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What Is Happening to My Money?

Like it or not, your 401(k)'s health is tied to a turbulent world at large

En español | The global markets took a tumble on Thursday in Asia, Europe and on Wall Street, with the Dow Jones dropping nearly 500 points by late afternoon. It's yet another in a series of downward spirals that analysts attribute to investors' fears about the economic outlook in the states and abroad.

In August, the United States lost its gold-plated credit rating for the first time ever. Europe passed financial crises around from one country to another like a bad cold; and a crazy down-then-up stock market vaporized $2.2 trillion of savers' wealth.

See also: 6 things to do when the market slumps.

 floor trader, the economy and markets, long term advice.

Many investors are riding out the ups and downs of the stock market. — Photo by Richard Drew/AP

All this drama brings home a key point about today's global economy: Your financial well being, like it or not, is tied to what happens in other countries. So before you decide what you personally ought to do, you might have some questions about what in the wide world is going on. Questions like:

What just hit me?

So far, you've been hit by a full-fledged "correction" but nothing worse than that. Defined as a drop of 10 percent from the most recent peak, corrections are routine (although they never feel that way), erupting once a year on average.

The last one hit in the spring of 2010, when stocks lost 17 percent for reasons strikingly similar to this month's drop — fears about debt in Europe and a recession in the United States.

Of course, there's no guarantee this correction won't turn into something worse. Bear markets, defined as a drop of 20 percent or more, occur about every 3 1/2 years, on average.

And the last one we had was especially vicious. Between October 2007 and March 2009, stocks lost more than half their value. The memory of that agony is one reason last week felt so scary.

And this time the sell-off was triggered by a downgrade of U.S. government debt. That's really bad, isn't it?

Standard & Poor's downgrade of U.S. debt from AAA to AA+ added some drama to the last week. But its role was mainly symbolic: The price of U.S. debt actually rose, as investors seeking safety piled into Treasury bonds.

That's the opposite of what you'd expect if investors cared mainly about the downgrade.

Instead, they really seemed to be reacting to an increasingly downbeat outlook for the U.S. economy. "Market volatility is always high when investors' expectations about the economy take a sudden turn," said Vanguard senior economist Roger Aliaga-Díaz in a letter to Vanguard shareholders.

Next: What's Europe got to do with your money? >>

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