The Dow Takes a Hit (And How to Survive It)

July 26, 2007

rollercoasterdrop

The Dow took a huge hit today! It was the second largest point drop so far this year (-311). The biggest was -416 on February 27, 2007. The largest point drop in history was when the market opened back up on September 17, 2001 after September 11th (-685).

The thing about any drops (or gains) in the market are that they’re just paper losses (or gains). They are unrealized losses (or gains) “on paper” and they don’t really matter until you sell your investments. It’s always wise to keep things in perspective. People tend to get emotional and scared when the Dow drops. It’s never wise to be emotional when investing. That’s why many people buy high, and sell low. I had a co-worker who stopped his contributions to his 401k after a big drop a few years back. That’s also not wise. You’ll miss out on the the employer match as well as any gains that usually come after a big drop.

Remember that investing is for the long term. It’s never good to look at the short term when investing (unless you’re a day trader). Just leave your 401k or IRA’s alone and review them quarterly.

So what can you do to survive a market crash? (From a CNN Money article):

Amp up your 401(k). It is true that a down market can be a time when stocks are on sale.

Adjust your risk. If your mutual funds went down more than you’re comfortable with, you may need to adjust your risk.

Determine your deadlines. As you near retirement, you need to adjust your stock/bond allocation so that there’s less risk as you near retirement. The common method is to subtract your age from 120 to figure out what percentage you should have in stocks (some say 100 if you’re more conservative). So if you’re 30 years old you should have approximately 90% of your investments in stocks.

Spread your bets. Owning an international or overseas fund can be a hedge against big drops here in the U.S. Often when the U.S. market suffers, the international markets are doing well. Being diversified is the key!

Source: CNN Money

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