Originally Published: Sunday, October 12, 2008 (The Advocate and Greenwich Time)
What should you do?
These are troubled times in the financial markets, to say the least. The markets are in turmoil and there is no place to hide.
If you are tempted to abandon ship, don’t – there is no need.
Today is not tomorrow. These bad market periods will come to an end. In other times such as these, many a steady investor made a fortune when others were panicking.
Since we don’t know when the market will find a bottom, the question is what you should do now when nothing seems certain.
Open those brokerage statements you received in the mail a few days ago. Don’t worry about the dollar amount – the general direction of the market is down and your account value should reflect that decline. Unless you were hedging, going short, or all in cash, your account will be lower than it was last month, last quarter, and last year. And, it will be lower still if you check your current values.
Focus instead on the asset allocation. How much do you have committed to stock, bonds, and cash?
Do the same with your 401(k) statements.
If there are any general rules that can apply across the board, this is one of them: people investing for income need to have higher allocations in bonds and dividend-paying stocks than people investing for growth.
If you depend on income from your portfolio, now is the time to review your sources of bond interest and stock and mutual fund dividends.
Address any changes that have occurred recently that will impact your cash flow. For example, Bank of America announced a few days ago that it would cut its dividend due to “recessionary conditions.” Have any of your dividends been cut?
Sit down with your spouse to review your cash flow - - how much money comes into the household every month and what is the source of that income? How much goes out and where does it go? Whether you are working or retired, you will help you be ready for emergencies should any arise – it’s always good to be prepared.
Now consider your timeline.
The younger you are, the higher your stock allocations can be on the theory that you will find yourself in better market periods sooner or later. Young 401(k) participants, for example, can put most or all of their 401(k) regular payroll deductions to work in the stock market even today – prices are substantially lower now – and if they should continue to decline, so much the better for these investors. If the 401(k) has a match, that’s even more desirable.
If you have a solid financial adviser on your side, that’s reassuring -- this is a most difficult time to be going it alone. On the other hand, if your adviser is not reaching out to you to help you, put it on your to-do list to look for another.
One day in the near future, we will have a trading day that has tremendous volume with a downward move followed by a large upswing, generally called a capitulation day. Expect the character of the market to change after that.