Should you do something when stocks drop?

I have recently been asked by several friends, “Should the financial aftermath of the infamous terrorist attacks of Sept. 11 change my investment and financial planning?” Some investors have the feeling that conditions have changed so radically that they should rethink their plans.  For most that may not be true. Here are some questions to ask yourself:

  • Have my goals changed?
  • Have fundamental financial market relationships changed?
  • Has my risk tolerance changed?

Your Goals

If you wanted to retire in 10 years and still want to do so, your goal hasn’t changed. If your kids wanted to go to college and still wish to go, your goal hasn’t changed.  That means you will still have to do the same things you were doing before in order to get where you are going.  You still will have to invest part of your wealth in the stock market in order to get growth in excess of inflation. You will still have to contribute to a retirement or college savings account.

However, if your approach to those goals was unrealistic before Sept. 11 then you may have to make changes.   For instance, if you counted on an unrealistic return of 15% a year, the current bear market may have convinced you to reduce your expectations to 8%. In that case you may have to put away more money for college and retirement, or delay retirement.

Financial Markets

Don’t let the big numbers scare you. Huge declines are as common in the financial markets as are huge gains. The underlying relationships of risk and reward have not changed.  If it was good for you to be in a diversified stock and bond portfolio before a crash, it is still good after. If you were about to diversify from a risky, concentrated position before a crash then you should still do it afterwards. Waiting for “your stocks to come back” may be the biggest mistake ever.

Risk Tolerance

Your risk tolerance is one area that you may consider changing.  Long before this decline you should have done serious thinking about how much of a decline you could stand at any one time.  Unfortunately, few investors thought that way during the roaring nineties, when the market seemed to do nothing but go up.  If you find that the recent market declines have made you upset, apprehensive, and nervous, and that no amount of reasoning makes you feel better, you should consider redoing your portfolio.   It is certain that the market will recover someday but it is also certain that more downturns will follow.