A nerve-wracking week punctuated by the biggest stock market plunge in three years has left investors with more questions than answers -- and considerably less money in their portfolios.
Is the plummet in the Dow Jones industrial average of 10 percent since late July a short-term blip or a precursor of what's to come? Will investors who didn't flinch, even during Thursday's 513-point drop, be rewarded for their perseverance or punished for not selling before the market gets worse? Most importantly, what should they do now?
Concerns over the debt deadlock in Washington that brought the government to the brink of default were then overtaken by increasing evidence of anemic U.S. and global economic growth. Now economists are talking about the increased chances of another recession, though not imminently.
That's left many individual investors unnerved.
"It all adds to the overall uncertainty, the nervousness. You just really can't count on anything," said Jeff Hawkins, 52, of Gainesville, Va.
Hawkins, a security director, and his wife, Jo, have most of their portfolio in stocks. He still believes stocks are the best way to invest in the long run, and he has decided to hang on rather than sell. But that faith is being sorely tested.
The wild swing in the markets following a report that the unemployment rate declined in July, underscored just how jittery investors are. After shooting up 171 points, the Dow tumbled into triple-digit-loss territory for the third time this week before yo-yoing back to close the session with a 61-point gain.
"The most important thing for people to do right now is to take a deep breath, whether you're reacting to the latest, pretty good job numbers or you're still in shell shock from everything else we've learned in the last week," said Jerry Webman, chief economist at Oppenheimer Funds in New York.
Consider how far stocks have climbed from their lows following the 2008 financial meltdown. The broader Standard & Poor's 500 index is still up 77 percent from its bottom in March 2009, although it's still 23 percent off the all-time high set in 2007.
Investors, though, have been focusing more on the economic turmoil. And many are selling stocks or piling into cash and presumed safe havens like U.S. Treasury bonds and gold.
Trading volume in the 401(k) accounts that Chicago-based human resources firm Aon Hewitt monitors reached $857 million Thursday, more than twice the normal volume on a typical day. Aon Hewitt, which tracks the accounts of 4.7 million workers, said the assets moved almost exclusively out of stocks and into fixed income investments _ stable value funds, bonds and money market funds.
Dan Nainan, 30, sees plenty of reasons for long-term optimism. He's not touching his $120,000 in stock holdings and is shrugging off the daily drumbeat of bad financial and economic news. "There's a lot of the 'sky is falling' mentality out there," said Nainan, a standup comedian from New York City. "People see in the media that everyone's dumping stocks, and then they do it. They're acting as if the world's going to collapse. It doesn't make sense."
Here's some guidance to help sort out all the mixed messages:
1. Don't panic
The volatility is dramatic and the TV anchors used phrases like "bloodbath on Wall Street." Yet despite the eyebrow raising market statistics, it's important for investors to keep a level head. Don't lose sight of your investing goals _ a key component of which is considering your time horizon.
Investing is for the long-term. However, if you're approaching retirement or expect to need the funds sometime soon, you'll want to assess the mix of investments in your portfolio. It may make sense for you to take some money out of the stock market and put a portion into something more stable.
This week's turbulent market appears to be a short-term variety of knee-jerk reaction by Wall Street, said Leon LaBrecque, managing partner and founder of LJPR LLC, an asset management firm with more than $400 million in assets based in Troy, Mich.
He sees this as an opportunity to remind investors to make sure the level of risk fits their time until retirement. A common mix for someone in their 40s is to have 60 percent to 70 percent of their portfolio in stocks and the rest in bonds.
As retirement approaches, the percentage of stocks should be reduced to ratchet down risk. Ultimately, you'll need to assess your personal risk tolerance.
2. Stocks on sale?
Historically the stock market is the best means to ensure that your savings outpace the rise of inflation _ though that's been minimal in recent years.
Many investors have fled to cash alternatives like money-market accounts or certificates of deposit. These investments return almost nothing right now and for a while on Thursday U.S. Treasury yields were actually negative, meaning investors were paying the government to hold their money for them.
A market downturn presents investors who are sitting on cash with buying opportunities. Tech stocks got hammered in the recent sell-off, and LaBrecque says he's looking for bargains. He's buying Apple Inc., which sank to around $315 a share in mid-June, but is up about 19 percent since then.
Despite the market downturn, corporate earnings are healthier and better able to endure an economic slump than they were three years ago. Earnings for the second quarter are still on pace to post a record high.
What's more, by some measures, stocks are now cheap. One price indicator that professional investors watch closely, the forward price-to-earnings ratio of the S&P 500, has fallen to about 12. That's well below its long-term average of 16. So investors who buy now are paying less for each dollar in profits.
Given that interest rates are so low, seeking out dividend paying stocks also is a good strategy. Among the highest dividend yielding sectors are consumer staples, at just over 3 percent, utilities at just over 4 percent, and telecommunications, at around 5 percent.
3. Play defense
When the economy gets tough investors typically flock to large companies with strong balance sheets. That's because these companies have the reserves and track record of being able to ride out economic downturns. Investors are drawn to the stability of their reliable earnings.
Certain sectors are also more defensive than others. If you're anxious about a faltering economy, consider consumer staples stocks. These include food companies and the makers of everyday household products. This sector is among the highest dividend yielding sectors in the S&P 500 with a current yield of a little more than 3 percent.
You could also buy into the old adage that when times are tough people drink beer and when times improve, they drink better beer. So take a look at companies like Anheuser-Busch InBev, the Belgium-based maker of 200 brands. Shares are down 9 percent in the past three months but rose $1.15, or 2 percent, on Friday to $54.32.
Global companies that make equipment for farmers, construction and other industries like Caterpillar Inc. and Deere & Co. also offer some cover in tough times.
Also look at utilities, which have a dividend yield currently of about 4 percent. This sector is one of only three of the S&P 500's ten industry groups to show growth for the year. The other two were health care and consumer staples.
Health care is traditionally a defensive move, but be aware that some companies in that sector could be affected by government spending cuts.
What playing defense doesn't mean is running to gold, said Richard Barrington, a financial analyst and personal finance expert at MoneyRates.com. Gold, he says doesn't produce earnings or dividends and since its up fivefold in the last decade, it could be a bubble ready to burst.
4. Bonds Overbought.
Investors have continued to pour into U.S. Treasury bonds for safety even though they have lost considerable allure as an investment. Heavy demand pushed the yield on the 10-year Treasury note to 2.42 percent Friday, its lowest of the year. Treasurys are overbought and investors should make sure they're not too loaded up on them because they don't offer good value right now, said George Rusnak, national director of fixed income for Wells Fargo Wealth Management.
Municipal bonds, issued by local governments to help pay for schools, hospitals, roads and bridges, are not necessarily the best place to be at the moment either, he said. The yield for 10-year munis with a Triple-A rating was 2.35 percent, close to the all-time low set last August. Yields fall when demand increases.
Investors, he said, would be better off in corporate bonds of large industrial companies that pay coupons _ semiannual interest payments.
And with interest rates poised to rise at some point down the road, they should not buy bonds that mature more than five years from now or they'll be stuck with today's rates.
5. Mixed international outlook
Fund managers still advise keeping a portion of your portfolio in international investments. But the worsening debt drama in Europe makes it worth checking your holdings to make sure you're not over-reliant on companies in developed countries. Emerging markets have delivered impressive gains for international investors for years and promise to continue to do so over the long term. They too, however, have had their issues lately. The iShares MSCI Emerging Markets index, a key indicator reflecting nearly two dozen developing markets including China and India, plummeted 13 percent in the last two weeks and is down 15 percent for the year _ 10 percent more than the S&P.
Further weakening in the global economy will hurt exports from emerging markets countries. But companies and funds there still have stronger balance sheets and remain a better bet than their counterparts in developed countries, notes
Arlene Rockefeller, president of the TruColor Capital Management hedge fund in Newton, Mass. The key is to be aware of, and comfortable with, the high volatility in emerging markets and have a plan in place to deal with it.
6. Shelter money in cash?
Shifting a portion of your money to cash or low-risk investments like money-market mutual funds can ease a potential hit from the stock market. It's important to keep in mind that after stocks lose half their value, it takes a 100 percent gain _ not 50 percent _ to get back to where you started.
But should stocks rebound, a move into cash now could lock in losses and prevent full participation in a rising market. If you shift money to the sidelines, do so for safety, rather than expectations of seeing your money grow. You'll earn next to nothing from cash these days, wherever you're stashing it in the bank, or in a money fund. Blame low interest rates, a consequence of the slow economic recovery, and the Federal Reserve's policy to keep interest rates low to stimulate the economy.
The low rates mean banks can't earn much from deposits, so they're not paying much interest to customers. For example, the best rates available nationally for six-month CDs are about 1 percent. Longer-term CDs pay more, around 2 percent now for 5-year CDs. But be careful about locking in too much money _ you'll pay fees for any early withdrawals.
One way to avoid problems with tying up your savings is to set up a "ladder" of CDs with staggered maturities. Money-market funds aren't able to earn much, either. Their returns are now averaging around 0.02 percent _ $2 a year for each $10,000 invested.
The outlook for higher returns may improve if the economy comes back, and the Fed raises rates. But those prospects now appear less likely due to the recent spate of disappointing economic news.