3. Keep your focus on the big picture
Disturbing headlines are inevitable: Home foreclosures are expected to continue at near-record rates; many states face ugly choices between slashing budgets and raising revenue; the BP oil spill may hobble the Southeast. Yet in May, even as the European crisis unfolded and the market fell, a panel of 46 leading economists predicted the U.S. economy will grow a solid 3.2 percent both this year and next. "We're climbing out of a deep hole, but our problems are much less severe than a year ago," says Mark Zandi, chief economist at Moody's Analytics. "Businesses in the U.S. are very profitable, and we’re seeing some job growth, increasingly broad-based across industries and regions of the country."
4. Besides, bad news often has a flip side
In economics there are always both winners and losers. With European debt looking risky, demand for U.S. Treasuries shot up — which lowered rates on mortgages here. Homeowners who refinanced will have more cash to spend, boosting economic growth. Oil prices fell as Europeans, hunkering down, drove less, making it cheaper for us to drive. And a falling euro has strengthened the dollar — making imports cheaper for Americans.
Even the market's slump in May has a silver lining for investors looking decades ahead. (Yes, that includes you. People in their 50s or 60s may need their money to grow for 40 years.) If you're adding steadily to your invested savings for retirement, you're now buying stocks at lower prices. That greatly enhances your potential long-term return: The less you pay for stock investments, the more you're likely to make when you sell them. That's why experienced money managers aren't sorry to see market "corrections" that keep stock prices in line with reality.
5. The basics of finance still apply
Consult a financial professional to see how these strategies might help you.
Diversify: You need a broad mix of stocks, bonds and cash.
Protect your future cash flow: Put money you'll need to spend within five years in a money market fund.
Stay flexible: Don't tie up all your money in supposedly crash-proof gold or a deferred annuity.
Slash your investment expenses: You can own a diversified portfolio at minimum cost with three low-cost index funds: total U.S. stock market, total foreign stock market, and total U.S. bond market.
Save more: If your portfolio isn't growing fast enough, there's no magic to apply. Set aside more income.
Remember your time line: Your true investment horizon is your life expectancy, not your retirement date. If you have a prudent plan, and can stick to it, you won't lose sleep over the market's inevitable ups and downs.
Contributing editor Lynn Brenner made the case for banking at a credit union in the July–August issue.