How To Weather A Down Market

With every dip in the Dow, the clamor to sell your investments gets louder. However you choose to act, remember that the only factors that should drive your decisions in any market are your long-term goals.

From the April issue of Money Magazine, here are five reasons why you should turn off CNBC when stocks are falling. Following these steps will keep you from doing things you may regret later:

Stock returns come in bursts.
Had you invested in an S&P 500 index fund in August 1997 and sat tight for 10 years, you'd have racked up an 88% return. Had you missed just the 20 best days in the market over that period, you would have had a 20% loss, according to Chicago's Altair Advisers. Moral: Step out of the market, even temporarily, and you may miss the whole point of owning stocks.

Get your emotions out of the picture.
Invest via an automatic plan that moves money into mutual funds every month. Then have your portfolio rebalanced automatically -- lifestyle or target-date retirement funds can do the job. Some 401(k) plans offer a rebalancing service.

Focus on what you can control.
That would be costs. Assuming an 8% annual return, if you invest in an actively managed fund with a 1.5% expense ratio versus an index fund that charges 0.2%, you'll give up almost 20% of your profits.

Give yourself a taste of power.
Set aside 5% or so of your portfolio as mad money in which you're free to deviate from your long-term plan. That way you can indulge hunches and gut feelings without harming yourself too much.

Seek professional help.
If you move money around every time the Dow drops 200 points, hire a financial planner. Yes, your expenses will go up, but if that keeps you in the market, it may be well worth it.

By Marshall Loeb