We all know that if the market drops by 50% it must earn 100% to get back to even.  We’ll, the market had no problem taking care of the first part of that equation.  The question is, how long will it take to complete that sentence?

History tells us that if you want your portfolio to get back on track, you better stay on the train.   In the past, the biggest rallies occurred right after the bear market ended.  A good example is what happened in the early 70’s.  The market lost 38% in the 12 months ending in September of that year.  But the market soared 38.1% over the next 12 months.  But how long would it take to get back to even?

If you had $10,000 in September 1973, it would be worth $6110 12 months later.  A year after that it was up to $8438.  Two years and 2 months after that,  your account value was over $10,000. But, at least in that case, you needed to be in the market in the beginning of the rally (when things seemed the very worst) in order to get the maximum recovery potential.    Of course, not all recoveries are so explosive and powerful but waiting can be costly.

Of course, I can understand why people are gun shy.  You’d have to live in a cave not to be shell-shocked these days.  But please, when all the geniuses on TV tell you it will take 20 years for the market to recover ask yourselves why these brainiacs didn’t predict this meltdown in the first place?

Here are some steps you can take to take some of the pressure off right now:

1.  If you can delay retiring, consider it. You’ll boost your social security benefits, have more years to fund your accounts and reduces the number of years you’ll draw on your accounts.

2. Cut spending. Make sure you get rid of your debt before you retire.

3.  Consider working part-time.

What if you are already retired?

Certainly, you should  take advantage of points 2 and 3 above.  Over and above that, I’m really not convinced that things are as gloomy as they may appear.   Here’s what I mean.  If you are 65 years old today and draw on your accounts, how long will you draw on them?  Maybe 20 or 30 years….or more.  Do you have time to make up recent losses? Yes….you certainly do.  A good strategy would be to keep 2 years worth of cash withdrawals in money market and make sure the balance is invested wisely.  This way, you won’t have to worry about the market.

The chart below summarizes previous market declines and how the market did shortly thereafter.  This is of course no guarantee of future results.  It does however make a strong case for what I’m trying to say above:  The riskiest course of action right now may be to sit in cash.

Like this article? You will love getting my free brilliant financial updates! No spam, and I won't give your email address to any other person or company.That's a personal promise. Neal Frankle, Certified Financial Planner, Los Angeles, California

Related posts:

• Market Update 3-20-09 & Your Weekend Reading Assignments Last week, the market staged its third-largest weekly gain...
• Investing for Retirement? Use (Don’t Lose) Your Emotions (Part I) Most everyone tells you that in order to be...
• Market Timing Strategies That Work There are strategies that use market timing that are...
• Stock Market Rally – Should You Buy or Sell Now? The market has shown “superman” strength over the last...