The Sky is Falling!

Last week was an incredibly scary trip for the US stock market. Correction. Last week was an incredibly scary trip for the global stock markets. What a roller coaster ride it’s been. If you have a diversified portfolio, you have probably lost upwards of 40%. That’s one heck of a hair cut! At least 2 trillion dollars of wealth have been lost in the US market alone. Devastating. Depressing. And the markets free-fall may not be over yet. Some experts think we could see another 1000 points shed before the markets bottom out. Then again, it could begin rebounding today. Either way, one thing is nearly certain, it’s going to be an up and down, bumpy ride for the foreseeable future. So what should you do next?

Define Your Investment Horizon

It really depends on your investment time line, how much time do you have until retirement, for instance. If you are like me, with 25 to 30 years until retirement, you should stay the course. In my opinion. In other words, leave your 401k, IRA, 403b or whatever ALONE. I know this sounds counter intuitive. Possibly stupid. But the fact is, if you have not made any changes yet, you missed the boat. A boat, by the way, I would not have sailed on anyway. What I mean is, you have already lost 35 - 40%. If you sell off your shares, you effectively “lock in” those losses, forever. On the other hand, if you reach inside and find those brass kahunas, make no changes and in fact continue to make your weekly/monthly contributions, you will probably look back in 10 years with rational exuberance. Historically, the best time to invest in the stock market has been after a major correction. The best financial decision my wife and I ever made was to continue investing in the weeks following September 11th. We looked at it as a patriotic show of support for the country. Kind of a middle finger at those responsible for trying to destroy the heart of our financial system. At the time, it almost seemed crazy to do so with so much uncertainty in the market and whether or not there would be more attacks. But our decision has paid off nicely. Just like the market rebounded after September 11th, I believe the markets will return to fight another day. As we did seven years ago, we plan to stay the course and continue contributing to our retirement accounts and other investments.

If your time line is less than 10 years or worse, you are trying to retire now, you obviously have a much more complicated situation. I would seek some good financial advice from a professional. A key decision is whether you can afford to wait out a market recovery. However, as I said earlier, if you have not made any changes, you have probably already lost 35-40%. If this is the case, I would have a hard time selling this late in the game and would opt to stay the course. Again, this is JUST MY OPINION.

Try To Avoid Knee Jerk Reactions

My wife is the Controller for a medium-sized family owned business. She has spent much of last week dealing with employee requests to stop contributions to their 401k. Many even wanted to sell all their shares and withdraw everything. BIG MISTAKE! In my humble opinion. These folks have already lost 40% of their life savings. If they would just stay the course and continue contributing, they not only have a chance to make up their losses, but they have an opportunity to buy new shares at prices not seen in at least 5 years. In other words, there is a high probability that staying the course and continuing to contribute will pay off BIG TIME in 10 to 20 years! MAYBE, there are no guarantees, but all historical data supports my theory!

Seriously John, What Should I Do?  **

#1 - DON’T PANIC!

  • Remain calm and level headed
  • Try not to base your financial decisions on emotions
  • Remember: There will be good days and bad days
  • Educate yourself about personal finances
  • Understand your own finances
  • Seek professional advice
  • Stay invested, if possible
  • Continue contributing to your retirement accounts, if possible

So what if you are wrong John? What if the stock market does not recover?

Look, if I’m wrong and the US stock market completely crashes, it won’t matter anyway. The rest of the world’s markets will crash and burn and we will probably be submerged in a long term, world-wide economic depression. As Warren Buffet said “An economic Pearl Harbor”. You will need a wheelbarrow full of cash to buy a loaf of bread. Hey mister, can you spare a dime? Do I think that is going to happen? NO! Could it happen? YES! However, as we speak, many of those “in the know”, many of whom helped create the problem, are working feverishly to remedy the situation. They are trying desperately to head off total economic destruction (and get re-elected). Let’s hope they are as skilled at fixing the problem as they were at helping to create it.

What do you think? Are you staying the course with your retirement and investments? Will the clowns in Washington be able to straighten out this mess?

** I am not a Certified Financial Planner, Accountant or any kind of financial expert. Please consult a professional before making any important financial decisions.

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