A "slump-proof" investment portfolio can be a challenge.
It is what many investors demand in turbulent times, even though history indicates the stock market eventually recovers from its slumps anyway.
You should at least have a strategy in place before you hit the panic button. This process involves inclusion of defensive holdings less captive to the economy, such as beverages, health care or utilities, and exerting personal discipline.
"The time to slump-proof your portfolio is before you go into a stock, mutual fund or exchange-traded fund," said Barry Ritholtz, chief market strategist with Ritholtz Research in New York. "Ask yourself how much you're willing to let it go before you cut and run."
Put a predetermined mechanism in place with a reasonable selling price, both on the upside and the downside, Ritholtz said. For example, his firm enjoyed a strong run-up in its shares of Chipotle Mexican Grill Inc., but he said it put a sell level on them after finally deciding "enough's enough."
Rebuilding of the nation's crumbling infrastructure provides an ideal defensive strategy in a year of volatility.
The Shaw Group Inc., an engineering and construction firm with a large number of government contracts, and Stanley Inc., an information technology firm that will help government agencies rebuild infrastructure, are both recommended by Ritholtz.
"Beverage companies are able to pass along higher costs, we're seeing worldwide growth in aviation and people take medications regardless of the economy," said Charles Rotblut, senior market analyst with Zacks.com in Chicago.
Because Rotblut expects a number of non-alcoholic beverage companies and their bottlers to turn in earnings growth rates of 9 percent or better for 2008, he recommends Coca-Cola Co., Coca-Cola Enterprises, PepsiCo Inc., Pepsi Bottling Group Inc. and PepsiAmericas Inc.
Military contractor Northrop Grumman Corp. should prosper because of the nation's ongoing defense requirements "even if the Democrats are in the White House," Rotblut said. He expects aviation prosperity because Asia and Europe will be strong even if a U.S. slowdown occurs, yet he isn't recommending Boeing Co. because of delays with its new 787 jetliner.
The medical field isn't overly dependent on the economy, but investment choices must always be company-specific, Rotblut said. He expects double-digit earnings growth in 2008 from Gilead Sciences Inc., Bristol-Myers Squibb Co., Allergan Inc. and Schering-Plough Corp.
"Right now, investors should make sure they have a good amount of their equity exposure in non-U.S. stocks," said Ernest Ankrim, chief investment strategist with Russell Investments in Tacoma, Wash. "Then, within the U.S., they should have large-cap and growth stocks of companies with globally diversified client bases."
As much damage as housing and lending problems have caused, almost their entire impact on U.S. gross domestic product the past three quarters has been offset by export growth, Ankrim said. The fact the dollar has declined makes the U.S. a "really good seller in the world."
Of course, no one should completely revamp an entire portfolio based on short-term trends.
"We're not forecasting a recession at this point, though we think there is a 40 percent chance of one," said Sam Stovall, chief investment strategist with Standard & Poor's Equity Research in New York. "We are underweighting financials and consumer discretionary stocks--even though they're probably due for a bounce--because we believe they'll generally be underperformers."
Sectors where demand for products and services remains fairly static, such as food, beverages, tobacco and utilities, don't fall as much as the overall market in a downturn, he said. That's why they're considered defensive, Stovall said, yet they aren't really safe havens "because on average they don't rise either."
Since 1945, there have been 49 stock market pullbacks of 5 to 10 percent in a year; 16 corrections with declines of 10 to 20 percent; and 10 outright bear markets, he said.
"On average, all the pullbacks were recouped in two months and the corrections in four months," Stovall said. "Except for three mega-meltdowns, we've recouped everything we've lost in about a year."
As always, the most aggressive reaction to market slumps is to consider them buying opportunities.
"People will buy everything on sale except stocks, but they should invest just like they would at Nieman Marcus when prices have been reduced," said Frank Holmes, chief executive and chief investment officer for U.S. Global Investors in San Antonio. "You must have underlying faith that the markets will always go to higher highs and volatility is your friend."
In the past few months the market fell 2 percent in a day several times, and each represented a buying opportunity, Holmes said. Gradually buy a bit more whenever you encounter a decline, he said.
Nonetheless, the unpredictable market will encourage many investors to seek slump-proofing.
"While we believe the market is deeply oversold, what we're watching for is the quality of the bounce we're bound to get," Ritholtz said. "We expect there will be more downside and, if the market isn't cooperative with the general expectations for a year-end market rally, January is potentially dangerous."
Andrew Leckey is a Tribune Media Services columnist.Copyright © 2015, CT Now