What Do We Do Now???

We’ve had a pretty rough decade, let’s take a look at some of the events within the last 10 years and how investors reacted:

Sept. 17, 2001. After the 9/11 attacks, the markets were closed for three days. When they reopened, investors were unsure of what the attack might mean to consumers. Would they stop buying cars and houses? Would the US economy go into a recession?

The market decline that day of 684 points, or about 7.1 percent, was part of a larger decline of about 20 percent over a month. By March 2002, it had made back all the losses. But then the Enron scandal hit and the so-called “Internet bubble” exploded, resulting in a two-year stock-market decline. The economy slipped into recession.

Then came the financial market debacle of late 2008. The stock market had some bad days as the housing bubble burst and the entire financial system seemed to be on the verge of collapse. On Sept. 29, 2008, the Dow fell 777.68 points, or 6.98 percent. On Oct. 9, it dropped another 678 points, or 7.33 percent. Then, on Dec. 1 it lost another 679.95 points, or 7.7 percent. The economy went into a recession in December 2007, which lasted until June 2009…???

The current drop in the market totals 1,147 points between last Thursday and the market close on Monday. What makes this decline unusual is that it is related to politics, not necessarily economics. For example, on Friday Standard & Poor’s, in lowering the debt rating of the US government from AAA to AA+, cited Washington’s dysfunctional and inadequate handling of the debt ceiling extension.

So where do we go from here?  What do we do now??  Well, the first thing is to assess your sleep at night index.  Don’t get me wrong, it’s never easy for an investor to see the markets take such a dramatic hit, but if it keeps you up at night, that is a problem.  The most important long term factor in portfolio management is setting the correct target allocation.  The target allocation limits the amount of risk you are willing to take in any given market.  How big of a slice of the pie are you willing to take in equity markets?  Is it 80%??  60%???  20%???  Whatever you set it at, that is the MAXIMUM amount that should be allocated toward that particular market, regardless of how much of a rally we are experiencing; because as we’ve experienced, it can turn the opposite direction awfully quick.

Once you have your target allocation set appropriately, then it becomes a matter of tweaking holdings and reallocating dollars within each category.  Right now is as good of a time as any to reassess your risk.  And remember, if you are an investor, you are in this for the long haul and stocks just went on sale.

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