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7 strategies for investing in a volatile market

A strong start to the holiday selling season and optimism that Europe is edging toward a plan to deal with its debt crisis sent stocks soaring Monday, but long-term investors should know better than to get caught up in the latest exuberance.

After all, U.S. stocks just suffered their worst Thanksgiving-week performance since 1942, and the blue-chip Dow Jones Industrial Average has been jumping and diving within a thousand-point range for more than a month now.

Whether it's political gridlock in Washington or the headlines out of the Eurozone, the market continues to be at the mercy of policymakers in the U.S. and Europe, meaning volatile trading is here to stay, writes the investment strategy team at Wells Fargo Wealth Management in a recent note to clients.

"Developed countries are only beginning to de-lever their balance sheets, and, as long as we take two steps forward and one and three-quarters steps back, the markets are likely to suffer uncertainty, volatility and a general re-pricing of risk," Wells Fargo advisers say.

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Investing for the long haul always means waiting out periods of violent price swings and anxiety. But sticking to your plan is difficult when markets are overemotional, as they are now. Here are seven worthy strategies to apply to today's investing landscape, says Wells Fargo Wealth Management:

1. Understand your time horizon and liquidity needs. If you need to spend the money within the next year, leave it in cash or short-term bonds. You should typically have enough cash to cover between 12 and 18 months of living expenses to avoid selling long-term assets during volatile markets.

2. Diversify a portfolio. Allocation to stocks, bonds, real assets and complementary strategies is the best way to reach long-term investment goals, regardless of the short-term noise. For example, this year stocks are down, but bonds are up. Meanwhile, within the stock market, the financial sector is down, but consumer staples are up. In commodities, industrial metals are down, but energy is up.

3. Globalize a portfolio. Although the market headlines this year have revolved around events in the U.S. and Europe, much of the world's economic growth is coming from countries outside of these geographic areas. Wells Fargo recommends at least 25 percent of a bond portfolio and 35 percent of the rest of a portfolio be invested outside of dollar-denominated assets.

4. Don't give up on equities. It's been a rough year for global equity markets, but average index returns are still up significantly from their 2009 lows. The sell-off has created attractive valuations to accompany strong fundamentals, which likely will benefit investors when volatility subsides.

5. Overweight domestic large-cap stocks. While much of the rest of the world's economic growth has been decelerating, domestic growth has been accelerating. The U.S. economy has improved notably since the beginning of the year, while earnings have reached record highs. Given those conditions, Wells Fargo likes domestic large-cap stocks for price-appreciation potential as well as dividend income.

6. Diversify income streams. If we are in a period of below-average returns for stocks, the income component will likely be an even larger portion of an investor's total returns. Wells Fargo likes companies that both pay and are seen to be growing their dividends. As for bonds, the wealth managers suggest considering local currency emerging markets debt (or dollar-denominated currency for lower volatility), high-yield bonds and global high-grade corporate bonds. Avoid Treasurys and developed market sovereign debt.

7. Take advantage of the holiday sale. With safe-haven assets such as Treasurys outperforming this year, your portfolio may be overweight bonds. Risk is on sale, and now would be a good time to rebalance back into some of the beaten down asset classes. Wells Fargo recommends adding to asset classes that still possess solid fundamentals but have suffered during the risk-off trade, including domestic large-cap stocks, emerging market stocks and high-yield bonds.

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