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By Steve Butler, Founder & CEO (sbutler@pensiondynamics.com)

Cole Porter’s “Just One of Those Things” describes market performance in recent weeks with lyrics such as, “If we’d thought a bit about the end of it, when we started painting the town, we’d have been aware that our love affair, was too hot not to cool down…”  which brings us to a collection of tech funds and small cap funds that gained from 25 to 35 percent over the past 12 months — until last week. Too hot not to cool down, in other words.

There are always clouds on the horizon, of course, as the market climbs “on a wall of worry.” The antidotes to market downdrafts are many, but my favorite is just adopting the reasonable expectation of having to give back some or all of a surprise windfall. The number of stock-based mutual funds clocking in at well over 10 percent for the past 12 months included just about every investment style category — except foreign funds, the darlings of the investment community not that long ago.

Given the potential for implosions at any time in the stock market, my second favorite antidote is a collection of mutual funds or stocks selected for their ability to crank out relatively high dividend rates.  Dividends automatically reinvested offer what amounts to a 3 percent annual gain, even when the share price is otherwise flat for the year.

Furthermore, as goofy as it may sound, anyone with some time until retirement and still making monthly deposits into a retirement plan should pray for a periodic implosion. Throughout the plunge, new inbound money will be buying more shares as the they become available at steadily falling prices. A variation on this theme is to consider a conservative mix of value/dividend-producing funds for the current assets, while choosing an aggressive allocation for all future contributions. The latter, more volatile funds, will benefit from the dollar-cost-averaging of future purchases, while we accomplish some protection what we have so far managed to accumulate. Most 401(k) and other retirement plans allow a distinction between what we could call “old money” and “new money” investment allocations.

As a final resort, there is always the option of folding some bond funds into the mix. One third of the assets in bonds softens the impact of falling markets by over a third, while reducing the projected annual return by only 1 percent — typically from 10 percent down to 9. Giving up 1 percent of average gain is a cheap price to pay for “selling down to the sleeping point” by shifting one third of assets out of the market. The worst mistake, I shouldn’t even have to mention, is bailing out of everything and moving to cash. Ask one of the many people who did this in 2008 and who have since missed the tripling of market values.

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