Unless you’ve been living in a cave that’s under the ocean AND on another planet, you have likely heard about a bit of trouble going on throughout the US’s financial system. First, house prices dropped, then stocks prices, now entire banks like WaMu and Lehman Brothers have gone under (taking the markets further down with them.)
While Congress and the United States Treasury Department try to figure out what to do about the mess that Wall Street (and, let’s be fair, Main Street) got us into, most investors are left trying to figure out what actions to take in their personal lives. Although I certainly don’t pretend to be an expert on the macro economy (and you don’t need to be to make good decisions when that same economy is acting crazy), I will offer some advice. The first step is absolutely essential; fortunately, it’s pretty straightforward:
This is a pretty standard rule in any scenario of perceived crisis. If you’re panicked, you can’t think straight. If you can’t think straight, you can’t make good decisions, SO RELAX! Take a deep breath, remind yourself of all the things that are going fine in your life (or at least pretend if things aren’t), and try not to think about that tanking retirement fund.
Really though, after you’ve calmed down, stop and reflect on your personal financial situation. (Stop worrying about the rest of the country for a minute, and do Ayn Rand proud by thinking only of yourself, and your immediate financially dependent family, if applicable.) If you’ve followed the rules I’ve recommended, you are hopefully already in solid financial shape. If you’re not, you need to apply the next step. (Even if you don’t think you need it, read over it anyway, just in case there are some things you’ve missed.)
Get fit financially
No course changes here folks, continue to pay off your high-interest debt, establish a short-term “emergency fund” (you could put it into a Money Market Fund like Vanguard’s VMMXX. Don’t worry, the government has said it will guarantee Money Market Funds for a while.) Get yourself the necessary insurance for your health, life (I believe term is best for most people), disability, car and house, and whatever else you need insured. (Keeping in mind that many of those types of insurance may be provided by your employer at a good price. Check into the details with your Benefits department at work.)
Note that we haven’t decided to take any different course of action yet due to the fiscal crisis that we’re facing. “But, surely” you might be saying, “our plan of action has to change when it comes to our investments, right? The stock market just isn’t safe any more! Our retirement and kid’s college funds are in there!” Well, sorry to disappoint, but the next vitally important step in our plan to deal with these troubling times is…
Well, almost nothing at least. DON’T rush to cash out your stocks and bonds. DON’T take all the money out of your savings and checking accounts to stuff it under your mattress (the FDIC insures those deposits at up to $100,000 per account.) DON’T lose faith in the stocks, the number one wealth-creating opportunity available to all Americans. In fact, the only “change” I might recommend is to strongly consider starting to invest in stocks (and to continue your regular investing if you’ve already started.) Over long time periods, stocks are by far the best investment you can make with your money.
Unless you plan on needing the money in less than 3-5 years, the majority, if not ALL, of your long-term savings should be in stocks. That especially includes your retirement, young children’s college funds, etc (assuming, of course, those events are still several years away.)
With the market in turmoil, it can be very difficult to maintain your disciplined investing strategy. Stick to it! Keep investing regularly, DON’T try to time the market, and avoid trading in and out of stocks. The market has been hit hard recently, but as history shows, the biggest upturns in the economy generally follow the biggest downturns. Don’t miss out on a huge rally by setting your long-term money on the sidelines.
Remember that volatility (referred to as “risk” by some folks) is your friend. Steady investments like bonds and CDs generally pay low to middling returns. When you buy (and more importantly HOLD) those broad index funds (like the total stock market index fund VGTSX from Vanguard), those short-term ups and downs historically translate into huge gains after many years.
So, to summarize, DON’T PANIC, get yourself financially fit enough to weather any financial storm and keep investing regularly in a diversified collection of stocks, like low-fee index funds (that way, if one of them blows up, you’ll have plenty of other quality business to fall back on.) Your own financial security is in your hands! This is just a broad overview of how to handle this adversity, if you have specific questions, please leave a comment or email me.
Hang in there!