My net worth dropped 8% in Q3, but my CDs saved me from worse

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I dove into my investment websites this weekend to see how much damage the third quarter had done to my net worth.

It was bad, but not as bad as it could have been, because my CDs did exactly what I needed them to do and provided a rock solid base for my portfolio.

When the quarter started, I had about 26% of my net worth in CDs, 18% in government and corporate bonds, and 56% in equities.

I was holding that cash mainly because I'm old enough that I should be reducing my exposure to the volatility of the stock and bond markets.

But I also figured that it would offer some protection against just the sort of unpredictable craziness we saw this summer from Washington and Europe.

In the end, nothing much happened. The U.S. didn't default on its debt. Nor did Greece. At least not yet. And the economy continued to grow -- albeit at an alarmingly anemic rate.

We certainly didn't come close to the financial chaos of three autumns ago when the failure of Lehman Brothers and the mortgage crisis brought the global banking industry to the verge of collapse and triggered the worst economic downturn since the Great Depression.

Yet the S&P 500 fell 14% and the NASDAQ declined 13%, their worst losses since that epically awful fourth quarter of 2008. The Dow was down 12%, its biggest drop since the first quarter of 2009.

And my net worth?

It was off 8% from the end of the second quarter.

Although I'm not happy about that, it wasn't the double-digit loss I'd feared, and for that I'm grateful and relieved.

For the year, I'm now up a pathetic 1%.

I would be showing a loss if I hadn't continued to make regular contributions to my 401(k).plan and added to my CD holdings.

I'm starting the fourth quarter with CDs accounting for 28% of my net worth -- and I'm good with that.

But I don't kid myself. My net worth won't rebound until the stock markets do.

I can point to a couple of reasons the stock markets should stage at least a modest recovery during the last quarter of the year:

Unfortunately, there are two big reasons the markets will remain volatile and could lurch lower over the final three months of the year:

So, what's my best case scenario for the rest of 2011?

Washington and Europe muddle along, the GDP eeks out a little growth and the markets recover enough for my net worth to show a 3% to 5% increase for the year.

Worst-case scenario?

Greece defaults. Europe must bail out the big French and German banks holding its bonds. Economists somberly agree that the U.S. is in a double-dip recession. Panic selling roils the markets, and I'm saddled with a 5% to 10% decline in net worth for 2011.

Should be fun, eh?

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