No pain, no gain. That evergreen is as true in financial planning as it is in the gym.
You've seen the stock market's recent melt down. The NASDAQ composite index, S&P 500, and even the venerable Dow Jones Industrial Average have all lost more than 30 percent of their value this year. Your own portfolio has probably followed them downhill.
It's perfectly natural to be scared. Your precious nest egg is evaporating before your eyes, and all of your careful retirement planning seems to have been for naught. But don't cash in that IRA account just yet. Leave your 401(k) where it is. Value investors dream of days like these, and you can make some of your best investments ever-right now.
Retirement at stake
History shows that disasters come and go, and 2008 may go down in history books as one of the roughest markets ever. Still, it's important to know that the Dow has lost more than 30 percent in a single year six times before. If your great-grandfather left the stock market for dead after the 38 percent drop in 1907, he missed out on a 47 percent gain in 1908. If his grandkids jumped off after a 28 perfect drop in 1974, they missed the 38 percent bounce the next year.
This crash may not bounce back as quickly, but the point is that the market will come back strong again. Sell now, and you've locked in some very low prices. You're supposed to buy low and sell high to make money in the market, not buy high and sell low. The Dow has had an average gain of 9.8 percent per year over the last 25 years, including this downturn, the popped tech bubble in 2001, and Black Monday in 1987. It's unlikely that you'll find a savings account of that caliber.
There's a very simple three-step plan for financial disasters like this one:
Step 1: Don't panic. Hasty decisions are often the worst ones.
Step 2: Keep investing. You're socking money away in that 401(k) for the long term, not for tomorrow's lunch.
Step 3: Take a fresh look at your investment strategies.
A young investor with decades to go until retirement should attack this market, looking for great values on excellent businesses. If you're close to receiving the proverbial gold watch, it's a good idea to play it safer. Bonds, Treasury inflation-protected securities (TIPS), and gold all have their place in a diversified portfolio. Sometimes, it's more important to collect interest and dividends on stable securities than to chase the best possible returns.
The sky isn't falling, no matter what Chicken Little says. The stock market rises when American companies grow their businesses. Our workers, our talent, and our entrepreneurial ideas aren't going away. Invest in the future today, when it's priced for a fire sale. Live through some short-term pain for long-term gains. Reap the rewards in two, three, or four decades. It really is that simple.