WHAT DO YOU DO IF YOU PANICKED ON THAT DAY (LAST AUGUST) WHEN THE DOW DROPPED BY 1,000 POINTS BEFORE IT EVEN OPENED?

This post is somewhat of an Inner Mind-Game essay:  What did you think, when did you think it, and why?

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There was a day last August when the Dow Jones Industrial Average was trading, before the markets even opened, as if it would open (at 9:30 EDT) down by more than 1,000 points, or roughly seven percent.  I did a quick gut check, and sub-consciously told myself three things:  I won’t do anything until I know what is happening, and why; I knew that our investment goals and preferences hadn’t changed recently; and I knew that our current mix of securities was such that I could feel comfortable with it.  Furthermore, I realized that no one really knew, for sure, which way the markets were headed anyway!

Now, I don’t say these things, mind you–a couple of months after the fact–just to pat myself on the back. But, through my decades in the financial markets, I have witnessed:  the “Stagflation” of the 1970s; President Richard Nixon’s resignation in 1972; the near bankruptcy of New York City in those same years; the 50% drop in bond prices soon after the Fed raised short-term rates by two full percent on one day in 1981; the stock market crash of 1987, when the Dow dropped 22% on that day; the bursting of the “Dot-Com Bubble” in 2001; the 9/11/01 Attacks and The Great Recession (4Q07-1Q09).

That last one, the Financial Melt-Down of seven years ago was, by far, the most grueling for me personally.  That’s because I had to work through it everyday for eighteen months and:  confront those markets head-on; advise my clients and calm their fears; and keep an eye on my own (then pre-Retirement) portfolio, as well.  So, if you expect to keep money in the financial markets in the future, be prepared for another roller-coaster ride or two…or three or…!

Every once in awhile, I think of the people who, during that Financial Melt-Down of seven years ago, panicked and shifted whatever was left of their financial assets into cash. Now, if you were in your 20s or 30s, you would still have had plenty of time to reestablish your investments and continue saving for retirement.  But, if you were in your late 50s or 60s, a shift into cash–probably earning less than one percent up until now–you are merely eroding your future spending ability.

For those who panicked and called their securities firm to liquidate everything–in any of these scary times–the potential of an actual person questioning your motives and having you speak to an advisor or broker who knew you, might have actually provided you with some alternatives to consider.  In many cases, the markets often start to bounce back in the next day or two, as on that day last August, when they recovered half the 1,000 point expected loss before the market actually opened.

Getting back to those folks who liquidated in 2008, think of how much better shape their finances would be in, if only they: left perhaps half of their money invested; or shifted those funds into more defensive securities (consumer staples, health care, utilities, etc), but still kept it in the stock market.  Also, if you do panic and liquidate money in tax-deferred retirement accounts, at least leave it in those accounts, even if in cash.  That way, you won’t have to pay taxes while you decide whether to get back into the markets or not.

Its most important that you have a plan, so you will know why you are investing.  Understand exactly what you want your investment portfolio to do.  What are your goals (i.e. children’s education; retirement; a first home; etc.)?  Your risk tolerance?  Time frames for achieving each goal?  Do you have other financial resources to fall back on?  Also, do your homework and get to, at least, understand the  basics of investing.

Lastly, always monitor your portfolio on a regular basis and re-evaluate it, from time-to-time. Reaffirm whether you are still satisfied with each of your current securities?  If you make changes, have a reason for doing so.  And lastly, if you deal with an investment representative, speak with them regularly, be prepared to ask lots of questions and expect them to provide comprehensive and understandable answers.

But, its important that YOU personally get involved with your portfolio.  A little knowledge helps overcome market fears!

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  1. #1 by Russell Manning on October 31, 2015 - 7:02 PM

    Nixon resigned in August, ’74. But your observations are so accurate.

    • #2 by cheekos on October 31, 2015 - 7:45 PM

      You are right! In 1972-3, the country was going through the Watergate Events and Hearings, which eventually brought “Trickie” Dick down. Remember that the markets can take bad news–which they can adjust for–better than uncertainty, which they cannot. The markets were truly clueless at that time.

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