Markets

Stocks Plunge: Correction Arrives

Updated on: August 5, 2011 / 6:52 AM EDT / MoneyWatch

Now that was a good ol' shellacking. Stocks plunged by 4-5 percent, culminating a very nasty 10 trading days that has put us in correction territory (down 10 percent from recent highs). Here's what happened:

DJIA 11,383: -512 points or 4.3 percent
S&P 500 1200: -60 points or 4.8 percent
NASDAQ 2556: -136 points or 5.1 percent
US 10-Year Bond: 2.4 percent
September Crude Oil $86.63: -$5.30 or 5.7 percent
December Gold $1659: -$7.30 or 0.4 percent

The selling started overseas, with more concerns about the European debt crisis spreading to Italy and Spain. But at the end of the day, there's no avoiding the bitter truth: the global economy slowed significantly in the first half of the year and there's no obvious antidote to that malaise.

As the wise Allan Roth points out, while the past ten days have been uncomfortable, let's put the selling in context: "stocks being down 13 percent since April 30...has more to do with a pull back from the 119 percent surge since the 2009 market bottom."

It is exactly for days like this that I developed these "9 Steps to Investor Sanity":

Take a deep breath.
Do not make a trade, unless you had planned to do it previously.
Repeat Step #1.
Ask yourself: will the news impact the economy over the long term?
If economic impact is significant, review long-term investment allocation to determine if your portfolio can weather the changes.
If allocation needs to shift, review your risk assessment and determine new allocation.
If you plan to reallocate your portfolio, review all trades after markets close and submit orders before they open-you are making long-term changes to your portfolio, so don't get spooked by the daily market gyrations.
If you have no idea how to answer questions 4, 5, 6 and 7, consider speaking to a financial advisor.
Remember my father's famous saying: "It's never as good or as bad as you think!" (Why listen to my dad? He was an options trader on the floor of the American Stock Exchange for three decades and has seen his share of crazy up and down days!)

For the record, I have been sitting on too much cash coming into this downward draft. I added a small percent of my total portfolio to the following two assets: HDV (iShares High Dividend Equity Fund) and SDY (S&P Dividend ETF).

For most people, a well-diversified portfolio that you rebalance on a regular basis should get you through these scary days.

Jill Schlesinger

Jill Schlesinger, CFP® is the Emmy-nominated business analyst for CBS News. She covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, "Jill on Money." Prior to her second career at CBS, Jill spent 14 years as the co-owner and chief investment officer for an independent investment advisory firm. She began her career as a self-employed options trader on the Commodities Exchange of New York, following her graduation from Brown University.

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