How to Survive the Financial Crisis... with Your 401k and Your Sanity Intact

What a mess. Who ever thought we would see the financial world brought to its knees like we have the past two weeks? Just think, household names like Bear Stearns, Merrill Lynch, Wachovia and WAMU are now a thing of the past while insurance giants like AIG have gotten by with the skin of their teeth thanks to billions from Uncle Sam. Fannie Mae and Freddy Mac are now officially directed by the government, the same government that is now poised to inject billions into the frozen banking system. And while terms like sub-prime mortgages and credit default swaps have become a part of our every day jargon, we the tax payers are billed to keep the whole ship afloat. Is it any wonder that the stock market has been on a roller coaster ride like we haven't seen since the Great Depression?

As if $4 gallon gas, rising oil prices, plummeting home values and rising unemployment weren't enough. What's next? A new president?

Has Your 401(k) Become a 201(k)?

While politicians and financiers try to sort the "crisis" out, your 401k or IRA has probably taken a huge hit right along with the Dow Jones and NASDAQ averages - both off their highs by almost 40%. Wow, that really hurts and there's no way to sugar coat a blow to the head like that. So if you feel like you've been taken for a ride, it's because you have. If you're money is predominantly in stocks, then you've likely taken at least a 20% hit or more even if your advisor's done an excellent job of protecting you from the downside. And you've probably lost a lot more than that.

But before you go out and sell off your investments and bury the cash underneath the bedroom mattress, know this one simple fact: markets have always fallen and markets have always risen. And this too shall pass.

Although there are no shortage of prognosticators forecasting when this roller coaster ride will come to an end, the truth is that no one really knows. So don't believe the hype. The previous market downturns in the long gone era of the 30s, in 1974, in 1987, the technology bubble bust in 2000 and the days and months following 9/11 were all unique animals made of their own day and time. Today's crisis is entirely different and magnified by the far reaching effects of globalization while public panic is fed by today's overwhelming 24x7 media coverage as never seen before. Nevertheless, history does teach us this, that markets do recover lost ground and then head higher. Eventually. So what do you do in the meantime?

1) Save in the good times. Save in the bad times. But always save. Don't stop now! Continue to save and invest in your retirement plan on a regular basis. Doing this helps guard against short-term market volatility and risk by spreading one's investment over time. This is known as dollar-cost averaging.

2) Don't put all your eggs in one basket. You've heard it before and you're going to hear it again. You need to properly diversify your retirement savings among different funds and fund types. Determining how to do this is not difficult and is based on your investment time horizon and individual risk tolerance. For those that would rather go on auto-pilot, there are new funds called Life Cycle Funds that automatically shift your mix of investments to a more conservative mix as you approach a particular year called the "target date" (typically your near-retirement date). As a result, these are often called Target Date Funds as well. Regardless of how you do it, be sure to diversify and allocate your investments accordingly.

These suggestions are straight from the first page of Investing 101, but they are still the most important principals for investing and saving for retirement. For those who have realized losses in recent weeks, remember that saving for retirement is a long-term process. So turn off the TV and get back to the work of doing your thing and letting Father Time do his. And if you're not sure if you're doing it right, consult with an experienced advisor.

The Million Dollar Question

So when will the financial crisis clear up? Some of the best and brightest feel that we may be in for a long couple of years, but only time will tell. As one panelist at a recent conference said, "Eventually, people will get bored with being afraid." And business will go on as usual.

Until then, just keep your cool. Remember that planning for your retirement is like a cross country flight in a jumbo jet. As winds and weather push the plane off course, the pilots (aided by sophisticated guidance technology) make regular adjustments to the plane's speed, course and altitude to make sure your flight keeps on track, stays as comfortable as possible, and gets you safely to your final destination. So if economic turbulence seems to have thrown your retirement plans off course, make the necessary adjustments and you too will meet your financial goals and arrive comfortably at your destination in retirement.