World Markets Are In Freefall - So What Does This Mean For You?

Investors didn't like what they saw come Monday morning: The market had dropped more than 1,000 points to start the day after a news-worthy decline last week. China was to blame: A decline in the Chinese stock market and fears of the Chinese economy sparked the sell-off that we watched in horror on our home court of Wall Street.

We're the first to admit: It is absolutely unsettling news for investors of both long term and short term investment, and those of us approaching retirement with a 401(k).

Donald Trump weighed in that people should be concerned, and a lot of people were downright terrified to look at their 401(k) to see how much it had fallen.

But let's take a step back. Deep breaths.

Analysts maintain that people need to hold off on pushing the panic button, especially if they're in the market for the long-term and if they did a great job of diversifying their portfolio to mitigate against this type of risk.

That's not to say that this freefall isn't a great wake-up call for some of us. So what might you learn from it?

First off, back to the basics. Bob French, director of investment analytics with Virginia-based McClean Asset Management Corp., says to remember that markets are efficient, and that it's not prudent to try and trade in and out based on what's happening in the market today. He previously worked at a mutual fund company, and during the 2008 financial crisis, there were a number of advisors whose clients cashed out a week before the bottom of the market - even though that's easily the worst-case outcome for anyone.

Yes, baby boomers, this includes you.

"For someone over 50, you still have a long time period to be working with here," he says. "If you look at the historical data over a long term, things tend to go up. That's because capitalism works. Investors wouldn't put their money in the market without an expected return associated with taking that level of risk."

The current fiasco wasn't unexpected.

"We expect to see moves like this every once in a while," French says, admitting though that, "This is a big one. But if you look back historically, it's not unprecedented by any stretch of the imagination. You need to develop your asset allocation based on the assumption that you're going to see stuff like this, and that you're going to see real bad days, real bad weeks, real bad months, and real bad years. What you need to figure out when you're developing that asset allocation is what you can actually tolerate."

So if you're looking at the sad realization that your portfolio doesn't have the tolerance to handle this China disaster, reevaluate. And don't do it lightly.

"It's something you should think very hard about for a little while before making any changes to your portfolio, considering that you thought out your asset allocations prior to this happening," French says. "You want diversification. It's the only free lunch in finance, to pick up that old cliché."

French says there's no right asset allocation, but there are a lot of wrong ones. Investments shouldn't be about shooting for the high score. What's a wrong allocation? French says it's hard to pick one, but an easy choice is someone looking for a quick fix.

"You have to take what the market gives us," French says. "The market has rewarded long-term investors. So for folks focusing on the short term, events like this are going to hit very hard."

French recommends people talk to a financial advisor to make sure they're on the right track with their portfolio. He says it's difficult to predict when the market drop is over because the market reacts very quickly to new information.

"Until we're able to predict the future, we prefer to stay the course and focus on the long term," French says. "We try to get people wherever they need to go with the lowest amount of risk to deal. It's not a fun time in the market by any stretch of the imagination, but it all comes down to focusing on that long-term prospective and making sure that you're comfortable with what you're doing and why it is you're doing this."

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