What now? Resist urge to flee or freeze

Are you OK?

The stock market is in bear market territory -- or a downturn of almost 20 percent that can last weeks, months or years. In any bear market, you have no idea when it will end or how bad it will get. So investors naturally get scared.

On rare occasions, such as 2000-2002, the stock market can drop almost 50 percent. Investors, throughout history, have recovered from the worst periods if they have retained diversified portfolios of stocks and bonds, but in the midst of the bear market the question is always: When?

On average investors have gained back what they lost within about 2.5 years, according to the Leuthold Group, which has studied bear markets throughout stock market history. After the 2000-2002 crash, investors did not recover what they lost for about five years.

So as you follow the news, you may wonder if you should flee. You might also simply freeze, unable to figure out what to do.

Try to avoid both, and force yourself to look at your investments.

As surprising as this might seem, you should not take your cues from the stock market. Rather, you should be guided by the types of investments you need, and how long you have before you will have to get your hands on the money.

Here are some tips that will help you think this through:

Do you have an emergency fund?
Money for an emergency -- like a job loss -- should not be invested in the stock market. That was as true last year when the stock market was climbing as it is today.

The rule of thumb is to invest no money in the stock market that you might need within about five years. Another rule of thumb: Always have three to six months of cash in a high yield savings account, money market fund or CDs, so you can get your hands on it quickly if you need it. If it's in stocks, and the stock market drops 25 percent, you could have a shrinking pot of money when you most need it.

Will your child be going to college soon?
If your child is in college or about to enter college, that money should not be in stocks or stock mutual funds. You don't want your savings to get chopped by a quarter, a half, or any large number when the Bursar's office is expecting a check.

It's still OK to invest heavily in stock mutual funds if your child is young, but by age 13 consider dividing your money up half and half in stock and bond funds. At age 16, you could follow the example used by T. Rowe Price in 529 college savings funds: Put only 34 percent into stocks, about 52 percent in bonds, and 14 percent in a money market fund.

As your child begins college, have no more than 20 percent in stocks.

Are you saving for a house?
Again, if you expect to need a down payment within about five years, insulate this money from the vagaries of the stock market. Down payments should be in money market funds, high yield savings accounts and CDs; not in stocks or stock funds.

To find the best rates for savings and CDs, go to www.bankrate.com.

Are you retired?

Featured Stories

CTnow is using Facebook comments on stories. To comment on ctnow.com articles, sign into Facebook and enter your comment in the field below. Comments will appear in your Facebook News Feed unless you choose otherwise. To report spam or abuse, click the X next to the comment. For guidelines on commenting, click here.

CONSUMER COLUMNISTS

Kevin Hunt - The Electronic Jungle

Kevin Hunt: Review: The T-fal OptiGrill (Watch Out, George Foreman) - October 14, 2014 - If a George Foreman indoor grill had a brain, it might use an optical sensor to detect the thickness of steak and automatically cook to...

Gail MarksJarvis

Dow closes down 173 points, not nearly as bad as the 400 earlier - October 15, 2014 - Investors continued to run for safety Wednesday, driving the Dow Jones industrial average down another 173 points, to 16,141. But it could...

David Lazarus

Moves by HBO, CBS could be tipping point for a la carte pricing - October 16, 2014 - In the Game of Thrones that is the pay-TV industry, HBO has unleashed the dragons.

Korky Vann

Weekend Discounts Include Kids' Consignment Sale In Simsbury - October 16, 2014 - >>Latimer Lane PTO's consignment sale Saturday in Simsbury features like-new children's fall and winter clothing,...

Advertisement

...