What is the right reaction?
I think all three are the right reaction. Which one is right for you depends on who you are and where you are in life.
The sky is falling, panic!
I think this might be a reasonable reaction for someone who just retired, or was expecting to retire soon. If your finances are RIGHT at the border of maintaining an acceptable lifestyle, this downturn has hit at the worst possible time for you.
Since you’re still fairly young, it might be reasonable to consider coming out of retirement or delaying retirement (yeah, I know it sucks – desperate times and all that). If you can leave your portfolio alone (and maybe keep adding to it) for a couple of years, you’ll probably be in a much better place to start / continue your retirement with a bit more of a cushion.
Its too late to sell (the market has already dropped), but if the drop has made it that you can’t live off of a 4% withdrawal from your savings, it’d be better to reassess your situation sooner than later.
Start Spending Like a Drunken Sailor
The Warren Buffett approach views now as a great time to build or add to a portfolio at discounted prices. If you aren’t currently investing in stocks, now might be a great time to consider setting up something like the couch potato portfolio, or the Vanguard Global Stock Index Fund. My brother has been making weekly contributions to the TD International Index (diversified international index fund with a reasonably low MER – 0.5%). Its down 41% YTD, but I think he’s going to come through this smelling like roses. Some people (like Buffett) have been stockpiling cash, looking to try to find (and buy) the bottom, but I think regular, consistent buying through this will look like a pretty savvy strategy in hindsight. Some might argue that increasing your contributions right now amounts to market timing, but I think this would be a reasonably good idea (if you have any extra cash).
This might be the ideal outlook for someone who is putting away money they won’t need for at least a decade (such as retirement funds).
What Market Downturn?
If your not willing to invest in the stock market (or you don’t have any money to add to your position, like some grubby grad students we all know), the whole situation is pretty irrelevant to you (feel free to ignore the headlines and carry on with your life). They’re talking about recession, but chances are if you have a stable job that you’re good at, it won’t make much of a difference in your life.
This would also probably be the case for someone who is well into retirement. The downturn sucks (a 40% drop could really hurt), but HOPEFULLY you’ve got the necessities of life covered by fixed-income or annuities. If it’s your heirs that will be hurt by the downturn, let them deal with it and get back to enjoying Matlock.
Wrong Response for You
I was talking to a friend recently and she was worried about the market, and thinking she should stop her bi-weekly retirement contributions (she’s about 30 years away from retirement). Panicking (and getting out of the market) would be totally the wrong decision for her. She has time on her side to see a recovery (and probably multiple more bull and bear markets) until her retirement.
Similarly, if someone was recently retired and decided to try and take advantage of the market downturn, I think they might be behaving a bit foolishly. Things might still get worse, or might not improve for an extended period, and if you’re not working you definitely want to protect the lifestyle you have. A friend of my father’s mortgaged his paid off house to buy Nortel stocks during the dot-com boom and had to come out of retirement after the crash. Not fun.