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Commentary: Five guiding rules for your financial well-being

By Chuck Jaffe - MarketWatch - October 21, 2008

BOSTON (MarketWatch) -- With the stock market flip-flopping and interchanging hope and despair on almost a daily basis, investors would be a lot better off looking inward, at their own investment portfolio and personal financial strategy, than at the broad market.

That's because what matters most is your personal strategy and your comfort with it. In all market conditions, there is always someone crowing about what they have done perfectly, but few who step up to acknowledge their mistakes. Meanwhile, plenty of people are quietly doing what is right by the strategy they are dedicated to.

With that in mind, here are the five things investors of all stripes should be able to say about their financial plan or their investment portfolio, regardless of the day-to-day action in the market. If you can say this about your own situation, chances are you are well-positioned to ride out the current storm.

1. My finances are not keeping me awake at night

Years ago, Bob Bright of Bright Trading, one of the nation's largest trading firms, told me that in spite of the frenetic pace a day-trader keeps when the market is open, they should be able to sleep as well as any buy-and-hold investor because they have absolute confidence in the strategy they are pursuing.

If you have no clear plan or insufficient conviction in your strategy, you are likely to lose sleep second-guessing yourself.

The buy-and-hold, invest-when-the-market-looks-against-you crowd keeps the faith by saying that every bear market has been followed by a bull market that, in time, has overcome the downturn. And the stay-on-the-sidelines crowd gets its faith by saying "I'd rather be out, and safe, than losing money and waiting -- perhaps a long time -- for a comeback."

It's not a competition; both styles can be right in time. Just be sure that wherever you fall on the spectrum -- whether at the extremes or somewhere in between -you aren't going to suffer cold night sweats that eventually force you to change strategies at what might be the worst time.

2. My financial goals are still in reach

Many workers have seen their 401(k) accounts shrivel to something more akin to a 101(k), but goals are less about the dollars and more about what the money is supposed to achieve.

If a portfolio is properly constructed -- balancing short-term needs with long-term goals and realistic time horizons -- an investor should not go through a period where a downturn dashes their hopes and aspirations. It may make the mountain more difficult to climb, but proper financial plans factor in bear markets, they don't get killed by them.

"People are more panicked than they need to be," says Judy Shine of Shine Investment Advisory Services in Englewood, Colo. "There's no denying the problems, but the market has seen downturns before and investors recovered. ... You may have visions that you could afford retirement a few weeks ago and now you can't, but if you have lived long enough, you have had those visions before. You had them in 1987 or 1991, and then after the tech bubble, and people adjusted each time. Your future is still going to get here, and it's not going to be as bad as it feels right now."

3. I have enough cash, emergency funds or available credit to meet my needs

Maybe you are putting more of your money into traditional short-term vehicles, changing your asset allocation to become more conservative with money that might be needed in the next five years, or paying down debt. Having access to money that allows you to maintain your financial plan without being derailed by some disaster is essential.

Again, there is no one right way. Some people prefer to have as much invested as possible, using available credit cards as their emergency reserve. That strategy works, so long as credit grantors haven't trimmed credit limits or cut off your line of credit -- which has been increasingly common during the current credit squeeze.

Others will keep as much of their short-term needs liquid as possible, but will settle for poor yields. If you pulled money out of the market and stuck it into a money-market fund paying 0.2%, you need to manage the cash better so that you can at least get some help in growing your reserves.

4. Regardless of the market, I am working to increase my net worth

In all market conditions, paying down debt and setting aside as much as possible will pay off. While some experts have described this as the best buyer's market they have seen in decades, many individuals can't bring themselves to step in. That doesn't mean that saving should end.

5. Looking back on this time, I won't remember it for what I've done so far or my next moves

For all of the hand-wringing that accompanied the stock market crash of 1987, there's not likely anyone who is at retirement age today saying "Darned, I could have retired if only I had [fill in personal strategy here] in October of 1987."

Obviously, the intervening years have brought us several more market problems, but people who study investor behavior say that consumers either remember the overall strategy they took, or they focus in on the few moves they made that turned out to be brilliant or tragic.

"Revisit your strategy, see how far off target you are right now, make the small moves that make you more comfortable, but don't let fear force you to make a change that you will regret later," says Peg Eddy of Creative Capital Management in San Diego. "Nobody has a strategy that is perfect for the market at all times; what they need is to have a strategy that will get them where they need to go over time."

Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.

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