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Bouncing Back

Learn how to get your personal portfolio back up to par.

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Q: I'm a thirtysomething small-business owner. When I left my job at a large corporation, I rolled my retirement savings over to a self-directed IRA. I often considered tapping it when money was scarce, but I wanted to save it for retirement. Figuring I had lots of time, I invested in some very aggressive mutual funds that had great track records. Now I've lost more than half of my money. I'm considering pulling out whatever's left and investing it in my business. What should I do?

A: First, the short answer: Hang with it. By the time you're ready to retire, your money will be there for you.

Now, in several parts, the longer answer:

1. Re-assess your risk tolerance. Let's face it, everyone loves a winner, and for the past several years, stocks have made lots and lots of people very wealthy. Unfortunately, prices can go only so high before gravity brings them back to earth. But like a rubber ball that, as the song says, comes bouncing back to you, quality investments generally rebound if you have time and patience. You have the former; all you need is the latter.

Let's look a bit beyond your current state of misery and examine what might be happening. Aggressive funds are great when they're setting the world on fire but not when they're going up in flames. If you find that the ups and downs in your selection of investments are making you lose sleep at night, you may have invested too aggressively, no matter how long you have until you retire. If this sounds like the case, go to the next step.

2. Rethink your asset allocation. If I've said it once, I've said it a million times: Past performance is no indication of future returns. This means you can't believe everything you read about a mutual fund, no matter how many stars Morningstar gives it (even Morningstar admits their star ratings aren't necessarily predictive of future performance, but that's another story). Nonetheless, funds with strong, long-term track records don't usually turn into permanent duds.

The key to successful investing is to invest across different sectors of the markets (small-, medium- and large-sized companies), investment styles (growth and value), countries (U.S. and foreign) and finally, to include some asset classes that don't necessarily move the same way stocks do (real estate, bonds and so on). If you have several funds and they're all dropping like rocks, there's a pretty good chance they're in the same market sector and may have similar portfolios. Check a recent annual report (visit the fund's Web site for a look at their top 10 holdings) and see how similar they are. Consider switching to other funds in the same family, or if there are no fees or tax consequences, switch to another family.

3. Dollar-cost average. If you'd like to continue to invest after you've checked your risk tolerance and re-allocated your investments, consider adding to your account on a steady basis. It's tough to invest when everything is going down, but that's the time when prices are low. While it's next to impossible to buy in at the bottom and sell out at the top, adding money monthly can help you make the most of your investment-and you don't have to worry about when to get in. Just make sure you don't put in too much (the annual limit for an IRA contribution is $2,000).

4. Bad markets happen. Losing money during market corrections doesn't make you a bad investor (based on the drop in Microsoft's stock, Bill Gates' net worth dropped from about $66 billion to less than $40 billion since August, so you're not alone). On the other hand, cutting and running-withdrawing money from your IRA and paying taxes and penalties-is another story. If you can't add to your account and just can't bear to look at it, don't. Staring at it daily won't make it go up, and it will only make you more upset. After you've done all you can, give it a chance to get itself back together. Like any good relationship, sometimes all you need is a little breathing room.

Lorayne Fiorillo is a financial advisor and senior vice president at a major brokerage firm. She spent six years as the on-air financial commentator for EyeWitness News and 11 years as a market commentator for National Public Radio. She is the author of the new book, Financial Fitness in 45 Days: The Complete Guide to Shaping Up Your Personal Finances (Entrepreneur). She specializes in retirement and business planning for small businesses.

The opinions expressed in this column are those of the author, not of All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.

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