What to do about a Stock Market Decline

It happens every time there is a stock market decline. Many more people seek financial advice about how to manage, protect and preserve their wealth.

The fourth quarter of 2007 was certainly a major test of nerves for investors. Many people continue to worry about increased market volatility, the slowdown in the housing market and the credit markets. If you read Chapter 6 of my book, then you should know what to do about a decline in the market. You would know that market conditions and the economic environment change over time. For example, if you were following the market over the last quarter, beginning in October 2007, there was a steep sell off in the broad U.S. equity market. Rallies in November and December were unsustainable and overall, investor concerns about the housing market, tightening credit and a potential slowdown in consumer spending saw most U.S. equity indexes in negative territory for the quarter.

Despite these challenges, however, equity returns were reasonably positive for the year. Within the U.S. equity markets, large-cap stocks continued to outpace small-cap stocks. Growth stocks significantly outperformed value stocks. International markets outperformed the broad US equity markets led by the emerging markets. With the continued weakness in the housing market, real estate also suffered a setback in the fourth quarter of 2007. As for the bond market, yields continued to decline as the Federal Reserve Board reduced both the discount rate and Fed Funds Rate. Oil prices ended the quarter at record highs continuing an upward trend sparked by growing worldwide demand. Going forward into the first quarter of 2008, we hope that employment figures remain strong, consumer spending remains stable and inflation is contained.

Although we can never know when a stock market decline will occur, stock market volatility is an inevitable part of investing. That said, a market decline is the last thing that many people want to experience, especially those who are nearing retirement or newly retired. However, once you understand what market declines are — how often they occur, why they occur, how long they last and what you can do about them, you will know how to handle a market decline and more importantly, the crucial role a market decline can play in your long-term investment success. If you get frightened into making big changes in your portfolio based on your emotions, you will invariable end up with mediocre investment results.
A market decline provides an opportunity to reassess your long-term plans and your investment strategy. Now is the time to reassess the level of risk in your portfolio and review your long-term financial objectives. If you are overly concerned about how a market decline could affect your investment portfolio, the first thing you should do is sit down with your financial advisor to review your investment goals, time horizon, risk tolerance and financial circumstances. How has your financial situation changed since the last time you talked to your financial advisor?

Resources: For more information about what to do about a market decline when there are changes in market conditions and the economic environment, see Chapter 6 of my book Securing a Retirement Income for Life: Strategies for Managing, Protecting and Preserving Your Wealth.