Don't Panic, Stick With Financial Plan

Feb. 28, 2007 — -- Tuesday's stock market tumble may have been just a correction and not a crash, but it was enough of a scare to give pause to millions of Americans trying to save for retirement. Financial experts say the worst thing you can do is to start tinkering with your portfolio in reaction to a downturn, no matter how dramatic. Sticking to a long-term financial plan is the best way to avoid being burned, they say.

ABCNEWS.com asked Dick Bellmer, chairman of the National Association of Personal Financial Advisers, to guide the average consumer through the ripple effects of the largest market drop since Sept. 11.

Belmer handles client investments at Deerfield Financial Advisors Inc. in Indianapolis, Ind.

Will the market continue to recover and avoid a recession?

I don't have a clue, in reality, it's the same odds as who would win the Super Bowl next year. We'll have a better indication over the weeks to come.

What happened?

This was just a correction. People got nervous and sold a lot of stock, but today it's up. There were a couple of things that happened. The Chinese market took a plunge and Dick Cheney [who escaped injury in a suicide bombing in Afghanistan], and Greenspan's speech that there will be a recession sometimes in the future. "Okay," they said, "it's time to get out."

But I have not had a single call from a single client. Not one. We've said over and over again: You do your asset allocation and then stick to the plan. The last five years we've had a fabulous run. Obviously our message has gotten through.

Is this the beginning of a recession?

In a recession you have an economy that is contracting instead of growing -- with inflation. There are all kinds of moving parts in the economy. For some people that means businesses aren't hiring. They may be laying off, and you might not have a job. If you are in a company that has a slow-down in production and is letting people go, that hits home. If I am a reporter, and businesses aren't advertising in my newspaper, there could be budget cuts. But if I am a physician, that means nothing.

One day doesn't mean anything, because the next day things can be great. One day does not a recession make. If you have to call it something, call it a correction. The market corrected itself because it was overvalued.

I want to buy a house, how will this affect me?

As far as the mortgage interest rates are concerned, I assume they will go down a little bit. In housing, things just got a little better. But it's a slippery slope -- when the price of homes go down, it's good for the buyer only if he has a job, or if he feels comfortable that the job he has is stable.

What if I'm selling my house?

How this affects you depends on the location of the real estate market. Real estate values in New York City went ho-hum when the rest of the nation's housing went down. I have a niece who lives in New York and her place went from a million to a million-one. I shake my head and say, "You've got to be kidding." In certain sections of the economy, there's not that much of an effect. I am here in Indianapolis in the middle of the country, and our market never had a big run-up or loss. It just goes along. But in Naples, Fla., you're lucky if you can find a buyer. No one there is looking right now. On the other hand, if interest rates go down, someone might be.

What about credit card interest?

The prime (interest rate) didn't change. Nothing happened there. There should be no effect on credit card debt or home equity loans.

Will the price of gasoline and heating oil go up?

Gas prices are a function of supply and demand. That won't change.

Television's financial guru Suze Orman says the market correction is good for my 401K. Why?

I absolutely agree with her -- if you have a long-term trend of the market going up. If I had a dollar and it buys one share and the market goes to 50 cents, I can buy two shares. When the price goes up to a dollar, I have three shares, instead of two and my value has jumped rather dramatically. But if it's the beginning of the next Great Depression and I'm 55 years old and I'm going to retire next week and the market doesn't come back, I may have bought more stocks, but my timing was crummy.

In what other ways will my life be affected?

You have to kind of wonder about the psychological value of people saying, "Oh my God, we've got to get out of the market." Greenspan says there's going to be a recession and everyone acts accordingly. Sometimes you have people who do irrational things for no other reason than they get scared. In a sense it happened in 2001. But the economy is like a pendulum and it never stops, and that's why I think we will look this over next week or so and say that people reacted, but it's going to be okay. On the other side, people who sold and those who are going to cash in are not sure what happened.

We looked at our own portfolios today and saw that the market had a pretty good run at the beginning of the year. Portfolios are still up for the year, and up if we annualize them -- even with the correction.

Are you feeling optimistic or pessimistic about the market?

I am feeling neither. I don't have a crystal ball and my predictions are no better than anyone else's.

What is your best advice to consumers?

If you have a financial plan in place, stick with it. Don't just react to just one day. And if you don't have a plan in place, get one.