Don't bail on stocks

The bottom line: Your retirement plan has taken a hit. The Dow Jones Industrial Average is down 1,700 points since the start of May. The markets seem to have gone haywire, down 400 points one day, back 700 points a few days later. People are scared by Wall Street bailouts, which they’ve never seen on this scale before.

But volatility and declines have hit the market before, and the economy has always recovered, said Marta Halvorsen, financial adviser with Edward Jones Investments in Vancouver. “As a percentage drop, this week’s declines have been nowhere near as bad as the crash of ’87.”

Lessons from the past can guide you through.

How low will things go?

NOBODY’S SURE: Probably not much more, but maybe some, experts say. Nobody has a crystal ball.

THERE ALREADY? Big swings disguise the fact that the Dow’s been hovering around 11,500 since bottoming in July, said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Ore. “This is really an indication of a prolonged bottoming process.”

WORST CASE: There’s still risk out there. In an unlikely worst-case scenario, markets could drop another 10 percent, Halvorsen said.

GOOD NEWS: “With the federal government coming in to provide safeguards, market volatility should ease,” Dickson said.

What’s a safe place to put my money?

CASH: “Keeping money below $100,000 insured limits with local banks is as safe as it gets,” Dickson said.

BONDS: “I’ve been placing a lot of money in municipal bonds that are extremely high quality and insured,” Halvorsen said. “They have the lowest default rate in the history of the market. But don’t put all of your money in any one place.”

THINK TWICE ABOUT TREASURIES: Treasury securities are also safe, but the return is so low they’re not worth it, Dickson said.

What does this mean for my retirement plans?

YOUNG WORKERS: “If you’re a 20- or 30-something, this is a blip of nothing,” Halvorsen said. Stocks will recover long before you retire. “Keep investing, keep investing, keep investing.”

NEAR RETIREMENT: “If you are within three or four years of retirement, make sure you have enough cash to cover three years worth of living expenses,” Dickson said. If you have enough cash set aside, your shares should recover before you need them. If you don’t have enough cash set aside, you may have to push back retirement plans by a few years.

IN BETWEEN: If you’re in your 40s or 50s, do not worry, Halvorsen said. “The market will recover before you retire, and if you’re reinvesting stock or mutual fund dividends you can make a good return even in a flat market.”

What should I do now?

REBALANCE: Make sure your investments are diversified. Rapid gains and losses may have thrown your portfolio out of whack. Rebalance now to keep your retirement plans on track. A financial adviser can help if this seems overwhelming.

DON’T PANIC: “We will see some more headline news events about financial institutions,” Dickson said. “But this is not the time to sell everything. Each time Wall Street staggers it comes back.”

BUY STOCKS: “People make money in the market by buying low,” Halvorsen. If you have cash available and can stomach a risky market, this is a good time to invest. If you’re in your 20s or 30s, this is a good time to boost your 401(k) contribution.

COURTNEY SHERWOOD is at courtney.sherwood@columbian.com.