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It seems as if I start every article the same way these days: Another day, another batch of wild developments in the market.
I'm still catching up with Tuesday's action as I write this -- I spent a good part of the day at the dentist, half-watching CNBC out of the corner of my eye -- but it does appear that some progress was made toward unsticking the commercial paper market, thanks to yet another "unprecedented" move by the Federal Reserve.
Meanwhile, several European governments are contemplating action to support the latest maybe-troubled banks, including Royal Bank of Scotland (NYSE: RBS ) and Barclays (NYSE: BCS ) . Australia's central bank cut interest rates. Exchange specialist CME Group (Nasdaq: CME ) and Citadel Investment Group are teaming up to create a trading platform for credit default swaps, which will hopefully bring some much-needed transparency to that market. In all, regulators and key actors throughout the world are taking hopefully constructive steps, now that the problems are better understood.
With luck -- and further interventions, here and abroad -- maybe we'll be able to settle down and have a fairly conventional global recession. That would be bad, of course, but it wouldn't be stock-up-on-ammo-and-canned-ravioli bad, which -- my secret fondness for Chef Boyardee notwithstanding -- is definitely progress.
Meanwhile, our retirement portfolios have taken a hard hit, and there may still be more to come. What should we be doing?
Can you stand to look?
If you can't deal with thinking about your retirement account balances yet, I totally understand. In fact, if you're more than 10 years or so from retirement, there's no need to look until things settle down. Turning off the TV news and going for a walk instead continues to be a fine idea. We've come through a heck of a storm already, and even though the storm might rage for a while longer yet, a damage assessment and repairs can wait until the winds die down.
When you do look, you'll probably see some scary-looking losses, and you'll probably start thinking about how to reduce further losses and how to prepare for more storms going forward.
This is all good, as long as you remember rule No. 1:
Panic leads to bad decisions -- decisions made out of fear, often in haste. If you're inclined to make a change to your portfolio, think about it for a day or two. In the grand scheme of things, in the context of a decade or three of being invested before you retire, a few days will make no difference.
Rule No. 2 is: Remember that you can only do so much. If you're looking at your 401(k), your universe of investments is probably pretty small -- a few dozen mutual funds, most likely. Your options are limited, but you do have options. And as Fool retirement guru Robert Brokamp pointed out in a recent update for Rule Your Retirement members, many factors affecting your portfolio (the Fed, housing prices, other investors' panic) are beyond your control -- focus on what you can change.
Roll up your sleeves
If you want to make some changes to your portfolio, here's some food for thought:
Diversify. Roger Gibson, an asset-allocation expert interviewed in Rule Your Retirement not long ago, hammers home this point: Spreading your portfolio across multiple asset classes, all of which behave differently at different times, reduces volatility and increases returns over time. A fund such as Stratton Small Cap Value (STSCX), which holds stocks including ON Semiconductor (Nasdaq: ONNN ) , Energen (NYSE: EGN ) , and Amedisys (Nasdaq: AMED ) , is arguably a great investment right now, but it shouldn't be your only investment. Far from it. Check out Rule Your Retirement's model portfolios for a look at a great diversification roadmap (it's a paid service, but grab a free trial for 30 days of access), and don't be afraid to dial down emerging-markets exposure and add some bond investments if you want to reduce risk even further. Speaking of which ...
Remember our old friend, the bond. It's true that study after study has shown that stocks outperform bonds over the long haul. But high-quality bonds give you income to reinvest -- and thus growth -- no matter what the market is doing. And unlike the dividends on blue chips, such as the one on my Bank of America (NYSE: BAC ) stock, a bond's income stream won't get cut when times get tough. You shouldn't be entirely in bonds, but some bond exposure will help smooth the ride now and in the future. Bond index funds are the best way to go here, if your plan has them.
No matter what, keep investing. I recently overheard a very smart acquaintance saying that this was a terrible time to be investing in her 401(k). She's very smart, but she was also wrong: Your contributions buy more shares now than they did six months ago. Adjust your investment mix if you feel the need, but keep adding new money -- 20 years from now, you'll regret it if you don't.
And last but not least, stay informed. I've mentioned the Fool's Rule Your Retirement service already, and I think it's the most cost-effective source of expert advice specific to retirement investing out there. From specific investment recommendations to expert interviews to timely updates to a message board filled with thoughtful advice, it's a complete source of guidance for retirement investors in these difficult times. Complete access for 30 days is free of charge -- with absolutely no obligation to subscribe.