Got a crystal ball? It's as good a bet as any other when it comes to predicting some of the events that have shaken our world and the stock market in recent months, whether it's political revolution or natural disaster on an unimaginable scale.
How can you prepare your portfolio for the shocks that follow unforeseeable events? Here are a few tips.
1. Make sure your portfolio is diversified across a range of asset classes, such as stocks and bonds, as well as geographical areas. That way, if one class is hit hard, others may help cushion the blow. Holding a wide range of mutual funds may not do the trick if they all hold a large number of overlapping stocks. Examine your holdings. "A properly balanced portfolio will likely spring back to a fair value after a crisis recedes, but an inappropriately allocated portfolio will likely not," says Jake Zamansky, principal of Zamansky & Associates.
2. Take stock of your investments and savings. Figure out which investments are tied to near-term goals and can't be touched - for example, bonds that you're counting on for sending a child to university. Examine the rest and see where you can rebalance strategically, says financial planner John Hauserman.
3. Get out of volatile holdings slowly and carefully. Make sure you are not holding a very large proportion of riskier investments, such as small-cap growth stocks. "Simply put, there is just too great a risk that when you need the money, it might not be available in sufficient quantities to meet your needs," says Mr. Hauserman.
4. Consider the opportunities that exist after the unforeseen has occurred. The knee-jerk reaction to tensions in the Middle East and the earthquake in Japan was a stock market sell-off. Many savvy investors chose the days that ensued to get back into the market and pick up high-quality stocks on the cheap with the intention of holding on to them for a while.
5. When the markets are in turmoil, keep up your regular contributions to saving and investment plans. Don't be driven away by gloomy headlines - try to maintain a sense of perspective. Think of it as dollar-cost averaging: When you put in a fixed amount of money every month, it buys more when the market is down and less when the market is up.
6. Beware of what MarketWatch columnist Chuck Jaffe calls the Disaster Stock Pitch. "Hyping penny stocks in the wake of a disaster is something of a cottage industry, taking advantage of people who feel like they've got a shot at the next great investment idea to come out of the headlines. And while the odds are against making money in penny stocks, it's clear that the pitches are aimed at little guys with big dreams," he writes.