas McManus, an analyst at Banc of America Securities in New York, suggests investors hold new cash on the sidelines for now.

So does Liam Dalton, president of Axion Capital Management. He told CNBC’s Power Lunch that you should consider moving into cash short-term and then look for stocks that don't necessarily follow the overall market.

Many market pros, however, see the current market swings as a buying opportunity.

“What we saw last week was a separation between psychology and fundamentals,” said Robert Weissenstein, an analyst at Credit Suisse. “What’s in front of us now is a real opportunity. Companies still have a lot of cash on their balance sheets and, in a decelerating environment, are likely to make capital investments, particularly in the technology area.”

Visitors to CNBC.com certainly have their own viewpoints. Responding to the “Question of the Day” on the website's homepage, many had strategies similar to the market professionals.

Mark C. of Ohio says he’ll look for “Long-term positions in core services and products” while Bill S. of Michigan plans to stick with five proven stocks: Philip Morris, Goldman Sachs, Cisco Systems, Lowe’s, and Level 3 Communications.

Tom L. of Michigan takes an apocalyptic view of his future investments: “Under my mattress. Seriously!”

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