Lehman Brothers an investment bank files for Chapter 11 Bankruptcy, Bank of America buys Merrill Lynch at a fire sale price, and insurance giant AIG needs a huge loan from the Fed to avoid bankruptcy. All of these problems are the result of the mortgage excess with its roots in greed that have now spread across the financial sector. Banks no longer want to lend to each other because they don’t trust that the bank they are lending to is actually solvent or ready to implode.
The Fed and the Treasury Dept. have now developed a plan to address the financial sector meltdown and the stock market shot up yesterday and today, but there is likely more bad news ahead.
Despite the bad not all is not lost. You should not move all of your retirement money to cash. The S&P 500 (the best measurement of “the market”) is still over 50% higher than it was 6 years ago. If you are having trouble sleeping or you are worrying a lot about your investments, I recommend you do the following:
- Check your retirement account balances and calculate how much your portfolio has declined.It may have declined less than you thought because most investors are invested more broadly then the Dow or S&P 500 indices which are often used to represent the stock market.
- Review your results with the downside risk inherent in your asset allocation.Your financial advisor should have reviewed this with you when he or she wrote your investment policy statement and reviewed it with you.If your advisor did not do this or if you need an advisor who can develop a good investment strategy for you go to www.napfa.org
- If your losses are within the range the advisor projected as possible but you still are uncomfortable then you may want to review your overall risk tolerance.You may be less risk tolerant than your thought.
- If your risk tolerance has changed, you may want to consider changing your asset allocation strategy.Understand that moving to a more conservative allocation may mean that you need to save more or be prepared to work longer.
- Understand that investing is for the long-term and that almost no long-term strategy that provides a reasonable long-term rate of return can protect you completely from short-term losses
- Also understand as humans we are wired to respond to short-term changes (positive or negative) and discount long-term changes that are more significant
For example, only a short-term increase in gas prices got us to reduce our gas consumption, not the possible larger but longer term effects of global warming.
Next blog, what to expect in the future.