On a day like this, you can behave in one of two ways: You can give in to your anxiety and make an emotional decision, which you will probably regret. Nearly 50 million Americans with 401(k)s are in your same position and if everyone reacted rashly, chaos would ensue. Or you can bet that this downturn will, like every other crash in history, be followed by a robust and unpredictable rebound. “I can’t prove to clients that the sun will rise tomorrow or that the market will rebound,” explains David Bugen, a veteran financial planner with Regent Atlantic Capital in Morristown, New Jersey. “I can show what has happened in the past and make decisions based upon probabilities.”
So can you. To pass the time until that highly probable rebound comes, do the following:
First, go into your bathroom and grasp the edges of the sink with both hands. Look deeply into the mirror, and repeat three times: I was ready for this, I can handle this.
How can you say that? Because you know that bear markets are the price you pay when you invest in equities and angle for returns higher than you can get elsewhere. As Larry Swedroe, research director for Buckingham Asset Management, puts it, “Bear markets are when you make your money in stocks. Because you are taking the risks that others aren’t willing to take.” But you have to be willing to stick to your plan.
This brings us to constructive activity number two: Remember that you didn’t put all your money in stocks. Go look at the statements covering your bank CDs, or your fixed annuities, or your bond funds. They made money today. Congratulate yourself for being so smart as to own some.
Swap some of your losing stocks and stock funds. By selling losers, you get to write those losses off against any gains on next year’s tax return or even against regular income. Since it was Congress got you into this downgrade mess, it seems only fair to pay them a little less tax. The trick is, don’t sell and get out of the market, because you’ll never get back in at the right time. Swap the stocks or funds for similar investments. If you own index funds or ETFs, there are at least 50 identical securities to swap into. “Not only is selling now a bit of a gamble, but if the market continues to go down, you also have to time your reentry point,” says planning analyst Joshua Mungavin at Evensky & Katz Wealth Management. “Timing the market once is hard, but timing the market correctly twice is nearly impossible.”
Rebalance your portfolio. Add up your portfolio at the end of the week and see how you stand versus your plan. If you wanted to have 60 percent of your money in stocks and you now have 55 percent, add more stocks. It’ll be hard, but had you done this rebalancing regularly during the financial crisis of 2008 and 2009, you’d have gone into the most recent downturn with more money than you had even at the peak in 2007. This is your chance to get it right this time.
“If you adjusted risk allocation properly in 2008 and sold bonds that were doing well and bought stocks that were doing poorly, then when things came back you’d own more stocks and would’ve benefited,” says Mungavin.
If you haven't maxed out, add another 1 percent to the contribution rate to your 401(k). If the market is going to rebound, you’re boosting your contribution at just the right time. If not, well, you’re going to need the extra savings anyhow.
Send your boss some chocolates or tickets to the home team’s baseball games. As long as you’ve got your job you’ll get through this fine; if the market disappoints for the rest of your career, well, you can work longer. In fact, email your boss to let him or her know that you’ve sent the gifts—and send the email at 7am or 7pm. From the office.