How to Calm Your Market Jitters

The decade-long upward-moving stock market of the 1990s came to a halt in 2000. But how bad is the market downturn, and what should you do to protect yourself?

The bad signs

There are several signs of trouble in the economy, including the stock market decline. The Nasdaq, with its heavy concentration in technology stocks, has lost a significant amount of its value in the last 18 months. Many observers say the drop was inevitable – that tech stocks had become so hot that they simply burst into flames. In addition to the stock market downturn, there are other worrisome signs in the economy. Consumer debt is high, layoffs are increasing, and consumer confidence is down. So should you panic? Not necessarily, the experts say.

In addition to the stock market downturn, there are other worrisome signs in the economy. Consumer debt is high, layoffs are increasing, and consumer confidence is down. So should you panic? Not necessarily, the experts say.

The good signs

There are many signs that the economy remains sound. Inflation and unemployment are low, and housing sales are strong. Overall, most experts agree, the U.S. economy is not in serious trouble.

So what about the market? Most experts believe that the current market downturn, like the preceding market upturn, is just part of the cyclical nature of the stock market. Since 1926, the Standard & Poor’s 500 has returned an average of about 11% per year, compounded annually, according to Ibbotson Associates (although past performance is no guarantee of future results). Returns during the ’90s were higher than average; returns now are lower than average.

But over time, long-term average returns for stocks should continue to be in line with historical experience.

What can you do?

The best approach to dealing with the current choppy market is to remain calm and remember the basics, experts say. For example:

Look at your timeline. If your investments are long-term - such as your retirement savings plan - you probably don’t need to make any changes. But if your investments are short-term, or if you are nearing retirement, you may want to move some of your money into less risky, more stable investment options.

Develop a strategy. Don’t invest in a vacuum. Know what you want to accomplish, and have a plan for achieving your goals.

Diversify. You’ve heard it before: Don’t put all your eggs in one basket. Different investments react differently to market change. By spreading your money around, you can help to protect yourself from problems in any one area.

Stay the course. As much as possible, ignore the news about the market. It will go up, and it will go down. But your financial decisions should be based on your personal situation and goals.