How to Protect Your Portfolio: Seven Ideas for Investing Now

Investors who capitalized on the market's amazing six-month run are now going to want to find a way to protect their profits as a potential correction looms.

Bulls and bears are in a pitched battle over which way the market may run, with some awaiting a seemingly inevitable pullback that has shown only a faint shadow, while others believe the market has more room to grow yet.

The answer, though, may lie somewhere in between, and investment advisors are contemplating a full menu of options on how to proceed for the final quarter of a whipsaw year on Wall Street.

"The coin is in the air," Art Cashin, director of floor operations for UBS, told CNBC. "We don't know where it's going to quite go yet."

Jeff Cox
Senior Writer
CNBC.com

While no one is flocking for the exits, investors are trying to find ways to hold onto the gains they realized from the massive rally off the March lows.

Many advisors are telling clients to take at least some of their profits off the table, but that doesn't mean they still won't be looking for returns.

"Fourth quarter 2009 is no time to be a hero," says Lawrence Creatura, portfolio manager and equity market strategist at Federated Clover Capital Advisors in Rochester, N.Y. "However, it is important that you do not leave yourself underexposed to economic improvement."

Here are seven ideas likely to be popular in the next three months:

1. Emerging and Other Foreign Markets

If there's one universal profit-protecting theme among portfolio managers heading into the fourth quarter, it's the need to move out of solely US-based interests and develop exposure to foreign markets.

"Be very quick to be conservative. Move more to something that's going to protect your gains," says Rodney Johnson, portfolio manager at the Dent Tactical exchange traded fund

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Indonesia, Korea, Turkey, Russia and Brazil were among the big foreign market winners in the third quarter, while Japan, China and Israel lagged.

Investors are expecting a bounceback in China, and in fact see the rest of the world's economies collectively outpacing growth in the US.

"The momentum trade of continued growth overseas will occur for a little while longer, or longer than the US," says Blair Anderson, managing director of HighTower Investors in Chicago. "We've had a stimulus up-move in the markets in the US and it's somewhat over the reaction. It's not over in China."

2. Energy

After a year of yo-yo trading in 2008 and the early part of 2009, oil has settled into a fairly tight range. But there are still opportunities in the energy sector, which is likely to be closely watched in the fourth quarter.

"We still have large exposure to energy and are overweighted energy stocks in our portfolio," says Ben Halliburton, managing director of Tradition Capital Management in Summit, N.J. "We're not being aggressive on the buy side right now but we think there are some good upsides in various stocks."

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He thinks crude prices will stay low in the near term but could go significantly higher when supply becomes an issue again. For now, he's advocating a few specific plays.

Among the favorites Halliburton cites are Conoco Phillips

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3. Stock Picking

Indeed, most market pros now are cautioning against playing the entire market, advising instead to carefully select stocks within specific sectors that are poised for growth.

"The macro market of last year has shown signs of giving way to an environment where stock picking could contribute more to performance," BofA-Merrill Lynch analyst Savita Subramanian wrote in a note to clients. "Company performance is growing more differentiated, and continued high levels of uncertainty suggest a less efficient market, where stock selection could provide a greater advantage."

In a dicey environment, being selective is critical for investors looking to protect profits, Creatura says.

"The environment that we're in is very dynamic and there's a lot of uncertainty and fear," he says. "You can have some success in finding names that will drive alpha, names that will drive performance."