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Face your stock market demons

After you survive a stock market collapse as gut-wrenching as the one in 2008, you are never the same.

So it's no wonder that many investors spent the past two weeks shuddering in front of TV sets and computer screens as their retirement savings and college funds were brutalized. In no mood to suffer another devastating loss like 2008, some called financial planners to demand an immediate exit from the stock market.

Another shock came Thursday when the Dow Industrials fell 419.63 points, or 3.7 percent, to 10,990.58, after a series of negative reports, among them an increase in jobless claims, a slowdown in manufacturing and another slump in home sales.

On the same day the Standard & Poor's 500 index fell 53.24, or 4.5 percent, to 1,140.65. The Nasdaq composite fell 131.05, or 5.2 percent, to 2,380.43. This was after the market had recovered almost 700 points during the week and seemed to be leveling.

Even so, much to the astonishment of financial planners, the trauma of 2008 has prompted a surprising number of people to respond to the market's latest plunge with a bit of moxie.

"A lot of people are saying they want to buy stocks," said Laura Tarbox, a Newport Beach, Calif., financial planner who has been calling clients in case they need calming.

Some are confessing regrets about 2009, a period in which stocks plunged to frightful lows and the cheapest prices in years. Some people who cowered after the market dropped 50 percent and waited for assurances that it was safe to invest again told her they kicked themselves after the fact for missing bargains.

Deerfield, Ill., financial planner Sue Stevens said she was surprised by a similar response this week.

As she telephoned clients she thought would be nervous, one asked what stocks to buy for her children, "so the kids get excited about finding bargains." She has purchased stocks such as Apple, General Electric and Exxon this week.

Of course, plenty of people are gun-shy, too, Stevens said. "Many are scared because they don't know what to do and the country's leadership seems inept."

Tarbox said some are calmer than she would have thought because they learned in the second-worst stock market period in history, from late 2007 to early 2009, that an investor can lose 58 percent in the stock market and recover relatively quickly.

A person who divided investments with half in a Standard & Poor's 500 stock market index fund and half in long-term U.S. government bonds would have been back to even in less than three years. A person who invested $10,000 just before the bear market began in 2007 would have had just $7,700 left in April 2009, which was the worst point in the market. But by October 2010, it would have become about $11,300.

For clients worried about the current stock market, financial planners are asking them to recall that they did recover in a fairly short time from the previous bear market. And because the most recent downturn was so fast in wiping out the value of stock portfolios, the financial advisers are encouraging people to avoid selling any stocks or stock funds and wait for a recovery.

That doesn't mean they are offering any particular date when they expect relief. Rather, they simply note that, with time, stocks will heal. And if a person has a mixture of stocks, bonds and cash, the bonds and cash usually provide a greater buffer from losses than people assume if they fixate on their stocks alone.

"The worst thing a person can do is panic and sell now," said Coral Gables, Fla., financial planner Harold Evensky.

But Evensky always positions clients so they never have to sell at times when the stock market is in distress. For retirees, he has them keep about five years of cash handy in CDs and safe bonds. Dividend-paying stocks also provide cash, but in a recession companies can cut those payouts, so they are not as reliable as CDs and government bonds.

Since the last bear market, many financial planners have become more conservative, suggesting that investors keep larger buffers against devastating stock downturns. Tarbox, for example, used to suggest people early in retirement keep about 60 percent of their money in stocks and 40 percent in bonds and cash. Now, she has reversed that.

For people in their 40s or 30s with 401(k)s, 70 percent in stocks is OK, even in the current market climate, she said. She notes that people saving for retirement will not need to tap the money for years, allowing them to ride out the current environment. An exception would be money for a student going to college within a couple of years. That shouldn't be invested in stocks, and Stevens said she would look for rallies or sharp upturns in the market to withdraw it if there is no other source of college money.

Meanwhile, El Cajon, Calif., financial planner William Bengen is more reluctant to expose money to stocks now than many of his peers.

"We are probably in a secular bear market that started in 2000, and there might be quite a bit of downside still," he said. A secular bear market lasts many years and can have extreme, sometimes lasting, rallies within it.

The reason?

Bengen thinks stocks are still expensive and could fall another 20 percent to get to attractive prices. It's also "very possible we head into recession again." As a precaution, he has retirees invest only 15 percent of their portfolios in stocks. For middle-aged people with 401(k)s, he would have about 35 to 40 percent invested in stocks, "but be ready to move full bore" to buy stock funds if stocks plunge, as he expects they will.

As for gold, he has aggressive investors keep about 15 percent of their money in gold exchange-traded funds. But for more conservative and elderly people, it's about 7 percent.

"In 2008, gold dropped 50 percent," he said. "That's not a safe haven for an 80-year-old."

Face your stock market demons