The Wall Street Journal-20080204-Investing in Funds- A Monthly Analysis- Mixing It Up- The Pros- Advice- Amid the tumult- investors are urged to hold tight

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Investing in Funds: A Monthly Analysis; Mixing It Up: The Pros' Advice; Amid the tumult, investors are urged to hold tight

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The best move investors can make in the current roller-coaster stock market: Hold tight.

In this column, we feature model portfolios from prominent financial advisers who invest in mutual funds and exchange-traded funds. This month, we revisit some advisers to see what they are telling their clients amid the market tumult.

The uniform response: Investors who have asset-allocation strategies based on long-term goals shouldn't make drastic changes. If anything, they might look for buying opportunities as stocks fall.

Here are some specifics:

-- LITMAN/GREGORY ASSET MANAGEMENT LLC: Since we profiled this firm's portfolio for moderate-risk investors last April, recommended allocations haven't changed, says Chief Investment Officer Jeremy DeGroot. The portfolio has about 60% allocated to mutual funds focused on U.S. large-company stocks, 15% to foreign-stock funds, 17% to high- quality U.S. bond funds, 5% to the Pimco Developing Local Markets fund and 3% to a fund investing in commodity securities and inflation- linked bonds.

Mr. DeGroot says the Orinda, Calif., firm has been fielding calls from some clients who are concerned about a possible U.S. recession and want to know if they should be taking a more conservative approach. In mid-January, when markets were particularly volatile, the firm's advisers sent out a letter to clients explaining their views: The markets can be driven in the short term by fear or greed, but the clients' well-diversified portfolios hold them in good stead over the long haul.

January was "a good test for individuals to see if they are comfortable with the risk levels of their portfolio," Mr. DeGroot says. If they feel uncomfortable, they should figure out if their longer-term risk appetite is less than they thought it was. Only in that case should they get more conservative, he says.

The portfolio's bond component acts as a stabilizer over the long run, Mr. DeGroot says. "In periods like this, when people are worried about the economy, bonds hold their value."

The advisers are now closely watching the market to see if the volatility presents any buying opportunities.

-- KOCHIS FITZ/QUINTILE: The San Francisco firm has made no changes in the past several months in the portfolio we profiled in October. It calls for 39% in U.S. stocks and funds, 39% in foreign stocks and funds, 5% in a global real-estate private investment, 5% in commodities and the rest in hedge funds and other alternative funds.

Chief Executive Tim Kochis says that just a few clients have called recently with concerns. He thinks the number is low because his firm has in-depth conversations with new clients at the outset about their appetite for risk. "You don't panic, and you don't change your strategy if markets go down, because they do go down from time to time," he says. Volatility "is the price you pay in order to get the kind of superior return that equity exposure gives you."

In an email to clients on Jan. 22, the advisers reminded investors that their portfolios are based on a long-term strategy that is still intact.

As global markets have fallen along with the U.S., some market observers have wondered if overseas investments are too closely linked to the U.S. Mr. Kochis says it still makes sense to invest globally over the long haul, because there is more room for growth abroad, particularly in developing economies like China and India.

He says this may be a bad time to add bonds to a portfolio, because he thinks the inflation rate will increase, which would likely prompt the Federal Reserve to take action that would raise interest rates; that would hurt the price of bonds.

-- LEGEND FINANCIAL ADVISORS: Louis Stanasolovich, founder and chief executive of the Pittsburgh firm, seeks to avoid the extreme ups and downs of the broad stock market in his "low volatility" portfolio by allocating half its assets to mutual funds that use hedge-fund-like strategies. These include funds that bet on mergers and acquisitions, and funds in which managers partly make money by betting that some stocks will fall in price. Mr. Stanasolovich says he is happy so far with results of the funds he recommends.

He invests about 15% of the portfolio in commodity-related funds. He holds one foreign-stock fund, at 7.5% of the portfolio, and puts another 7.5% into foreign real estate. The remaining 20% is in U.S. and foreign bonds and a money-market fund.

While 80% of the portfolio doesn't change from year to year, Mr. Stanasolovich in recent months has made some small "opportunistic" investments, based on his view that the U.S. economy is in a recession. For instance, he added a structured note -- a type of debt security where the return is often based on the performance of various market sectors -- betting that U.S. small stocks will decline more than U.S. large stocks, which is typically the case in a slowing economy.

He also added a small allocation to the Hussman Strategic Total Return Fund, which has some investments in gold and inflation-linked securities. He also bought a global bond fund, partly because it helps provide a hedge against a declining U.S. dollar.

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Ms. Anand is a staff reporter for The Wall Street Journal in New York. She can be reached at [email protected].