What To Do When The Market Crashes
The Dynamic Wealth Report
September 17, 2008
Just Like The Great Depression?
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.
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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.
• Oil (Below $93 per barrel)
Oil prices continue to dive. We’re now close to 30% off the high set
just a few months ago. The concern is economic turmoil will create a
drop in longer term demand. Prices are falling dramatically.
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