How to Preserve Your Retirement Plan in a Down Market

Contributor

By Mark P Cussen, CFP, CMFC
eHow Contributing Writer

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(20 Ratings)

Falling Stock Market

Watching your retirement account balances dissipate during a bear market is never fun—but rash action can only amplify the problem. Here's how to protect yourself during turbulent times.

Difficulty: Moderate

Instructions

Things You'll Need:

A clear head
Common sense
Some knowledge of stock market history

Step 1

DON'T SELL WHEN YOU SHOULD BUY is the first and most important caveat to remember. The knee-jerk emotional response in this type of market is to dump everything and move to cash—but smart investors will be doing exactly the opposite, using cash and cash equivalents to purchase solid stocks and mutual funds that have good sound value and fundamentals, but are substantially down in the short term. After all, when do you buy anything else? When it's priced the highest or when it's on sale? For all practical purposes, the fundamentally sound stocks in the market are WAY ON SALE when the economy is down.
Step 2

Another common mistake investors make is to try and regain their losses by hanging on at any cost. Although it's important not to panic, it's also important not to ride a real loser down to the bottom, unless you feel very comfortable with that stock or fund. Again, fundamentals should be the issue. If it's basically a good company that manufactures a solid product with a bright long-term future, then it may be worth holding on to. But if the company is only so-so with a stock price that was inflated to begin with, then liquidating your holding may be wise.
Step 3

If you have retirement money that you won't be drawing on anytime soon, then moving the funds into a variable annuity that offers a Dollar-Cost Averaging program may be the way to go. Many insurance carriers provide this benefit within their annuities, and the money that remains in the fixed account waiting to be invested often gets a higher rate of interest than is available in other guaranteed accounts.
Step 4

Whatever you do, DON'T KEEP YOUR LONG-TERM MONEY IN CASH BECAUSE OF CURRENT MARKET CONDITIONS. If you do, you will doom your retirement savings to mediocre performance, because it will never grow faster than inflation. Money that you need in less than five years should be invested more conservatively, but longer term funds should always be invested at least partly in equities.