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January 22, 2008
What do you do with a global selloff?
Given yesterday’s meltdown in global stock markets, “all this talk of ‘decoupling’ may have been a bit premature,” says Steven Pearlstein in The Washington Post. This time the U.S. matters because foreign banks and other financial institutions haven’t yet faced the music regarding their exposure to U.S. subprime mortgages and “more exotic securities.” European banks are just starting their write-offs, and China and India have their own bubbles. But Russia’s and Brazil’s declines? “This kind of contagion is rarely a one-off event.” So forget inflation and moral hazard: if central banks want to stop “another wave of panicked selling,” it may be time to cut interest rates.
The U.S. may indeed “join the fray” of the global selloff, but hold on before you abandon your 401(k), says Robert Daniel in MarketWatch. Small investors should resist the “urge to sell into the global tidal wave,” and instead pay down their credit card debt. And as hard as it is to watch your retirement account shrink, it is worse to “follow the market into the tank.” So continue paying into your 401(k), but also consider starting or contributing to a Roth IRA. Now is a good time to reevaluate your portfolio, though—emerging markets and growth stocks may now be overvalued, and your stock holdings may need to be rebalanced.
of The Week magazine.