Survive Stock Market Meltdown 2.0

Online, August 10, 2011 (Newswire.com) - The past several weeks have been quite ugly on Wall Street, making virtually all investors feel a sense of deja vu. Is it 2008 all over again when the market halved investment portfolios and 401Ks? Should we be worried about our retirement plans?

A combination of different events caused the market to selloff, but one of the more lasting problems weighing on investors from a valuation perspective is the global slowdown. There have been clear signs of this slowdown over the last couple weeks, but the market's attention was on the dance in Washington over the debt ceiling increase.

Once the debt ceiling issue was resolved, concern shifted to slowing growth in the economy going into the second half of the year, which affects the estimates for companies' earnings going forward. The market doesn't like uncertainty, and we're at the point where we don't know what earnings are actually going to be, so valuations are shrinking to account for that.

The big issue for the global economy and debt ceiling is the fact that we're not going to have a better second half than first half. We are already a third of the way through the third quarter, and things don't seem to be much improved from the second quarter.
So what can you do as an investor? First of all, take out the emotion. Do not make investment decisions based on either fear or greed because emotional decisions in investing usually work out pretty badly. Simply put, you don't want to gamble when planning your 401K and retirement.

If you widen the picture, from the lows in 2009, the market is still up almost 100%. We've had a sharp pullback, but such pullbacks (if contained) are corrections and are actually healthy for the market longer term. In the big picture, the market still had a pretty sizable advance, so most people's 401Ks are still seeing pretty big advances from the lows of 2009.

Additionally, companies themselves are in great financial shape. There's nearly a trillion dollars in excess cash reserves on corporate balance sheets right now. Moreover, the consumer has gotten into better shape, and debt has come down versus two years ago. The biggest issue, however, is the condition of sovereign entities. Like most developed economies, the U.S. government has a massive debt load, so the worry has shifted from consumer debt to sovereign debt. It may take a little while, but the sovereign debt issue will work out as well.

So, if you're a long-term investor and you already have a conservatively allocated portfolio with both high-quality income and equities, my advice is do nothing. Again, you don't want to make changes whenever there's high emotion in the markets. There may also be an opportunity-possibly very soon-for you to pick up very high-quality companies at better valuations.

If you're young, you have a long-term time horizon, which is a huge advantage because volatility will smooth out. The volatility of a 500-point move that feels really important today will never be seen on the chart once you spread it out over ten years. On top of that, you have the power of time and compounding. The very first thing you should do is continue putting money into your 401K-max out your 401K, or at least, contribute to it up to the company match, remember, that's free money.

The bottom line is, while there has been recent turmoil in the market, do not panic. If you already own quality companies with well covered dividends, they may be even more attractive. When everything is declining it is hard for investors to believe stocks will ever rise again, but we must remember some of the best buying opportunities have surfaced when there has been "blood in the street". The stock market crash of 1987 and low of the financial crisis in March 2009 as the market was looking into the abyss, served as opportunities to buy the best-of- breed companies at perhaps once in a generation valuations. If you would have sold everything instead of adding to quality companies you would have missed the cyclical bull markets each period produced while most likely permanently realizing losses.

www.valuereturns.com

About the Author

Randy Beeman is the managing director of the Wise Investor Group, author of Value Returns, and the host of WMAL's Wise Investor Show with Randy Beeman, which airs Sundays on WMAL at 9:00-10:00 A.M.