How to Ride the Economic Rollercoaster

Oct. 23, 2008 — -- The dizzying economic dive has left many people terrified about their financial futures.

For those who are hanging on every change in the markets, "GMA Now" asked Liz Ann Sonders, senior vice president and chief investment strategist at Charles Schwab, for the most important things individuals and families should consider about their investments in light of the fast-changing economy.

Here are Sonders' tips on how to invest your way to financial freedom:

1. Panic is never an investment strategy.

Take a look at your overall exposure to stocks in light of your target asset mix for your portfolio.

Your target asset allocation should reflect your long-term goals and your risk tolerance. If those circumstances have not changed and your portfolio has roughly the same percentage in stocks as indicated by your asset allocation, then you're probably in good shape.

Be sure, however, to assess whether your stock holdings are well-diversified and of high quality.

2. At a time like this it's more important than ever to resist the herd mentality. The stock market is the only market where people tend to run for the exits when things go on sale.

3. Review your overall stock portfolio and evaluate how it measures up from an individual economic sector point of view.

The present crisis has had a disproportionate impact on certain sectors of the economy, like financials. What is your exposure to that area? If it is higher than 15 percent of the S&P 500, we would generally consider that an outsized position and we'd suggest bringing it in line with market weights.

There are smart things to do with your money at a time like this -- moving gradually, via dollar-cost-averaging, into those asset classes or economic sectors where you might be underrepresented. And dollar-cost-averaging out of others where you might be overweighted.

4. It's always smart to have cash in your investment portfolio -- but there are dangers to being in all cash (inflation risk), and the risk of missing out when the market recovers.

Typically, following a bear market, positive returns are front-loaded -- in other words, the market can come roaring back.

Key Actions for Investors

1. Do not operate in a vacuum. Take stock and customize a plan of action based on your own timeframe for investments and comfort level with risk.

2. Review your portfolio and consistently review you your asset allocation to ensure that your long-term targets are met.

3. Tools for Navigation in both good and bad times:

Asset allocation

Diversification

Periodic rebalancing

4. Education: Use every event that occurs within the market, good or bad, as an educational opportunity to further increase and enhance your financial literacy -- both for you and your loved ones.