From its beginning in the overheated Asian markets to the dramatic drop in the Dow, Tuesday’s (February 27) plunge in stock prices came as a surprise to many traders. Although unusual — there have been only 29 trading days since 1950 that have resulted in such large percentage losses for the S&P 500 index — anomalies such as these will occur. Investors should consider the following in determining whether their portfolios are well-positioned for future sell-offs.

1. Often, the diversification benefit of international investing is only experienced when stocks are going up. Absent the benefit of currency diversification, a portfolio that is overly spread among global bourses may end up generating significantly more volatility than expected if stocks head south.

2. The best type of diversification can be gleaned from investing in disparate asset classes. Fixed income investments, for example, fared well during Tuesday’s debacle, a common occurrence during market dislocations. In addition, fund of hedge funds seemed to weather the storm fairly well, and many of them will post gains in February.

3. If the slowdown in housing spreads from the sub-prime lender to the rest of the market, resulting in more expensive corporate credit, the sell-off may continue. Advisors should keep abreast of credit spreads, and adjust positions accordingly.

The Monthly Index Report for March 2007

Index

Feb-07

QTD

YTD

Description
S&P 500 Index*

-2.18%

-0.81%

-0.81%

Large-cap stocks
DJIA*

-2.80%

-1.56%

-1.56%

Large-cap stocks
Nasdaq Comp.*

-1.94%

0.04%

0.04%

Large-cap tech stocks
Russell 1000 Growth

-1.88%

0.64%

0.64%

Large-cap growth stocks
Russell 1000 Value

-1.56%

-0.30%

-0.30%

Large-cap value stocks
Russell 2000 Growth

-0.32%

1.54%

1.54%

Small-cap growth stocks
Russell 2000 Value

-1.23%

0.25%

0.25%

Small-cap value stocks
EAFE

0.82%

1.51%

1.51%

Europe, Australasia & Far East Index
Lehman Aggregate 1.54%

1.50%

1.50%

U.S. Government Bonds
Lehman High Yield

1.40%

2.53%

2.53%

High Yield Corporate Bonds
Calyon Financial Barclay Index**

0.53%

1.69% 1.69% Managed Futures
3-month Treasury Bill 0.43% 0.87%

0.87%

All returns are estimates as of Februrary 28, 2007. *Return numbers do not include dividends.

** Returns are estimates as of February 27, 2007.

Ben Warwick is CIO of Memphis-based Sovereign Wealth Management. He can be reached at ben@searchingforalpha.com.