Net Gains: Weather the Market Lows with Confidence

Jan. 23, 2008 — -- Sure, it's easy for advisers like me to tell investors, "don't panic."

The truth is that advice can be tough to follow in times like these. For many folks, it goes against their very nature to do nothing after watching their portfolios lose 10 percent of their value in just three weeks.

But in this case, the easy advice is the best advice no matter how tough to implement.

I can't tell you when the stock market will recover or when the Dow Jones industrial average might return to the 14,000 level it crossed last year. But I can tell you there's a good chance a rash decision to sell today will be one you regret later.

I can also tell you that a portfolio stuffed entirely into CDs, money market funds or even U.S. Treasuries is unlikely to provide for a comfortable retirement 10, 20 or 30 years from now.

Keep in mind that a 10-year Treasury note yesterday yielded just 3.4 percent. There's a decent chance that kind of return will not keep pace with inflation, nevermind provide the kind of compounding needed to help you realize your financial goals.

Rather than simply tell you what not to do, however, let me offer a couple suggestions of actions you might take to divert your attention from recent market lows, help you resist the urge to sell and maybe even put you in better financial shape for the long run.

First, figure out your asset allocation. How much of your money is invested in stocks, bonds and cash? How much is allocated to large cap stocks, small caps, developed international stocks, emerging markets, real estate and maybe even commodities? Are your bonds in short term or long term? Corporate notes or municipals? TIPs or plain Treasuries?

Knowing this information is key before making any major changes to a portfolio. Then compare it with your investment time frame and your individual tolerance for investment risk.

Yes, if you're retired, generally conservative and holding 85 percent of your portfolio in stocks, then yes, you probably want to consider cutting that back regardless of current market behavior.

But if you're 40 years old with a good 25 years until retirement and a stomach for risk, then an 85-percent stock allocation might be right for you. In that case, just tune out the current market noise the best you can.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning (www.fourpondsfinancial.com) in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com