5 rules for thriving in a bad economy
Rule No. 1: Don’t panic
The stock market’s gyrations can give even the hardiest investors a case of the jitters.
However, converting all your investments to cash is likely to cause you far more harm than good, says Joe Baker, CFP and president of Alcus Financial Group in Mount Pleasant, S.C.
“People are scared,” he says. “They’re asking, ‘Is the economy crashing? Should I move my 401(k) to a money market?’”
Baker answers: “Please do not, unless you need the cash tomorrow. You’d be making a huge mistake.”
Unless you need the money short-term — say, within two years — it’s best to remind yourself that good and bad times pass. Historically, the market’s made up all its losses fairly quickly.
5 rules for economic survival1.Don’t panic2.Bullet-proof your portfolio3.Don’t let your home become a trap4.Dust off your resume5.Reduce your debt and build savings
Since 1945, there have been 11 recessions as officially defined by the National Bureau of Economic Research. The S&P 500 — the index of widely held stocks used as a barometer for the overall market — generally has hit bottom six months into the typical 10-month-long recession, according to Sam Stovall, chief investment strategist at Standard & Poor’s.
After that point, the market typically starts regaining its footing. If you include the very worst meltdowns, when the S&P 500 lost more than 45 percent of its value, it took 19 months for investors to recoup their losses. But exclude the mega losses, and you find that it’s actually taken just eight months on average for the index to bounce back.
“The reason the market peaks before recessions start on average and troughs before they’re finished is that investors are anticipators,” says Stovall. They’re willing to become more optimistic once the bad news is out,” says Stovall.
Stovall’s advice to today’s worrywarts is direct: “Don’t freak out.”
Rule No. 2: Bullet-proof your portfolio
Sure, we all know the warnings about putting all our eggs in one basket. But when it comes to investing, too few heed this advice.
One study by Hewitt Associates, for example, found that three out of five workers participating in a 401(k) plan never rebalanced their portfolios over a four-year period from 2000 to 2004. Failing to rebalance causes your portfolio to skew over time, leaving you overloaded with one kind of asset while owning too little of something else.