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Turbulence in Markets Creates Fear and Confusion

Many financial experts say 'don't panic'

En español | Investors are bracing for another roller coaster ride Monday following the downgrade of the U.S. cherished credit rating over the weekend and the spreading fiscal crisis in Europe.

The Standard & Poor's downgrade comes days after Thursday's drastic stock market drop that saw the Dow sink 513 points, or 4.3 percent, doing little to calm jittery nerves of investors across the country, with retirement savers worrying that their hard-earned accounts are being damaged beyond repair.

The Dow Jones Industrial Average closed nearly 61 points higher on Friday after Thursday's drastic stock market drop saw the Dow sink 513 points, or 4.3 percent, amid fears that a faltering U.S. economy and new financial discord in Europe could strangle global recovery.

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Bear eats stock market what to do with savings.

Photo by: James Balog/Getty Images

Bear market has investors fearful.

It was the worst single-day tumble in more than two and a half years.

"The nation seems to be gripped by this feeling of uncertainty about what's ahead for the next few weeks, and it's probably precipitated by the dragged-out, contentious fighting over the debt ceiling, which isn't completely resolved," says Bernard Baumohl, chief global economist at the Economic Outlook Group, a research and advisory firm in Princeton, N.J.

"It's not what investors want to see," he says. "Once we begin to see with more clarity where the economy is heading, the market will turn up."

Recover losses?

Younger investors have many years to recover losses when markets get caught in downdrafts. But older ones often worry they'll be forced to tap those savings for retirement expenses well before the losses are recovered.

For the older investor worried about the bottom line amid uncertainty, Baumohl counsels, "Stand pat on equities and don't do anything. There's been significant loss in the market in the last week and a half, so at this point, there's already a loss on paper."

When the market turns around and gains become more steady, Baumohl recommends that investors 55 and older allocate between 35 and 40 percent of their portfolios to liquid investments like short-term certificates of deposit and Treasuries; 20 percent to precious metals such as gold and silver, which do well in periods of uncertainty; and about 45 percent to equities.

He says half of those equities should be in domestic stocks and half in stocks in emerging countries like India and Brazil.

Next: Be proactive not reactive, says financial planner. >>

Repeated days of decline

Even before Thursday's dramatic decline, markets had been heading steadily down for days — at the close of trading Thursday, the Dow Jones industrial average was about 1,000 points below its July 21 level.

As successive days brought bad news, other financial planners offered views that investors shouldn't radically alter their savings portfolios unless those investments are already riskier than they're comfortable with.

Typically, stocks make up 20 to 60 percent of a portfolio for people nearing retirement, financial planners say.

"The key to investing is to be proactive and not reactive," says Frank Jaffe, a certified financial planner at Access Wealth Planning in Roseland, N.J. "To try to make major adjustments now to a portfolio doesn't make sense unless a portfolio is overly risky to begin with."

"Doing nothing may not sound like you're on top of things," says Jaffe. "But your portfolio should already be set up to reflect the amount of risk you're willing to take."

Kevin Cook, a senior stock strategist at Zacks Investment Research in Chicago, echoed the "sit tight" advice and said investors might consider selling small amounts of equities timed to rallies in the market.

He expects the stock market to "go sideways" for the next two months. "This is not a time to worry about the market going 30 percent lower like it did in 2008. It won't do that," Cook says.

If you're a conservative investor, Michael Davis, president of Davis Financial Services in Jacksonville, Fla., recommends fixed annuities and dividend-paying stocks so that you will still be earning money even if stock values fall.

"Fixed annuities have made it through the test of time; they made it through the Great Depression," he says. "The ups and downs of the market are tough on us the closer we get to retirement." So the 6 or 7 percent rate that's guaranteed for 20 or 30 years through income riders attached to fixed indexed annuities "can create a pension for a person to draw on."

Also of interest: Interactive map shows financial pain, state by state. >>

Carole Fleck is a senior editor at AARP Bulletin.