"There is a lot of economic uncertainty, so it is best not to put all your eggs in one basket," says Rick Jandrain, chief investment officer of equity products for Bank One Investment Advisors, a group that manages more than $155 billion in assets. "Diversification spreads the risk."
Frank Wojcik, senior portfolio manager of Fifth Third Investment Advisors, agrees.
"There are two basic keys for protecting a portfolio from a volatile stock market -- proper asset allocation between stocks, bonds and real estate, and diversification within these asset classes," he says.
Wojcik recommends a combination of 60 percent stocks and 40 percent bonds, depending on how long you have to invest before you'll need the cash from your investments.
"The shorter your time horizon, the more money you should move into fixed income assets like bonds," he says.
When it comes to stocks, Jandrain and Wojcik advise investors to include a blend of large-, mid- and small-cap stocks in their portfolios, as well as a balance between growth and value stocks. Wojcik says growth stocks do well when the economy is expanding, while value stocks perform well when the economy is slowing down. Having both in your portfolio can minimize your risk.
And don't forget to include international stocks.
Although mutual funds didn't perform as well in 2001 and 2002 as they had in previous years, they are still worth investing in instead choosing several stocks on your own, as long as they follow the diversification rule.
"Just because you have four or five funds doesn't mean you have diversification," says Jandrain. "Make sure your funds have a blend of investment styles."
If you do choose your own stocks, make sure you have at least 20, and that they pay dividends.
"Dividend paying stocks are less volatile in the long run," says Wojcik.
And again, diversify.
"One mistake people make is buying a handful of stocks all related to one industry," says Wojcik. "You should never invest more than 20 percent of your money in one industry." How to reach: Bank One Investment Advisors, (800) 480-4111 or www.onegroup.com, Fifth Third Investment Advisors, (614) 233-4429 or www.53.com