Does the stock market have you worried?

The huge swings in the stock market last week may seem all too familiar.  Perhaps you’re worried about a repeat of the 2008 financial crisis.  Before you dump your holdings and run for cover, consider this surprising fact. 

According to the Employee Benefit Research Group, most retirement plan account balances have bounced back to pre-2008 levels.  Account balances didn't recover entirely from the strength of the market -- those automatic paycheck deductions helped a lot too.  Investors who cashed out and remained on the sidelines missed out on the profitable years since the crash. 

Still, the roller-coaster volatility we have experienced recently with the Dow dropping 600 points one day and rallying back 500 points the next is enough to cause some participants to consider getting out of their plans all together.  For many people, this could be a big mistake. 

Buy Low:  Legendary investor Warren Buffett once counseled, "Be brave when others are afraid, and afraid when others are brave."  If you want to heed Buffett’s advice, the best time to buy low is when everyone else is scared.  It is their collective fear and the group-think selling that drives stocks to deeply-oversold bargain prices.  History has shown that the rallies coming out of these oversold positions often occur quickly and are highly profitable. 

Don’t you just love a bargain?  I was recently shopping at the at .  Activity was brisk and I can’t begin to tell you how many customers were leaving the store with stacks of books, all purchased on sale.  Often times when we read about the Dow Jones Industrial Average dropping, or watch the TV news anchors emotionally-charged segments about Wall Street, we worry and think that these market corrections are always a bad thing.  If you’re young and have many years before retirement, however, market drops can be a very good thing indeed.  When else can you purchase your mutual funds on sale?    

Another consequence of the turmoil in the stock market is plunging interest rates.  Last Tuesday, the US Federal Reserve pledged to keep interest rates at an “exceptionally low level” until the middle of 2013.  This news could be a boon for families looking to buy or refinance their homes.

Borrow Low:  "There’s a huge increase in mortgage applications," said Jerry Maguire, Senior Mortgage Advisor at Province Mortgage Associates, a local mortgage lender.  With rates on conventional 30-year fixed-rate mortgages falling near, and in a few cases below, the 4 percent level, homeowners locally have been rushing to refinance in recent weeks.  You’ve probably heard the old rule of thumb that says it only makes sense to refinance your mortgage if the new interest rate is at least two percentage points lower than your current one. 

“Not true” says Maguire. “Many people worry about their adjustable rate mortgages resetting at higher rates in the future.  Even if you can’t lower your monthly payment by refinancing, many families can benefit by exchanging the uncertainty of a floating rate loan for the certainty of a fixed one.”  Additionally, today’s low rates may allow some families to reduce the term of their mortgages from 30-years to just 15 or twenty years and potentially save thousands in interest costs. 

Of course, everyone’s situation is different.  As a financial advisor with more than twenty years experience, I’ve been down this road before.  I understand that the number one question on the mind of most investors is, “What should I do now?”  The answer to this question is the same for everyone: Talk with your advisor. 

Oh, and if you’re worried that this is 2008 all over again?  It’s not; there are major differences between then and now.   Yes the equity markets have experienced recent losses, but today’s economic growth, while weak, is still positive.  The banks in the United States are in much better shape than when the housing market collapsed.  And corporations are producing solid earnings even in a weak economy.  As an investor, I find that reassuring.

About this column: Steve Davis is a local CERTIFIED FINANCIAL PLANNER™ who has been helping clients since 1990. You can find out more about Steve and his company, Davis Financial at www.talkwithdavis.com

The opinions and economic forecasts voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.