En español | When the Dow drops significantly, your stomach tightens, your palms sweat, and you begin to envision yourself living your last days in a cardboard box. With those thoughts dancing in your head, you can do one of two things: You can give in to the panic and make an emotional decision, which you will probably regret. Or you can do something constructive with your time.
Here are six good moves to consider.
1. Go into your bathroom and grasp the edges of the sink with both hands. Look deeply into the mirror and repeat three times: I was ready for this, I can handle this.
Why do you say this? Because bear markets are the price you pay when you invest in equities and angle for returns that you expect to be higher than bonds.
2. Go look at the statements for your bank CDs, or your fixed annuity statements, or your bond funds. They make money when stocks tank. Congratulate yourself for being so smart as to own some.
Photo by Brendan McDermid/Reuters
3. Swap some of your losing stocks and stock funds. By selling losers, you get to write those losses off against any gains on next year's tax return or even against regular income.
The trick is, don't sell and get out of the market, because you'll never get back in at the right time. Swap the stocks or funds for similar investments. If you own index funds or exchange-traded funds (ETFs), there must be 50 identical securities to swap into.
4. Rebalance your portfolio. Add up your portfolio at the end of the week and see how you stand versus your plan. If you wanted to have 60 percent of your money in stocks and you now have 55 percent, add more stocks. It'll be hard, but had you done this rebalancing regularly during the financial crisis of 2008 and 2009, you'd have gone into the most recent downturn with more money than you had even at the peak in 2007. This is your chance to get it right this time.
5. Add another 1 percent to the contribution rate to your 401(k). If the market is going to rebound, you're boosting your contribution at just the right time. If not, well, you're going to need the extra savings anyhow.
6. Note to workers: Send your boss some chocolates or tickets to the home team's baseball games. If you're lucky enough to have a job, you'll get through this fine; if the market disappoints for the rest of your career, well, you can work longer. When you have a job, you have that option. It sure beats the cardboard box.
Also of interest: 5 retirement planning mistakes.
Eric Schurenberg is the financial editor at large for AARP The Magazine and a former managing editor of Money magazine.