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If you thought that getting a debt ceiling deal done would lift your stock portfolio out of its recent doldrums, you got a rude awakening yesterday. With the big drop in stocks, the S&P 500 is now sitting on a loss for the year -- and bearish commentators are coming out of the woodwork proclaiming an end to the big market recovery over the past two and a half years.
Whenever a change in sentiment happens, it makes sense to do a gut check on your investing strategy. If you're already feeling pressure to do something, then a further drop will only make your anxiety level rise exponentially. On the other hand, by taking some necessary steps right now, you'll be more likely to resist making emotion-driven mistakes later on.
Welcome back, bears
In one fell swoop, those who've been bullish on the country's economic prospects seem to have turned tail and fled. It's easy to identify the world's problems right now:
- An utter lack of confidence in Europe and the U.S. is pushing investors away from ordinary stocks toward fallout-shelter investments. The gold-owning SPDR Gold (NYSE: GLD ) and the currency ETF CurrencyShares Swiss Franc (NYSE: FXF ) have both rocketed to all-time highs in the flight to perceived safety.
- Although Congress raised the debt ceiling, the deal foreshadows a series of contentious future fights on the issue. That bodes ill for the AAA credit rating that the U.S. currently enjoys, putting pressure on financials Citigroup (NYSE: C ) and Bank of America (NYSE: BAC ) as they face the potential for higher rates that will likely result.
- Moreover, we've already seen some of the fallout from how budget cutting will affect businesses. With Medicare potentially vulnerable to cuts in reimbursement rates, health-care plan managers UnitedHealth (Nasdaq: UNH ) and WellPoint (NYSE: WLP ) , as well as nursing companies like Kindred Healthcare (NYSE: KND ) , are likely to struggle to maintain growth.
- The largest contribution to economic activity comes from consumers, and they're doing exactly what economists feared they might: earning more but spending less. Personal income rose 0.1% in June, but spending fell 0.2% -- the first monthly decline in almost two years.
In addition, technical analysts are pointing to violations of the S&P's 200-day moving average as predicting further declines. Meanwhile, fundamental market strategists have drawn parallels between the austerity measures in the mid- and late 1930s that extended the Great Depression and the current budget deal.
Take care of you
Obviously, you can't control these macroeconomic factors. What you can do, though, is look at your own financial situation to protect yourself. Here are five things you should do right now:
1. Get your emergency fund ready.
Having cash available is critical to keep you from having to liquidate stocks after they've dropped. Having enough set aside for three to six months of expenses gives you a cushion against what may happen to your job and your portfolio.
2. Check your portfolio risk.
After a long run in stocks, you might have more of your money in stocks than you're comfortable with. Rebalancing to your ideal asset allocation could reduce your risk exposure to a more secure level.
3. Keep on investing!
When stocks are dropping, it's hard to invest new money into the market. But doing so can give you some of the best deals you'll ever get. Those who did so during the 2009 market swoon were richly rewarded in the ensuing months and years.
4. Make a watchlist.
Great investors make shopping lists, and then are patient enough not to buy shares until they go on sale. If the market keeps dropping, some of your favorite stocks might finally give you the bargains you've hoped for. Don't miss this chance.
5. Do a gut check.
The most important thing about surviving a market downturn is mental fortitude. If stocks fall further, you might want to panic -- but the only way to get those losses back is to wait until your long-term investments pay off for you.
It's never fun to see a falling stock market take away your hard-earned wealth. But by taking these simple measures, you can at least make sure you won't make any mistakes you'll later regret.
It's also smart to make sure you have the right stocks in your portfolio. The Motley Fool has five stocks it owns that it thinks will perform strongly for you as well. They're in this free special report, so take a look and then get them on your watchlist today.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.