A Guide to Surviving a Down Stock Market

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There's just one thing to say about the stock market's recent performance: Ouch.

Last week, the Dow Jones Industrial Average lost 4 percent and now stands about 20 percent below a peak reached in October, while the Standard and Poor's 500 lost 3 percent last week.

Now, as it did in January and March, panic mode is setting in, triggering advice from me and others, advising small investors to resist the urge to do something rash like dumping all your stocks for CDs.

And the panic-stricken will respond, "Easy for you to say. I just lost $20,000."

So, for those to whom "Don't panic" is not enough, let me offer some suggestions on ways to respond constructively to the current bear market. The suggestions are targeted by age category.

Early accumulators (ages 20 to 35): For this group, the advice is easy: Buy more -- stocks just went on sale.

Compared to earnings, stock prices are about the cheapest they've been over the last 10 years. Remember, the first rule of investing is to buy low and sell high, and right now, we're at a low.

So, by making sure you're enrolled in your employer's 401(k), or other retirement savings account, and contributing enough to capture fully any matching contribution, you're buying low. For most, the best bet is to buy on-sale stocks through a mutual fund or exchange-traded fund, rather than individual stocks.

At this stage of your working life, you need not worry about the market's daily ups and downs. The losses sustained this year are minimal, compared to what you should be able to accumulate over the next 30 or 40 years.

Mid-career types (ages 35 to 50): Stick with your game plan, and if you don't have one, get one.

Folks in this age group, you have plenty of time on your side to make up for recent losses, but you can't be fooling around. Before you know it, the time that is the investor's greatest advantage will be gone.

Rather than making any rash investment decisions, you should consider upping your 401(k) contributions if you're not maxed at $15,500 a year. This will allow you also to take advantage of the stocks on sale now.

You also should give a close look at your investment accounts with an eye toward rebalancing. Consider trimming holdings in areas that have done well over the last three years, like emerging markets, commodities, and energy, and could be at risk for serious declines. Plow that money into other portfolio areas that have not done well and may be poised for a rebound. Also look to fill in gaps in your asset allocation.

For this group, I'd also recommend you be sure you hold a decent share of international stocks, somewhere in the range of 15 to 25 percent of your overall portfolio.

Both domestically and internationally, this group cannot afford to be out of the market.

Pre-retirees (ages 50 to 65): It is those of you in this age group that I'm most worried about.

Your portfolios recovered after the 2000-2002 market downturn, and now you could be facing another extended bear market, just as you seriously begin to consider when you might retire. On top of that, the home values you had been counting on as a financial backstop also are in decline.

For pre-retirees, it is critical you pay particular attention to your finances.

But, rather than act in haste, I'd suggest you review your asset allocation to see how much you have in stocks versus cash and bonds, and gauge whether that's the right mix for them.

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