In shaky market, stay with long-term plan

What should you do to protect your money now? For starters, stick with your long-term investment plan. If you're young and saving for retirement, keep directing your IRA and 401(k) contributions toward stocks — over the long run, you'll gain from steady purchases of stocks and stock funds by buying on weakness. Look for beneficiaries of lower short-term interest rates, stay with companies that are strong exporters, and hunt for dividends.

If you do take risks now, do it only with money you can afford to lose. Tim Byrnes, 50, a technical director for AT&T who lives in Jackson, N.J., has 70 percent of his 401(k) in stocks and 30 percent in bonds. He also has a small taxable account in which he is willing to experiment. After a wonderful 2007, Byrnes lost 16 percent in the first two weeks of 2008 as his holdings in small tech companies collapsed.

Byrnes could have frozen or cashed in what was left. Instead, he made some sensible changes. Noting the Federal Reserve's interest-rate cuts, he sought investments that get a boost from lower short-term borrowing costs. One is Annaly Capital Management (symbol: NLY), an unusual real estate investment trust that borrows at short-term rates, uses the proceeds to buy higher-yielding, long-term government-backed mortgage securities and pays out as dividends nearly all of the profits from these interest-rate differentials.

Byrnes also invested in MFA Mortgage Investments (MFA), a slightly racier rival of Annaly. Both gained more than 12 percent in the first six weeks of 2008. As long as the Fed keeps signaling its intention to cut rates, these kinds of REITs are good places to park cash and get good income.

Byrnes also bought shares of Midwest Air Group, reasoning that a recession would bring down oil prices. But the stock (now trading as AAI after a merger with AirTran) bounced around until late February, and then fell 10 percent when oil spiked to more than $100 again.

Rotating into stocks of companies that tend to hold up well in feeble economies is part of defensive investing, but you can also take some nuts-and-bolts measures to protect your gains. For example, financial planner Donald Duncan of D3 Financial Counselors in Downers Grove, Ill., suggests using stop-loss orders on individual stocks or exchange-traded funds. With a stop-loss order, you set a target below a stock's current price. If the stock drops to that price, your broker is obligated to sell it.

Stop-loss orders are particularly helpful if a stock is in a gradual decline. They're not as successful when a stock crashes and blows right past your stop price. The other drawback is that you can get "stopped out" of a stock that's still a long-term winner and become liable for capital-gains tax. Therefore, stop orders are more appropriate for use in tax-deferred accounts.