Hold it! Despite Wednesday’s 167.5-point drop by the Dow Jones industrial average to close below 13,000, this is not the time for investors to change their investment strategy in a panic, according to local financial experts.
The blue-chip index is now down more than 8 percent from its record close of 14,000.41 on July 19.
“If you get out of the market now, what you are saying is you are 100 percent sure that you can buy back in at a lower price, and you have to make that timing call,” said Dana Anspach, certified financial planner at Wealth Management Solutions in Scottsdale. “What most people do is they get out now and then once things start to recover, they buy back in. What they’ve done then is they’ve bought back in at a higher price than when they exited.”
Robert Swanson, a project manager who lives in Chandler, said he’s not worried about the current market slide hurting his retirement savings. He is one of Anspach’s clients.
“The way I would think about this is that I’m not going to lose any money until I sell something,” he said. “You pick a plan and you work with whoever you work with, and you have to stay the course with the plan. If you understand the economics of the market, it’s going to go up and it’s going to go down. It went up artificially quickly and it’s coming down artificially quickly.”
Swanson will be 62 in December, and hasn’t decided when he will retire and begin drawing on his retirement savings.
“My 401(k) plan is about one-third of my (retirement savings),” he said. “My assets are in categories to satisfy my objectives and my risk tolerance, meaning I’m not going to make a huge amount of money if the market goes up and I’m not going to get a huge loss of money if the market goes down. I’m interested more in constant and steady growth than big movements up.”
Participants in 401(k) plans should resist the temptation to take action when the market drops, Anspach said.
“What we tell clients is we’re concerned with what your account value is going to be five years, 10 years from now, not where it’s going to be next week or at the end of the month,” she said. “The natural reaction is for people to overreact. What you’re seeing in the markets right now ... is an overreaction to subprime lending. The general U.S. economy is in solid shape and we have a diversified economy.”
What’s happening now is much different than the market correction of 2001-02, Anspach said.
“Right now, stock valuations are fair, so we’re recommending that people do not make any changes,” she said. “The worst time to sell and change is right now.”
Someone who is decades away from retirement may be “very happy” with the falling market because it’s an opportunity to get more for their investment dollar, said Neal Van Zutphen, a certified financial planner with Delta Ventures Financial Counsel in Mesa.
“The 401(k) plan really functions as a dollar-cost averaging system,” he said. “It’s not so much a concern about what the market does as it is how many shares they’re buying of the fund.”
If, for example, a participant contributes $100 a month into his or her 401(k), and the per-share price has fallen from $100 to $50, that $100 is going to buy two shares versus the one, Van Zutphen said.
“If I was very young, I’d say ‘Gosh, I hope the market tanks and stays there for 10 years, and then all of a sudden starts taking off ... because I would be a multimillionaire after 20 years of accumulation,’” he said. “I would have been buying low the whole time and then 10 years later be selling at high markets.”
Even if you experience a loss in your 401(k) savings, it’s most likely less than the market loss if your assets are well diversified, Van Zutphen said.
It’s a good idea to review your 401(k) fund allocation on an annual basis to ensure proper diversification, Van Zutphen said. However, anything more often is asking for trouble, he said.
“The hard part is the concept that people think that they can time the market,” he said. “You look at your portfolio and if you can make tweaks versus major changes, tweaks could help you while major changes could hurt you.”
Don’t get out yet!
The Dow Jones industrial average fell 167.45 points Wednesday to close at 12,861.47. However, this is not the time for investors to pull out or sell, according to experts.
Instead, they should:
• Look at the drop as an opportunity to purchase more shares.
• Start reviewing their 401(k)s on an annual basis to ensure proper diversification.