In this financial turmoil caused by sub-prime mess and wisdom of Wall Street veterans everything looks bad. Declining 401K balance is heart breaking and fear starts creeping in forcing us to think "what next?".

As of September 2008 I have lost nearly 20% in my 401K from the fall of 2007. Nothing is working towards stock market stabilization - even the signed bill of $700B didn't do any good. I wonder how the government and wise advisers succeeded in fooling leaders in congress to sign the bailout package (that's a completely different story). Bottom line is that for stock market to do well fundamentals must be strong and that's lacking in US economy right now and we see Dow under 9500 first time in 4 years.

Declining stocks have reduced the investment values and most of use are sitting with much lower 401K balance. Most of us must be wondering if we should move all the money into bonds right away or we should stop contributing to 401K completely.

Here is my suggestion:

Don't Panic

What goes up comes down and what comes down goes up. Don't panic with market going down.

Market is going through a good correction and the economy looks quite gloomy going forward. But this is exactly the time when you make most of your money. For the same amount your new 401K contributions are buying more shares that what it could buy a year ago. Once the prices of these share go up you would be sitting with smiling face and fat profits.

Patience is the key. If you have more than 10 years to retire don't even look at your declining 401K portfolio and get a heart attack. Make sure that you are well diversified and you have well adjusted your money into bonds and shares depending upon the years you are about to retire. If I was going to retire in 10 years I would put 75% or more of my money into bonds. I don't want to wake up and see 25% decline of my 401K from $1million to $750K in my retirement when I won't have time to recover the losses. Better stay with the safety of high quality bonds.

If you are retiring in less than 5 years chances are that you might not be able to recover your losses if you move all of your assets into bond market immediately. You will have to keep more than usual percentage of your asset in stocks to recover the losses when market comes back up in due course.

Stay focused and follow the basics that are as follows:

Be well diversified

Have proper mix of stocks and bonds based on your age

Keep regular investments going, e.g. 401K

Use dollar cost average if investing outside 401K

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