Riding Out a Market Freakout

An article that I found on the internet. It seems appropriate in light of the recent 20% drop in the S&P 500 index.

Riding Out a Market Freakout by Walter Updegrave

Instead of panicking and dumping stock funds in a downturn, be cool and rethink your strategy, says Money Magazine's Walter Updegrave.
Question: I'm 56 and have my most of my nest egg in stock funds. But with the stock market crashing so much lately, I've become concerned and am considering switching out of stocks. Do you think this is a good idea? - Sharon Bollmann
Answer: I certainly understand your apprehension about the stock market's behavior this year.
After reaching an all-time high in May, the Standard & Poor's 500 stock index - which is a better barometer for stocks overall than the more often watched Dow Jones Industrial Average - has undertaken a series of white-knuckle ups and downs that's made investing in stocks a bit like riding one of those loop-de-loop roller coasters.
And with a seemingly unending litany of bad news on the economic front - declining housing prices, ongoing subprime woes, a slowing economy - you can't help but wonder whether we're in for another stomach-churning dive from which it may take many months to recover.
This kind of situation is unsettling for all investors, but even more so for people like yourself who are nearing the end of their careers. After all, the last thing you want is to see the money you've worked so hard for, saved so diligently and invested so carefully get whacked with a big loss just when you're in the home stretch to retirement.
But this isn't the time to give in to fear. Rather, it's a time to re-assess your investing strategy and consider what you need to do to remain on track toward a secure retirement.
If you're like most people in their mid 50s, you probably have a good 10 or more years before you can realistically think about retiring. During that time, you've got to pull off a bit of a balancing act.
On the one hand, you don't want to do anything to unduly jeopardize the savings you've accumulated in 401(k)s and other retirement accounts. But you still need to make that money grow. It's not as if you'll only be investing until age 65.
After calling it a career, you'll probably spend another 20 or more years in retirement. Which means you still need to bulk up the value of your nest egg so it can generate enough income to maintain your purchasing power until you're well into your '80s or even longer.
So even though your gut may be telling you otherwise, you don't want to abandon stocks. Nor do you want to embark on what may seem like a plausible strategy of getting out now with the idea of jumping back in at a more opportune time in the future.
As I pointed out in a recent column, that sort of market timing is very difficult to do and can easily backfire. A better strategy is to decide on a mix of stocks and bonds that's likely to get you the long-term growth you need, but that also offers enough protection so that your nest egg isn't totally scrambled should stocks take even more of a hit.
The blend of stocks and bonds that's right for you will depend on a number of factors, including the size of your nest egg, the value of other resources you have to draw on (Social Security, a pension, home equity, cash value in life insurance policies, etc.) and how much risk you're comfortable taking.
But generally someone your age should have roughly two-thirds of your retirement portfolio in a diversified blend of stocks and the rest in bonds.
It's also important that you continue to contribute to 401(k) and other retirement accounts in the last stages of your career. That may not seem like a very sensible thing to do when the stock prices are falling and the economic outlook appears iffy.
But remember, the shares you buy while the stock market is down will likely be the ones that will have generated the biggest gains a decade or more down the road. And the money you invest during market setbacks could very well provide the spending cash you'll need in your later retirement years.
One final note. While I've tailored my answer to people like you who are nearing the end of their career, the fact is that a tumultuous market like this one presents a challenge no matter where you are in your retirement planning.
So for those of you out there who have more than 10 years before you'll call it a career, you can get a suggested retirement portfolio blend by clicking here, while anyone who's already retired can get a recommend mix by clicking here.
But whatever stage of retirement you're in, remember: no matter what the market is doing, you're always better off setting a reasonable strategy and following it rather than letting your gut or your emotions lead the way.