The Dow Jones Industrial Average has tumbled to lows not seen since 2003, and many must be wondering how they can protect their exchange traded fund (ETF) portfolios in times like these.

Much of today’s weakness came on concerns about the auto industry, as executives pleaded for relief and an infusion of cash to prevent layoffs and bankruptcy.

This year, the markets have hit lows that even last year, few could really have predicted. Many investors, especially buy-and-holders, have been shocked at the hit their portfolios have taken and wonder a) how much  more they can take and b) what they can do now. Many are at a crossroads – exiting now could mean you’re just exiting at the bottom. But staying could just mean hanging on for a ride that takes us to even lower depths.

We have some thoughts about what you can do while this plays out, for better or worse:

  • If your mutual fund is poised for a big year-end distribution, has underperformed its benchmark, and is losing its position, then sell it and buy an ETF in a similar asset class. We have mentioned this before but mutual funds have a tax shocker; ETFs don’t. Capital gains on ETFs aren’t paid until a fund is sold, so there are no surprises.
  • Now is the time to re-balance your investments even if it means tearing up your old asset allocation models. The upside to this is that you will be purchasing some of the same ETFs at close to half off. Investors will want to weigh the differences and go with what you like depending on your desired level of risk and long-term goals, investments spread over several types of asset classes, including equities, fixed-income and non-equity correlated assets
  • Investors may also consider delaying the required minimum distribution (RMD) or donate it to charity. The recent bailout plan allows for individuals to donate up to $100,000 of their RMD to qualified charities for 2008 and 2009, writes Diana DeCharles on ShreveportTimes. The only thing still in question is whether individuals will be required to take their RMD this year.
  • Maybe it’s time to start an investment account to teach your kids about the market? Where one should start by opening a savings account for more prudent youngsters and maybe moving up to stocks and ETFs with holdings that kids might find of interest such as gaming, fast foods, or even clothing. While things are cheap, it could be a great time for some teaching moments.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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