Don't swing for the fences. To get even after a 28% loss, you have to gain 37%. But that doesn't mean you should load up on risky funds to make up for lost time. You'll just increase the odds that you'll lose more money.
Two important statistical measures will help you get a handle on risk. The first, beta, tells you the fund's relationship to an index, such as the Standard & Poor's 500-stock index. A fund with a beta of 1 rises and falls in lockstep with the index. A fund with a beta of 1.1 will rise 10% more and fall 10% more than the index. Conversely, a fund with a beta of 0.9 will rise 10% less and fall 10% less than the index.
Another useful measure is standard deviation, which tells how much you can expect a fund to vary from its average. The higher the standard deviation, the more volatile the fund. The standard deviation of the S&P 500 the past three years is 19.6. AIM China fund has a standard deviation of 37.6, so you can expect that its performance will be roughly twice as volatile as the S&P 500. You can find a fund's beta and its standard deviation by putting the fund name or ticker into any Get a Quote box at money.USATODAY.com. Scroll down to Risk Measures.
•Don't go to cash After taking a mauling from a bear market, many investors want to give up on stocks and bonds and move to money market mutual funds or bank CDs. But savings rates are so low that you'll earn close to nothing: The average money fund yields 0.05%, or $5 on a $10,000 deposit. Factor in inflation and taxes, and you'll earn less than nothing.
True, a 0.05% return is better than a big loss. But you have your best chance of getting back to even in stocks. Recovery time for a bear market depends on the severity of the downturn, says Jeff Hirsch, editor of the Stock Trader's Almanac. Hirsch thinks the market won't make new highs until 2011.
•Don't give up. Unless your retirement plan is to keel over at your desk, you need to lick your wounds and keep going. Even if you have a pension and Social Security, you'll need savings to maintain your standard of living.
How do you recover from the market's drubbing?
•Save more. The only sure-fire way to make up losses is to increase your savings. For example, suppose you earn $50,000 and contribute 5% of your salary to a 401(k) plan. You get 3% raises every year. If you earn 6% a year, you'll have $260,500 after 30 years. Bump up your contribution to 7%, and you'll have $364,000.
If you're investing in a 401(k) plan, bumping up your savings by a percentage point or more could be surprisingly painless, because your contributions are before taxes. For example, suppose your gross salary is $50,000. You pay 25% in federal taxes and 5% in state taxes, and you contribute 5% of your salary, or $48 a week, to your 401(k). Increasing your contribution 2 percentage points, to 7%, will decrease your take-home pay by just $13 a week.
•Make a plan. If you want a reasonable shot at retirement, you'll need to know how much money you'll need when you retire. Fortunately, you can find plenty of help estimating your retirement needs. Fidelity (www.fidelity.com), (www.troweprice.com) and Vanguard (www.vanguard.com) all have excellent online programs for figuring out how much you'll need to save for retirement.
If you feel you need a financial planner, consider a fee-only planner — preferably one that charges you by the hour, not by commission. You can find fee-only planners at www.napfa.org. You can also buy financial planning by the hour at the Garrett Planning Network at www.garrettplanningnetwork.com.
•Don't ignore dividends. Although red-hot growth stocks make the headlines, it's the stodgy dividend payers that do the heavy lifting over the long term. The S&P 500 has gained 867% the past 30 years without dividends. With dividends reinvested, the index has soared 2,200%.
•Keep expenses low. If your plan offers two similar funds, choose the one with the lowest annual expenses.
•Find an asset allocation plan. Once you've figured out how much you need to save, figure out how much of your money should be split between stocks, bonds and money market securities. The more time you'll have before you need to spend your money, the more you should have in stocks. If you have 20 to 30 years before retirement, for example, you should have 70% or more of your investments in stocks.
Post Office Interest Rates Table 2023 The government has recently announced the interest rates for PPF, NSC, KVP, and Sukanya Samriddhi for ...
What We Deliver : * You can find various tips and resources that will help you save your hard-earned money. There are lots of finan...