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Don’t get spooked by the market

By Barbara Whelehan · Bankrate.com
Friday, October 19, 2012
Posted: 5 pm ET

You've heard by now that it's the 25th anniversary of Black Monday, that fateful day Oct. 19, 1987, when the Dow Jones industrial average plummeted 508 points in a single day, suffering a loss of nearly 23 percent. That event shook the investment world. "Yesterday's thunderous collapse smashed whatever life was thought still to be in the bull market of the previous five years," The Wall Street Journal declared in its coverage of the event the following day. John J. Phelan, then chairman of the New York Stock Exchange, was quoted as saying the crash was "the worst market I've ever seen, and as close to financial meltdown as I'd ever want to see."

Fast forward to May 2010, when the Dow fell nearly 1,000 points within 30 minutes. OK, so that loss represented a mere 9 percent loss, but it still rattled investors.

With the benefit of hindsight, we know the bull market that began in 1982 didn't die in 1987. In fact it had a lot more legs, regaining its losses by the following year and going on to reach new highs over many more years.

Despite those two events, and the big bear markets that we endured in the first decade of this century, I can't help but arrive at the inescapable conclusion that the stock market is resilient. Investors who sold out after a drop locked in their losses. But those who hung in there made money.

The historical biggie was the crash that began on "Black Tuesday," Oct. 29, 1929, resulting in an 89 percent decline over the next couple of years. After that crash, many investors renounced the stock market forever -- some still to this day. It took 25 years for the market to get back to pre-Depression-era levels.

But those who gritted their teeth and invested through that time period made out very well.

Retirement lesson
So what's the retirement planning takeaway? The stock market may unravel. We have so many events coming up that augur chaos -- the elections, the fiscal cliff, the national debt, the European debt crisis, and, of course, the end of the world (in which case, there's no point in investing at all).

But I tend to have an optimistic outlook and believe things will turn out OK, no matter what happens. We may slog through some rough terrain in the near or distant future. But don't let it steer you off course.

Fittingly, a resolution passed by Congress last month marks next week -- Oct. 21 to Oct. 27 -- as National Save for Retirement Week. Take two minutes to read the resolution. It's short and provocative. Among the clauses, it states that "the need to save for retirement is important even during economic downturns or market declines, which make continued contributions all the more important."

Celebrate National Save for Retirement Week by taking advantage of your workplace retirement plan. Increase your contribution to 10 percent or 15 percent of your pay or more if you possibly can. We may go through more turmoil in the future. View it as an opportunity to buy stocks at a bargain. And allocate your investments wisely.

Conquer your fears by using your head instead of your gut when investing. That's how to slay the dragon and come out ahead.

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10 Comments
Debbie
November 01, 2012 at 11:50 am

Thank you...yes, I understand your position. It's interesting to get different people's perspective.

Barbara Whelehan
October 31, 2012 at 5:27 pm

Hey Debbie -- I'm not a financial adviser, so I'm not at liberty to dispense advice. And frankly I'm not that familiar with equity-linked CDs. My understanding is that you won't lose principal if you don't sell them prior to maturity. But they have a lot of moving parts. I highly recommend you find a good financial planner to help you navigate your retirement plans. Good luck and best wishes!

Debbie
October 31, 2012 at 4:52 pm

Thanks for answering so quickly. I included an indexed cd tied to the S&P and that's the part that's all over the map. I did it to get some "stability"...should I keep it? I won't start taking mandatory withdrawals for 5 years. Thanks, Debbie

Debbie
October 31, 2012 at 4:47 pm

Thank you for answering so quickly...I did an indexed CD tied to the S & P and that's the part in my IRA that goes all over the map. I had switched to that in IRA to gain some "stability".

Barbara Whelehan
October 31, 2012 at 4:33 pm

Hi Debbie,

Let's look at the S&P 500, which the 99 percent like you and me can buy via a mutual fund or ETF. Since the market low on March 9, 2009, it has gained more than 100 percent as of last Friday, October 26. Of course, the stock market's been testy in recent weeks, but for long-term investors, it's the place to be, in my opinion. Those with low risk tolerance might allocate less of their portfolio to stocks (maybe 50 percent) so they can sleep at night.

Debbie
October 31, 2012 at 4:24 pm

Just realized the last sentence of what I just posted is something of any oxymoron...:)

Debbie
October 31, 2012 at 4:20 pm

Hi again...are you able to be specific about which companies/which stocks have rebounded? That's part of this financial crisis/situation I haven't understood very well. The lion's share of us are not in the "1%"...Thank you, Debbie

Barbara Whelehan
October 21, 2012 at 9:33 am

Debbie -- I understand what you're saying, but the market has rebounded substantially since 2008 and those who didn't sell at a loss and who continued buying have likely recouped their losses and are sitting on gains. Of course, if you're approaching retirement, you need to allocate a good chunk of your savings to less volatile investments so that the losses aren't so profound in the next rout.

Ray -- The resolution is more of an attempt to raise awareness among people who aren't saving for retirement or who aren't saving enough, not so much for people who are maximizing their retirement options. As for incentives, there are plenty available. I think because the country needs to confront its debt, tax-favorable accounts will likely be limited to what we have now and not expanded. But if you need to save more, do so in taxable accounts. The desire to have a comfortable retirement provides incentive enough.

Thanks to you both for sharing your thoughts.

Ray
October 20, 2012 at 11:11 am

Congress passes a resolution! "Whooopdedoooo!" How about some legislation that would actually help folks accumulate retirement wealth like increasing drastically Roth IRA maximums!

Part of the reason folks aren't saving is because the incentives are not that great. $5000 per year/$6000 (over 50) is not enough for someone who is trying to catch up via Roth contributions. Tax deferred (401k's and the like), in the absence of an employer match is not a great incentive. What ever happened to the talk of "lifetime tax free savings accounts"?

Debbie
October 20, 2012 at 10:43 am

Very funny:( How about those of us who "played by the rules"...i.e. lived below our means; saved faithfully only to see a huge percentage of our retirement wiped out? AND...at our age, won't likely recoup all we lost.