Investment tips for a shaky market

Mattress + money = bad idea.

With the economy in turmoil, stashing your cash under the bed or burying it in the backyard may feel like the safest bet. But experts say there are still investments that make sense.

The most important tip is Investing 101: Think long term. Markets fluctuate every minute and they go through cyclical swings that can last many months. But over time, stock market investing always beats inflation. You have to be able to ride out the volatility.

"Don't panic," said David Campbell, a principal at San Francisco's Bingham, Osborne and Scarborough, which has $1.7 billion under management for high-net-worth individuals. "The smart money never panics; it always looks for opportunity."

He and other financial advisers said withdrawing investment funds in a downturn is often the worst strategy.

"The problem with taking your money out of the market is, we know at some point in time, based on historical data, this market will rally," said Barry Taylor, portfolio manager at the same firm. "If you pull out of the market, you're not going to be there when those losses are recouped. Our recommendation is not to pull out but to stay in and ride it out, wait for the eventual return we know will happen. Markets go through cycles."

Creating a diversified portfolio is one way to be ready to ride out financial storms.

"It's important to stay diversified - well balanced between stocks and bonds within different sectors, maybe different asset classes if you can tolerate the volatility," said Gary Schlossberg, senior economist with Wells Capital Management, the investment-management arm of Wells Fargo.

Hank Herrmann, CEO of Waddell & Reed, a mutual fund company in Kansas with $70 billion under management, said that now can be a time for some people to go bargain hunting in the stock market.

"We've had about a 22 to 23 percent decline," he said. "The average decline for a bear market is 28 percent. If you use that as a rule of thumb, you've got 5 percent more downside. It suggests that most of the damage is done."

Here are suggestions from investment professionals:

Commodities: There's nothing as basic as energy, precious metals, food, etc. "Historically, commodities are a good diversification tool," Schlossberg said. "They're not so much to goose returns, but to stabilize returns."

In fact, a lot of money now looking for a home seems to be being channeled into commodities, as shown by an increase in their prices, he said.

"Gold is always a good barometer for fear and anxiety, and we have plenty of that now," Schlossberg said.

Basic consumer products: "Health care and consumer staples (have) resilience to the business cycles. They are essential items that don't bounce around as much as the economy moves up and down," Schlossberg said. "Health care earnings tend to be stable. Essential consumer items like food, certain types of beverages, personal care products are not terribly exotic but tend to be more resilient to a slowing economy."

Telecommunications is another area that tends to outperform the market during an economic slowdown, he said.

Blue-chip stocks: "For truly long-term investors, it's a great opportunity to buy equities," Herrmann said. "Stocks are on sale now. Stocks are the only thing you can think of that people sell when they go down. Usually when you put something on sale, people rush in to buy, but not with stocks."

Fortune 500 companies are large enough to withstand an economic slowdown, and they derive a large portion of their sales from overseas. That's a double plus: They benefit from stronger growth internationally, as well as from bringing in revenue in currencies that are stronger than the dollar. "It's a nice protection for U.S. investors," Campbell said, naming companies like General Electric, IBM and Hewlett-Packard.

Financial services: With banks, brokerage houses and mortgage lenders imploding on a daily basis, it sounds like heresy to suggest investing in the financial services industry. But the country will still need banks two years from now - and the ones that survive will be stronger than ever.

"If you have confidence some of these will be survivors - Citigroup, Bank of America, Wells Fargo - they're having to float new bonds and securities to raise more capital, and because of the current environment are having to float long-term rates with a very nice yield," said Richard Welty of Welty/Solari Capital Advisers in Lafayette. "I wouldn't put all my money in any one of them, but it's an area that's worth looking at. It's all in the timing."

Timing: You can't time the market just right. But again, experts emphasize, you should use a long horizon when deciding where to invest.

"The question you should ask yourself today is not 'When will the stock market bottom, next year or next month?' " said Jim Paulson, chief investment strategist at Wells Capital Management. "Draw a big circle around where we are today. Ask yourself, 'If I step in and buy something, will I be happy two or three years from now, even if it goes lower in the next six to nine months?' If you ask that question today about stocks in general, the answer is 'Yes.'