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The investor’s guide to putting it all back together

It’s not easy facing the realities of a damaged portfolio, admits this U.S. advisory, but only by making hard decisions can investors move ahead.

How many investors have seen years of patient effort undermined — or even ruined — by events beyond their control?

Many, unfortunately. And what can they do about it?

Indignation and anger may relieve some of the frustration, but it won’t bring back the assets that have dwindled away.

Watching the stock market rally and roll back and hoping a brighter day is around the corner isn’t much of a solution, either.

No, there may be only one course of action that works.

“Get over it. Move ahead. That’s the tough love prescription for investors debilitated by the economic and financial downturn. Yesterday’s gone, so deal realistically with the world before you.”

Those are the words of Mr. Andrew Leckey, who writes a column on “Successful Investing” for Bull & Bear’s Monetary Digest.

In order to give investors a wide perspective, Mr. Lecky talked to three different experts — a financial adviser, one of the editors at a prominent U.S. advisory firm and the editor of a newsletter for income investors.

His message is simple but forceful. Rebuilding your portfolio will require time and effort. There are no short cuts that will take you back to where you were before this all started.

Stop thinking about history

Take a deep breath, writes Mr. Lecky, and revisit the value of every one of your holdings. “Too many Americans are still stuck in avoidance mode.” Many Canadians are stuck there with them, of course.

The author’s first interview is with Ms. Marilyn Capelli Dimitroff, a certified financial adviser in Bloomfield Hills, Michigan (since this is right in the heart of GM country, we can only assume that Ms. Capelli Dimitroff is working overtime these days).

“Folks won’t even look at their investment statements because they’re so worried about the market, and that is a mistake,” she says. “Stop thinking about history and where your investments were a year ago, because what you have now is what you have.”

You can assume that investment values will revive at some time, but your projections for the future should start with today’s figures, says this adviser. In particular, go over your retirement accounts to see how your retirement prospects look today.

Determine how much you need to save and invest regularly to get your overall assets back on track. The major component in wealth building, she insists, is still deferred spending. To coin a phrase, “a penny saved is a penny earned.”

Cut your spending

If, after you have gone over your assets and decided they are just not enough, take action, says Ms. Capelli Dimitroff. Do more saving and investing, or cut your spending.

“With U.S. equity markets down more than 30 per cent, you have to ask yourself if you could sustain another loss like that, because if not, it is time to ratchet down equity exposure by selling some stocks,” she adds.

For fixed income, this adviser likes Treasury inflation-protected securities (TIPs), roughly the American equivalent of Canadian Real Return Bonds, which are indexed to inflation. Brave investors, she says, may try some discount-priced stocks. And mix them up — large and small cap, domestic and foreign stocks, growth stocks and solid blue chips.

There’s less risk in the stock market now, she adds, than when the Dow Jones Industrial Average was at 14,000 “and everybody loved it.”

Mr. Leckey adds this point: “More than ever, you need a budget you can follow and a regular plan to put your money to work.” And he goes to Chicago for a stock picker’s view of the situation.

Don’t dump everything

Morningstar is a notable name in the investment world and Mr. Paul Larsen edits the Morningstar StockInvestor newsletter. He takes a Weight Watchers approach to today’s market.

“Handling this market is akin to trying to lose weight, because to lose a pound you must burn more calories than you take in,” he says. “Similarly you must save more money than you spend.”

But there’s a wrong way to start. Don’t just dump everything you own. “Resist the urge to sell everything that dropped in value, for this market isn’t going to persist forever,” Mr. Larson advises. “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.

“If you’re mentally and emotionally up for stock investing,” he adds, there is potential in traditional “defensive” stocks like health care and consumer staples. In the former category he likes Johnson & Johnson (NYSE-JNJ) and Novartis AG (NYSE-NVS). In the latter he opts for beverages — Coca-Cola (NYSE-KO), Pepsi-Cola (NYSE-PEP) and the world’s largest alcohol distributor, Diageo plc (NYSE-DEO).

Out in California, Mr. Jack Bowers talks to conservative investors in the Fidelity Monitor newsletter. He has a few encouraging words.

Getting in line with reality

First, he thinks investors should get “get paid while you wait” by moving into high-yield corporate bonds. But he does see improvement in the market (and this was written well before the recent rally).

There is some relief, he notes, when companies announce earnings down by only one-third from last year, which is “not so bad in this environment. It also suggests that market valuations are getting in line with reality.”

By the way, he shares Mr. Larson’s faith in consumer stocks as a good place for equity investors to shop these days.

A full recovery for stocks, however, might take three to five years, Mr. Bowers concludes. If that seems rather pessimistic, it’s undoubtedly better to start out expecting the worst and build from there.

We’ve seen some brisk rallies of late, but rebuilding a deflated portfolio will take more than a few good days on the stock market. It will take a willingness to face the realities of the situation and work through it step by patient step.

It seems a shame to have to start over again because of someone else’s mistakes, but investors who got it right before can get it right again.