What to do now

Investors who feel panicky because of the recent stock market dive and forecasts of a recession should resist the urge to cash out all of their stocks and stock funds now.

This is not a financial Armageddon — it’s the turbulent end of a five-year bull market, Sheryl Garrett, CFP, founder of an international network of 300 independent financial planners, told Bottom Line/Personal.

Her reasoning: Although stocks could remain weak for months, major rebounds typically take just weeks or even days. It’s easy to be left out of any rebound if you dump all your stocks now and wait too long to jump back in.

Instead, use the enormous volatility likely to characterize the rest of 2008 to make small, tactical shifts. What to do now if…

You are still working and retirement is at least 10 years away.

  • Keep buying stocks with your contributions to 401(k), IRA and other retirement accounts. If the stock market continues to drop, you’ll be accumulating more shares at lower prices than before. In fact, as the stock market turned sour in January, I advised people to file their taxes, get their refunds as soon as possible and use the money to make their IRA contributions.

  • Sell just enough to get back to your ideal asset allocation. For instance, if you have decided that for the long term, your portfolio should have 5% in emerging-market stocks, but those stocks have appreciated to the point that they now make up 8% of your portfolio, pare them down.

  • Move out of high-yield (junk) and long-term bonds and bond funds. With signs of a shaky economy increasing, the total return you get on these bonds is no longer worth the added risk. Better: Short- to intermediate-term, high-quality, fixed-income investments, including bonds and certificates of deposit (CDs).

You are retired or near retirement.

  • Sell enough investments now to be able to ride out a bear market. I suggest that retirees keep three years’ worth of expenses in a money-market account or bank CDs so that they don’t have to disrupt their portfolios when the stock market is down.

  • Maintain your original diversified allocation when you sell assets to create a cash reserve. In other words, if you want your portfolio to be 60% bonds and 40% stocks and you liquidate 8% of your portfolio now, you still should have a 60/40 split. Any dividends, interest and capital gains distributions you get from your portfolio should be used to help replenish what you spend.
  • Hang on to the types of stocks that tend to hold up well in downturns and that offer solid dividend yields. These typically are found in sectors such as basic consumer products and pharmaceuticals.

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