Market Meltdown

What to do now?

Here’s some advice from financial planners for investors who are reeling in the wake of this week’s market meltdown:

* Take stock. Pardon the pun, but use the weekend to review your portfolio, your goals and your tolerance for risk.

If you have decades until retirement or another investment goal, your best bet may be to do nothing about your equity portfolio--unless you realize you’re taking so much risk that you can’t sleep at night.

Over the long term, stocks have offered the kind of inflation-beating returns that most of us will need to meet our goals. Aggressive and growth stocks promise even greater returns--along with greater volatility along the way.

“If you can stomach it, then stay the course,” said Mitch Freedman, a financial planner and certified public accountant in Sherman Oaks.

What to do if you’re getting close to retirement age--or are already there? If you’re not already well diversified, now is the time to do it. It’s painful to sell investments at a loss, but you could suffer more if markets continue to plunge.

Some older investors have forgotten that they are more vulnerable to market drops than the young. A big market drop in the early years of retirement can have an outsize effect on a portfolio and can cause an investor to run out of money much more quickly than expected, according to studies by mutual fund giant T. Rowe Price. That’s because retirees are drawing on a shrinking pot of funds and aren’t refreshing it with new earnings from wages.

Retirees who have investments in cash and bonds as well as stock, and who keep their annual withdrawal rate below 5%, tend to weather market drops much better than their more aggressive peers, said Todd M. Cleary, T. Rowe’s vice president for financial planning services.

* Reallocate. If you decide your portfolio needs some tweaking, now is the time--when all stock sectors are suffering at once. Getting in while prices are down should position investors to benefit when markets eventually bounce back, Freedman notes.

In other words, if you have been meaning to take some long-term profits in highflying growth stocks and use the money to boost your position in blue chips or value stocks, start the process now.

“When we start to see a recovery or if only portions of the market recover, they can share in that,” Freedman said.

Some investors may now realize they should have a higher percentage of their assets in bonds. Again, now’s the time to begin the process.

Need some help figuring out the right asset allocation for your risk tolerance? The latest editions of Intuit’s Quicken and Microsoft Money personal finance software have asset allocation calculators.

There are also plenty of Web sites that can help, and many online brokerages have retirement planning calculators that now recommend appropriate allocations and even specific mutual funds. Some to try include Financial Engines at https://www.financialengines.com or Intuit’s 401k Advisor at https://www.quicken.com.

* Go shopping. If your problem isn’t that you have too much exposure to technology and growth stocks, but too little, now is the time to draw up your shopping list.

Some investors have understandably been loath to pay high prices for the growth stocks they wanted. Buying now does not guarantee prices won’t fall further, but investors can manage the risk.

Irvine financial planner Paul Bernardski advises his clients to use dollar-cost averaging, easing into the market through small but regular purchases, often through their 401(k)s or individual retirement accounts.

He particularly urges clients to fund their IRAs at the beginning of the year to start getting tax-deferred returns as soon as possible, and then transfer $167 each month from the account’s money market fund to stock mutual funds. The balance in the money market account continues to draw interest, while the gradual exposure to the market keeps investors from buying at either the top or the bottom.

“If the market goes straight up, you don’t get the best price, but if the market goes straight down, you haven’t gotten in at the top,” Bernardski said.

* Consider your taxes. Some active traders who had big gains last year may have expected to sell their stocks this week to pay their April 17 tax bill, Freedman said.

Oops.

Now’s the time to remember that the stock market is no place for money you’ll need in the short term, which is anything less than three years. (Many planners would recommend an even longer time horizon to be safe; time horizons of five to 10 years are often suggested for stock market investments.)

You can consider taking some tax losses now to offset any gains you’ve realized this year, but don’t let the tax tail wag the investment dog, planners say. You should have other good reasons for selling at a loss, such as the need to be diversified or a well-founded dissatisfaction with the fund or stock.

“You have to remember why you bought it,” said Nancy Langdon Jones, an Upland financial planner and tax specialist. “If it’s a company you bought because you believed in it, and you still do, then hang on to it.”