Losses are basically locked in two ways: (1) Selling out low and (2) not continuing to invest (or rebalance back to your target allocation) after a decent drop.
Those who pulled money out 10 -12 years ago and never got back in are now scared because the market
was too high and
now has dropped ~10% this last week. When, if not now, are they going to get in for the long haul? Probably at another peak. It is an individual decision and when money "disappears" it becomes tough, but having an
Investment Policy Statement can help you hold yourself accountable in tough times.
Everyone has to decide their own allocation but if you're not sure, you might consider the following (exact #'s are depending on your risk tolerance):
Total Bond Market Index: Your age minus 10 or 20
Equities: the remainder (in this allocation: 70-100% Total Stock Market Index / 0-30% Total international market index)
If you're getting some kind of 401k match and/or can do a Roth, the benefits are great even (especially) in down markets! If you're speculating by buying individual stocks, you're probably better off going to Tunica or Vegas
At least then you'll get a free buffet!
Here’s what
Boglehead’s.org wiki says about the
order in which you should pay off debt and invest (modified slightly by me with some commentary on the interest & return rates): “Here is the
most likely order of priority for investments versus paying off loans; it does depend on the rates, so these examples are based on
typical rates which may not be accurate at any specific time."
- Invest in 401(k) to get maximum employer match (return rate may be over 100% in the first year)
- Pay down credit cards (interest rate may be 10-30+%)
- Pay down non-deductible auto or student loans, or other medium-rate loans (interest rates typically 5-8%)
- Invest in Roth IRA, deductible IRA or decent 401(k) (compare at rate of 5% on Treasury bonds)
- Pay down deductible mortgage or student loans (rates are around 4% after tax)
- Open and Invest in taxable investment account with index funds … (at Fidelity, Vanguard, Schwab, etc – but definitely NOT anywhere where you’re going to be charged management fees of up to 2% per year!)
- Do not pay down/off subsidized loans as long as subsidy lasts (or rates of 0-3%) ”