Personal Finance : How to Protect Your Portfolio from Politics

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Byline: Jean Chatzky

Washington's shoddy compromise sent the stock market plunging last week. What's an investor to do?

All the dithering about raising the debt ceiling sent the stock market tumbling last week, as investors faced down the prospect of a "double dip" recession. Given the sorry state of Washington, a reasonable person might ask: is there any way to protect our portfolios and cope with the ramshackle global economy at the same time?

Yes, but it calls for a strong stomach, a handle on your own financial goals, and the ability to tune out the noise. That's the lesson of the debt-ceiling talks, says David Kelly, chief market strategist of J.P. Morgan Funds. Friday's stronger-than-expected jobs number (which added 117,000 jobs to nonfarm payrolls and sent the unemployment rate down to 9.1 percent) also brought revisions upward in the jobs numbers for May and June. In other words, things the past three months, while not good by any means, were also not as bad as we thought.

In order to stay out of the fray, individual investors need to focus on controlling the things they can control, says Mark Zandi, chief economist of Moody's Economy.com. We can't control Washington, but we can take charge of our investments. Here's how:

Maintain enough liquidity. There's a big difference between the money you need to make that first college-tuition payment for your daughter in 2013 and the money earmarked for your retirement two decades from now. To safeguard the tuition, you need to protect yourself against having to sell in the middle of a market correction, says financial adviser Harold Evensky. He's advising clients to keep five years' worth of necessary cash in either cash itself or fixed-income instruments like CDs and Treasuries with short durations. Short is important, because when interest rates rise you'll want to be able to transition fairly quickly into better-paying safe havens.

Increase your diversity. When you built your portfolio, you should have decided on a ratio of stocks to bonds that made sense for your age and risk tolerance. …