By BEN LEVISOHN And JOE LIGHT
What is part bull, part bear and so ornery that even the hardiest souls are afraid to get too close?
If you guessed the financial markets, you're right.
After tumbling 17.9% during the three months ended Oct. 3, the Standard & Poor's 500-stock index, a broad proxy for the overall market, jumped 11.4% between Oct. 4 and Friday's close.
Normally, such a surge would be cause for jubilation. Underneath the rally, however, signs of distress remain, from the European banking situation to uncertainty in China. As a result, "it's difficult to know how [the turbulence] will play out," says Benjamin Bowler, head of global equity derivatives research at Bank of America Merrill Lynch.
Fortunately, you can take some simple steps to minimize the damage to your portfolio if the markets tank again—and still capitalize on a sustainable rally. Among them: use a "barbell" portfolio for stocks, buy bonds of emerging-market nations and hold more cash.
Get the recipe right, and you could ride out the current volatility with your portfolio largely intact—and even capture some gains.
"You have to realize that risk is a fact of life," says Richard Peterson, a psychiatrist and director at research firm MarketPsych Data. "But if you stick to the fundamental principal of investing to buy cheap and growing companies, it will work out in the long term."
That's easier said than done, of course. Despite the latest upswing, investors are no closer to knowing how three big economic uncertainties will play out.
The European mess remains most worrisome. Even if Europe manages to avoid a disorderly default by Greece, the economic damage might already be done. On Oct. 3, the euro zone's manufacturing Purchasing Managers Index for September came in at a two-year low of 48.5; readings under 50 suggest economic contraction.
Read more at The Wall Street Journal
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