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By Jason Stipp and Christine Benz | 06-05-2013 02:00 PM

Mental Preparation for Market Volatility

Morningstar's Christine Benz offers tips on how to handle your portfolio's stock, bond, and cash stakes when markets shake investor confidence.

Jason Stipp: I’m Jason Stipp for Morningstar. Markets have been skittish lately, with some folks talking about a June swoon. So if you’re the worrying type and want to check your portfolio's risk level, Morningstar’s Christine Benz, our director of personal finance, has some tips for you.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: The traditional way of thinking about taking risk off the table is to go to cash. This is what a lot of people will run to when the markets really get bumpy, but that has its downsides, too.

Benz: I think it does, Jason. The big one is psychic. So when you think about these periods where the market’s a little bit volatile, sometimes it’s not this straight-down plummet. It’s kind of sideways, and you wonder, "Did I get out prematurely? Is it time to get back in." So coming into the market with a lot of cash really can provide headaches of its own.

Stipp: So you have some tips where people can do some things in their portfolios that actually will help control risk, but they’re not as drastic as just moving everything into a cash account. The first one you say is kind of boring. It might be something that you would tend to do anyway during the year, but now could be a good time to take a look.

Benz: That’s right. We’ve had a great run [in the stock market], so I think it's time to rebalance potentially out of stocks if you haven't looked at your basic stock/bond/cash weighting recently. It’s probably time to peel back on the equity piece, and so you would want to think about rather than moving the money directly into bonds, which arguably aren’t attractive either, you might think about taking at least some of that money you’d otherwise have earmarked for bonds and leave it in cash, and then sort of dollar-cost average into bonds. I think that we probably will see yields go up in the years ahead, and you’ll have some better buying opportunities down the line than you do today. So I think that’s a good first step, use Morningstar's X-Ray tools, check your baseline asset allocation, and see if any tweaks are in order.

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