What ETF, Stock, and Fund Investors Should Do Now

Bet on quality, dollar-cost average, and don't panic, experts say.

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Watching your portfolio plunge is a scary experience, no doubt. The temptation to sell is strong, but most experts say that long-term investors should ride out this bumpy market. Does that apply to investments across the board, though? U.S. News recently spoke with experts—from ETF reps to fund gurus to financial advisers—to get advice for different types of investors (you may find yourself in several of the following categories):

ETF investors: Even though exchange-traded funds can be bought and sold with the ease of stocks, a buy-and-hold approach still applies. "The strategy with ETFs is not much different than with traditional funds," says Dan Dolan, director of wealth management strategies for Select Sector SPDRs. He says investors should look for well-diversified ETFs (see Jason Zweig's take on ETFs to avoid). For the adventurous—or those seeking exposure to a particular sector or region of the world—narrowly focused ETFs can work in small doses, he says. Institutional investors refer to this type of strategy as "core and explore." Dolan says regular-Joe investors are increasingly using ETFs as stock substitutes, since they can avoid company-specific risk by investing in an assortment of companies within the same sector.

Stock investors: Quality rules in shaky markets. That means big-brand companies with airtight balance sheets, smart managers, and plenty of cash on hand. "In areas [of the economy] where there is no fear, people will be reasonably secure. Coca-Cola, for example, is close to making a new high," says Stephen Lieber, chief investment officer at Alpine Mutual funds. He says investors should take a hard look at their individual stocks and decide what the long-term strength of the companies is likely to be. "History tells us that with well-positioned investments (in terms of the overall economy), we will get through these periods," he says. Alan Gayle, senior investment strategist at RidgeWorth Capital Management, says he's looking to companies that are taking "self-help steps," such as making product changes and cutting costs to improve their bottom line. And Charles Norton of the Vice Fund is betting on sectors that deliver in a variety of market environments: alcohol, tobacco, defense, and gambling.

Fund investors: Find out if your fund holds significant stakes in AIG, Lehman, or other battered financial companies (you may see a drop in short-term performance). Then relax a bit, says Neil Hennessy, chairman and CIO of Hennessy Funds: "[A] 3 percent or 4 percent [position] is no big deal—that loss can be made up if it's only one position." That's the beauty of diversification. Says Vanguard's new CEO, Bill McNabb: "It seems like motherhood and apple pie to talk about diversification and balance, but it just keeps coming back, over and over. Think about every period for the last 25 years that we've gone through and how much better the diversified investor is than somebody who had all of his or her eggs in one asset class . . . It doesn't insulate you totally—when you have a period when stocks and bonds both do poorly, then you're not going to look great—but in the long run, that balance has been really important." Here's more calming advice from McNabb.

Money market investors: Money market funds have long been considered "safe harbor" investments and virtually risk free. But last week, that safety was called into question when the Reserve Primary Fund dropped to a net asset value of 97 cents (money funds strive to maintain a $1 NAV). One blowup doesn't mean you should cash out of your money market fund, however. For one thing, what happened with the Reserve Primary is an anomaly. "I'm generally not concerned about great loss in a money market," says Lew Altfest, president of L. J. Altfest & Co. "Having said that, I've had my clients in government money market funds for a little over a year. I like them for psychological reasons." Investors should keep in mind that money market funds made up of good old government-backed T-bills provide much lower yields than other money funds. On the other hand, Morningstar says investors should be wary of funds that pay above-average yields—as the Reserve Primary Fund did—because it may indicate that the managers are taking on extra risk.