Rules for coping with a stock market correction
- Alan Lavine and Gail Liberman
A few bad days in the stock market doesn't mean the sky is falling. History tells us we have to accept the good with the bad when we invest in stocks or stock funds.
Here are a few golden rules to follow if you're getting the jitters.
Rule 1. Understand what you can expect from a stock market investment. Over the past 30 years, when the stock market lost at least 15 percent, it took two years to recover those losses. That's happened five times since the 1960s, according to Ibbotson Associates, Chicago.
On the plus side, the average bull market lasts three years. Over the past 50 years, a 100 percent investment in the stocks grew at an average annual rate of 11.7 percent.
The average loss was -9.4 percent. The worst one-year loss was -26.5 percent.
Rule 2. If you can't sleep at night due to your investments, make changes! The majority of those who sell mutual funds when the stock market tumbles have invested over their heads. Perhaps they bought a hot growth stock fund because the paper said that it gained 25 percent, and they thought the trend would continue.
Best to start saving in a low-risk investment like a bank account or money fund. Do some research so you can match your risk level with the investment objectives of a fund. Jane King, a Wellesley, Mass.-based financial planner, says concerned investors might be better off in a balanced fund that invests in both stocks and bonds. The Dodge & Cox Balanced Fund, for example, will give you about 85 percent of the return on the S&P 500 with one-third less risk, she says.
Rule 3. Don't Panic. Experienced stock fund investors should invest regularly in their stock funds through thick and thin. Over the long term, this strategy pays off. For example, a $100 a month investment in the Vanguard Index 500 over the past 15 years would have grown to almost $61,000.
Rule 4. Reduce the risk of your overall portfolio. Take profits from stock funds and invest in bond and money funds. Every year, keep the same percentage mix of stock and bond funds that fits with your investment comfort level.
Rule 5. For seniors. The older you are, the more you should be concerned about preserving your principal. On the other hand, those who recently have retired may well live into their 90s, and also need to make certain their money will hold out. Experts say a 30 percent investment in a stock fund is a good compromise for retirees.
Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.
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