What To Do When The Market Crashes

| September 17, 2008 | 0 Comments

We find ourselves living in uncertain times . . . and no one knows it better than my grandfather.  He lived through the great depression.  He was old enough to remember the mass layoffs and the turmoil in the economy.  He remembers stuffing cardboard into his shoes to make them last longer.

I enjoyed a Sunday dinner with him shortly after Bear Stearns collapsed.

I explained to him the changes in the financial markets.  I told him about the “run on the bank” they experienced.  I told him about how credit was tightening and banks were refusing to lend to each other.  I’ll forever remember his comment.

“It’s just like the Great Depression.”

That comment hit me right between the eyes.

Many investors thought the bankruptcy of Bear Stearns would mark the end of the market turmoil.  Past market downturns often ended as a major company went bankrupt.  This time around we’ve seen not one but four companies fail.  Bear Stearns, Lehman Brothers, Fannie Mae, and Freddie Mac.

The scary part is, more are on their knees.

The crumbling real estate market caused a giant credit bubble to pop. Unfortunately, when credit freezes up, the economy stops working. That’s what my grandfather pointed to.  He knew when the banks stopped lending the economic engine of America ground to a halt.

I keep thinking about his comment.  “It’s just like the Great Depression.”  I know we can survive tough economic times . . . but Depression?

Fear is gripping the market right now.

The perception of strength or weakness is now more important than reality.  For now, the fundamentals of stock investing are out the window.

What do I mean by that?  Simply, the market’s now focused on the worst case scenario.  They’re looking for who’s next to fail.  Who’s going to hit tough times?  The market’s more concerned about this than what corporate profits will be next year.

Fear can feed upon itself.

You might be gripped by this same fear.  You might be thinking about selling your holdings.  You might be thinking about stuffing the money in your mattress.  Or you might be stocking up on canned food and buying survival supplies.  Before you plot your escape to the mountains – let me make a call for calmer heads to prevail.

So what should we do now?

First, we need to remain calm.  Remember the last time the market dropped like a stone?  September 11, 2001 was a meaningful day.  A few months later, the markets were up.  After the 1995 bombing in Oklahoma City, the markets fell.  A few months later they were in positive territory. Back in October 1987 the market dropped by 500+ points.  And a few months after that the markets were up.  (Don’t forget Warren Buffett was buying stocks with both hands back in 1987.)

Do you see a trend here?

Now, there’s no guarantee the market will be up in a few months.  But we’ve got the world’s largest and strongest economy.  I wouldn’t bet against that, not over the long term.

Here’s the other thing you can do.  Be diversified.

Don’t be afraid to put some of your money in non-correlated investments.  Look to other investment choices like options, currencies, commodities, or even bonds for diversification.  Your stock investments might fall in value, but your other investments will hold their value, or even go up.

This will help on days when the market plummets.

Lastly, I’d hedge part of your portfolio.  We’ve discussed this before so I won’t bore you with the details yet again.  Let’s just say, I know an investor who hedged part of his portfolio with put options.  He’s laughing all the way to the bank.

Remember in times of extreme market volatility it’s important to hold tight to your investment strategy.  Don’t panic.  Diversify with other investment products and don’t be afraid to hedge part of your portfolio.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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