What now? Resist urge to flee or freeze
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 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?