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Reconsider bailing on the stock market

by Jim Sloan

If the recent downturn in the stock market has you worried that your investments need to be in a safer place--such as a certificate of deposit or a high interest savings account--it might be a good idea to take a deep breath and reconsider.

According to Forbes.com, although declining stock values could hurt retirement savings accounts such as your 401(k), the stock market drop also allows you to buy more stock for your money now that prices are low. That's why smart investors don't rush to sell their stocks when prices are down, Forbes said. This phenomenon of maintaining steady, regular investment in stocks despite fluctuations through 401(k) savings account is called "cost averaging."

Time to increase savings rates?

The low price of stocks that accompanied the 634-point drop in the Dow Jones industrials in early August might have been a signal to increase your 401(k) contributions in an effort to capitalize on the bargains, Forbes noted.

Many of us have fresh memories of the pounding our investments took after dot com bust in 2000, and then again in 2008 in the wake of the housing market collapse. According to the Los Angeles Times, American investors in general have become more skeptical about the value of putting investments into a stock market that seems so volatile.

For instance, small investors have pulled $350 billion out of the stock market in the last 5 ½ years, the Times said, and continued to re-channel their money to such things as money market accounts, savings accounts and other options providing the best savings rates even when the stock market was doing well. There are roughly 100 times more Internet searches for "saving" than for "stock investing," the Times reported.

The big drop in the stock market followed Standard & Poor's decision to downgrade the United States' credit rating from AAA to AA+. That decision came on the heels of a Congressional showdown that had lawmakers deciding at the 11th hour to raise the nation's debt ceiling and continue to pay its debts.

The security of bonds

The drop in the bond rating also had many people with investments in bonds concerned about whether their money was safe. According to Kiplinger's Personal Finance, investors should not expect big changes in bond prices and yields in the coming months.

Although bonds' low yields in recent years haven't made them attractive to individuals, Treasury bonds remain a safe place for many banks, governments and insurance companies to park their money, Kiplinger's said.

If you own Treasury bonds, Kiplinger's recommends that you hold onto them until they mature. When that time comes, investors should consider investing in investment-grade quality bonds, such as corporate and municipal debt.

As Forbes.com notes, its important for investors to have the right mix of bonds, considered 'safe' investments, and stocks, which until recently can be counted on over the long haul to increase in value more than the best cd rates or online savings accounts. Selling stocks prematurely locks in your losses

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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