Now would be good time to review your portfolio
Wall Street experienced another gut-wrenching ride yesterday, with stock values plunging 2 to 3 percent as investors feared that the spreading subprime mortgage crisis could make it harder for companies and individuals to get loans even though central bankers in Washington and in Europe pumped billions of extra dollars into their systems.
After swinging down and up through the day, the Dow Jones industrial average ended its session down 387.18 points to close at 13,270.68, its second-biggest drop of the year. Shares in financial-services companies were among the hardest hit, and an index measuring the volatility of stocks hit a four-year high.
Investors are expecting the market to remain volatile in the coming weeks. Market strategists said the current period of instability provides a good opportunity for individual investors to evaluate their portfolios -- and their tolerance for risk and volatility. Here are some things to consider:
Q What does all this instability mean for my investments?
A Stocks and bonds that carry the highest risks tend to drop the most in the face of specific concerns. For example, financial institutions have been some of the hardest-hit stocks as investors fear that banks' profits will be affected by losses in the subprime mortgage sector. And, if these institutions in turn raise their lending terms, that could reduce the corporate mergers and share buybacks that have buoyed stocks upward through much of this year.
In these conditions, James Swanson, chief investment strategist for Boston mutual fund firm MFS Investment Management, said for most investors a good rule of thumb is to focus on shares of higher-quality, larger companies. These larger firms tend to have better access to capital and aren't as affected by rising interest rates, and they tend to have steadier profits. They are also more diversified, with broader product lines and investments in faster-growing foreign economies that can boost profits at a time when growth rates in the United States aren't as robust.
Q What about bonds?
A Many yields have gone up, especially those on bonds considered below investment grade that carry the most risk. While professional investors might want to pile in, for the average investor this is a good time to think about a long-term plan that spreads investments through various sectors, said Harvey B. Hirschhorn, chief portfolio strategist for Bank of America Corp.
"The kind of lesson you can learn from this kind of volatility is that you have to be broadly diversified and have to look at the markets and make adjustments from time to time," he said.
Q What happened yesterday?
A The catalyst for yesterday's sell-off was another problem related to the meltdown in the subprime mortgage industry: French bank PNB Paribas froze access to three hedge funds with holdings of mortgage-related securities. A concern is that credit problems that started in the mortgage industry are spreading through global financial markets.
Both the US Federal Reserve Bank and the European Central Bank pumped billions of extra dollars into the banks within their systems, moves designed to keep capital markets functioning but may only have served to heighten suspicions that the markets face deeper problems.
Yesterday's sell-offs still left US stocks above where they traded at the start of the month. At a White House press conference yesterday President Bush tried to soothe anxieties by calling the economy "strong" and declaring "there is enough liquidity in the system to enable markets to correct."
But after months of relatively steady movements, stock markets have become increasingly volatile and erratic in recent weeks -- with swings of more than 200 points in the Dow common -- as investors worry that the credit crunch may hamper the economy.
Q Just how volatile are markets?
A Price swings are actually still modest by historical standards. The Volatility Index kept by the Chicago Board Options Exchange -- sometimes know as the "investor fear index" -- stood at 26.48 at the close of trading yesterday, its highest level since 2003 and up 5.03 points from Wednesday. Fear levels have been much higher in the past, however, around 40 earlier this decade with the bursting of the dot-com bubble and 9/11 terrorism attacks.
Q How long will stocks stay unstable?
A Duncan Richardson, chief equity investment officer of Eaton Vance Corp. in Boston, said markets are "halfway through" this period and noted that one important ratio, price-to-book ratios, of some firms most affected by subprime issues are near their historic lows.
One encouraging sign, he said, is a steady number of share repurchase programs by companies, and consistent buying of shares by company insiders. "Those are managements saying that 'yes, there's a credit crunch, but we're not worried about our business,' " Richardson said.
Ross Kerber can be reached at kerber@globe.com. 
