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Repeat After Me: Do NOT Panic!
In case you haven’t noticed, the stock market hasn’t been doing so well lately. And after another precipitous drop yesterday, a lot of people are very concerned. So what is the best course of action to take under these current conditions?
There are two ways to look at the current situation
1. This is the end: the US economy is crumbling, the market will never recover, everyone will lose his/her job, and no one will have any money.
2. This is a painful but temporary disruption: things will be hard for a while but the market will eventually recover. Start by looking at the history of the US stock market – it has always recovered in the past, right? Isn’t the market higher than before The Great Depression, or the Savings & Loan Crisis, or the tech-market crash of the early 2000’s?
If you think the economy and the stock market will recover (eventually), then you should not do anything rash. It’s time to take a deep breath (maybe even stop listening to all the talking heads screaming "PANIC!") and sit tight.
Remember, the goal is to buy low and sell high
If you were going to get out of the market, you should have already done it. It’s too late to take action now – all you’d be doing is following the strategy of buying high and selling low.
If you are a long-term, buy and hold investor and you believe that #2 above is the current reality, then the best course of action is to do nothing. Actually, you might want to consider buying more now that stocks are "on sale." As of this writing, the major US indices are all approximately 40% off of their recent highs of about a year ago. If you believe they will recover, that sounds like a good bargain to me.
For a buy and hold investor, having an appropriate asset allocation is the best strategy to ride through situations like this, not jumping into and out of the market in an emotional frenzy. In fact, if you still have a number of years before retirement, the current events might even be viewed as good for you. I believe it was Alan Greenspan who stated in his book, The Age of Turbulence , that a prolonged recession early in a working career was actually good for building a comfortable retirement nest egg. That person is able to purchase many more shares of stocks or mutual funds due to the lower prices and see them appreciate when the market finally recovers.
What is Warren Buffet doing?
Warren Buffet has a quote that I feel applies very well to the current situation:
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." Warren Buffet
It certainly seems that now is a time when everyone is fearful…and as you would expect, Buffet seems to be out buying (He recently invested $3 billion in GE , for instance). Since his net worth exceeds most people’s by a few billion or so, I’d tend to follow his advice before that of all those on TV screaming about how bad everything is right now.
My disclaimer
Now, I certainly don’t know what the absolute best course of action is in the current economic climate (no one does). But I will tell you that I am following the advice I put forth here (I’m not like one of the professional mutual fund managers who have their own money investing in index funds). I have not removed any money from the market and, in fact, I just signed up to have Vanguard put a few hundred of my dollars into some of their index funds each month (and after reading about the 40% off sale…I’m very tempted to find some more money to put into mutual funds).
What about someone close to retirement?
Now, if you are close to retirement or in retirement and have all or most of your money in the stock market, then unfortunately I don’t have too much good advice for you. After a disaster strikes is not the best time to create a strategy to deal with the disaster – it would have been much better to plan for a possible economic meltdown beforehand by diversifying your assets among stocks, bonds, cash, etc.
What to do now is a much tougher question for someone who needs the money sooner. The real question is "what is the market going to do next?" Is it going to go down more? Are we at the bottom? Will it recover and, if so, how quickly? Unfortunately these are very difficult questions to answer (well, they’re easy to answer just not easy to answer correctly). Whatever course of action you decide to follow, be cautious – if you get out now, make sure you don’t miss the market as it starts to go back up or you’ll be worse off than if you did nothing now. It would be great if you could withdraw your money now and get back in at the bottom, but even the pros have a very, very hard time doing that. In fact, if you were a good enough investor to be able to do that, you would have taken your money out of the market about a year ago.
Emotion does not mix with investing
I’m really sorry that I don’t have a good answer for you. The one piece of advice I would give is do not panic or act out of emotion . If you decide to pull your money out of the stock market, do so because you have calmly and rationally decided that is the best course of action and not because all the TV personalities are screaming "panic! calamity! sell!"
As for me (someone with a number of years before retirement), I think it’s time to follow Buffet’s advice and get a little greedy.
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6 Responses to “Repeat After Me: Do NOT Panic!”
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Beautiful. Thanks for writing this – I like what you said about Buffett and taking his advice over all the talking heads who get paid to create a story.
Truth is these are the best of times for traders. If you limited your loses [sell everything with 8% loss] and are buying those positions back now you are very, very happy. This is a traders paradise! I bought the DDM this morning at DOW down almost 700 and sold it on the mid day launch. Don’t forget metals/mining always lead the charge back so I bought RIO at $11.30 and sold it for $12.27 a couple hours later. What more could you ask for!
Now’s definitely the time to be buying!
@Ray & @Ali – I agree, though if you finally sold on Friday and tried to buy back on Monday, you might not be feeling so good. It’s unfortunate that a large number of people seem to be buy after the market goes up and then they panic and sell after the market goes down. Buy high & sell low won’t make you much money in the long run.
Sorry Ray, while I can appreciate a bounce and a jump in stock price, there is little ability to predict in such short runs ( day-trading has largely gone the way of panning for gold. Sure you could do it…but why?).
There are some great companies out there that are on sale….. but if you don’t know what you are doing, stick with mutual funds or ETF’s.
Very useful stuff here. I am researching content for an article. Bookmarked, will be back.