Ten Steps for Remaining Calm in a Financially Turbulent Time

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The Storm by aussiegall on Flickr!As I write this, the stock market has just completed the single best day in its history. This follows the worst week in its history, in which the market lost approximately 20% of its value (depending on the indicator you use). The volatility of the stock market has never been higher, and people out there are basically just guessing at this point. Case in point: Jim Cramer predicted over the weekend that the Dow would drop to 4,700 by Tuesday afternoon.

The uncertainty can be unnerving, to say the least. About two weeks ago, I argued that the only thing we have to fear is fear itself and encouraged people to be calm, but I fully understand it’s not easy to do that if you’re watching your 401(k) erratically bounce up and down like a two year old on a trampoline.

Here are ten realistic suggestions for getting through financial turbulence without your ulcers flaring up. I myself do most of these things.

1. Stay away from pundits. The talking heads on CNBC and the other cable news channels make money off of being sensational and for making stock picks that benefit them personally. Don’t waste your time listening to any commentator. Instead, look for impartial (or at least as impartial as you can) sources for your news and information. Stick as hard as you can to facts and make up your own mind. If there’s something you don’t understand, do your own research.

2. When the market isn’t turbulent, develop an overall investment strategy. Right now isn’t the time to make major changes, but once the turbulence calms down a bit, take a look at your overall investing strategy. What are your goals? Are your investments in line with those goals? A good example is retirement savings – many people are too heavy into stocks in their retirement plans and have paid the price over the last year.

3. Stick to “timeless” investment principles instead of the flavor of the month. There are a lot of investment strategies that have worked time and time again over the last hundred years or so, both in up markets and down markets. Dollar cost averaging. Value investing. Growth investing. Stick to strategies like these, not “flavor of the month” strategies like jumping head first into dot-com stocks in the late 1990s or flipping houses in the mid 2000s.

4. Don’t sell into a sell-off. Many people were tempted to sell their stocks last week because they kept losing money. If you did that, you probably quickly saw why it was a bad idea – an immediate 11% bounce happened on the following Monday. What’s the point? Don’t make a move with your investments just because that’s what everyone else seems to be doing. You don’t make money by following the herd – you only lose money.

5. Instead, sell according to your own reasons and needs. If you have an investing strategy in place, the only time you should ever sell is when you need to withdraw your money or because something has triggered a change (reaching a certain age, for instance). Day-to-day or even year-to-year market changes shouldn’t change your strategy.

6. If you NEED big gains to reach your goals, increase your contributions, not your risk. Many people were invested heavily in stocks because they needed to hit 12-15% returns in order to retire when they wanted to. Guess what? 12-15% returns over a long period aren’t realistic. You might luck out and get those kinds of numbers over a few consecutive years (like 2003-2007), but it’ll be followed by a correction. If you need big gains like that to reach a goal, you need to be contributing more towards that goal – or you need to be rethinking your goal.

7. If you can’t state concrete, specific reasons why you’re in an investment, you shouldn’t be in that investment. This really means two things. First, you have to know what you’re investing in. Read the prospectus. Do the research. Know what it is you’re buying. You should be able to name a specific, concrete reason why you’re purchasing that investment – and past performance is not a concrete reason. You might be invested in an individual company because you believe in that company’s management or you think they produce stellar products or the company has an inherent competitive advantage over their immediate competition or they work very hard to pay good dividends to shareholders. You might be invested in a broad index fund because you believe in capitalism itself over the very long term. You shouldn’t be in an investment because it’s “hot” or because the sector is “on fire” – those aren’t reasons, those are selling points from commission-based advisors and pundits.

8. If you don’t know what you’re doing, get a fee-only investment advisor to help. If you thought you were following a safe strategy but then found out that you’d lost a lot of money, it may be a matter of simply not knowing what investments you should be in. The solution to that is to hire a fee-only financial advisor, one that does not get a commission if they “sell” you an investment package. Get some help and do things right.

9. Any money you will need in the next five years shouldn’t be in stocks. This is a good rule of thumb to follow. If you are going to need money in the next five years for any reason, don’t keep that money in something as volatile as the stock market. Move it into bonds or CDs so that you know the principal is safe. You might miss out on some exceptional gains, but you’ll also miss out on periods like the last two weeks.

10. Don’t look at your day-to-day balance. If you’re sure about your strategy and your reasoning, your day-to-day balance is just a distraction. Don’t even look at it. I haven’t looked at my retirement account balances in months. Why? I know my strategy is a very long term one, so I don’t really care that much about the short term, and I also know that seeing a value decline will do nothing more than rile me up. So why do that to myself?

Know your goals. Know your investments. Don’t make rash moves. Those are the keys to weathering any storm. Good luck.

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31 thoughts on “Ten Steps for Remaining Calm in a Financially Turbulent Time

  1. Great and timeless advice. When I was a financial advisor it was like pulling teeth to get people to invest in bonds and fixed income investments when the markets were booming. Oddly enough when the markets were falling, all anyone wanted was fixed income – stocks were just to risky. Developing an overall investments strategy based on time tested investment philosophies doesn’t make losing money in the stock market any more fun. But it does give you the confidence you need to whether the storm.

    RDS
    http://financialvalues.blogspot.com/

  2. Trent,
    I think the biggest thing that we need to focus on with the average investor is your point #7.

    Many times people don’t know what they are invested in and why they are invested in that company (fund, etf, etc.).

    It is hard enough to stay the course when you know what and why you are invested, how can one be expected to stay invested when they don’t know what they are invested in?

    In this situation, although I am going long the stock markets, I can’t blame anyone for bailing out if they don’t understand what they own.

  3. The thing that’s helped me the most in keeping calm is actually something I read here: My biggest asset is not my Vanguard accounts. My biggest asset is me.

    I remember back in 1998 (I think) when the market took a short-lived plunge. I had a few index-fund investments, but since I was in college, I had better things to do than follow the financial news. My Dad called me up one night and said, “You know, you just lost a lot of money.” I just shrugged and said, “It’ll come back.” And sure enough, it did.

    I was able to remain calm then because my sense of self worth was not tied up in the day-to-day changes in my financial net worth. It had a lot more to do with the grades I was getting, the grad schools I was getting into, and the skills I was learning both inside and outside the classroom. Now, ten years later, I still have all those skills (plus a lot more), I’ve discovered a line of work that I’m good at and I enjoy, and I have tangible accomplishments that I can feel proud of. I feel confident that I can always earn more money, and I’m good at spending less than I earn. Those are my economic realities, and they’re a heck of a lot more important than what happens to my 403(b) balance.

  4. Great ideas to help stop the panic, but I think a lot of people have put too much money in the stock market instead of paying off their debts and having a savings account. Now that the market is crashing, maybe we will have an increase in savings account which will be good for banks to have the additional capital.

  5. Good solid advice. My favourites are numbers 9 and 10.

    That being said, I like looking at my day-to-day balance of everything :-) I don’t know why but I just generally find it fulfilling.

  6. I hate to say it, but I’m dissappointed that it came back up on the 13th and 14th like that. It couldn’t have waited until after all the 401k contributions go in for those of us who get paid at the start and the 15th of every month… I’m fine with it going up at the end of the week, but let us automated paycheck shmucks get in on the fire sale at the bottom too. :P

  7. i’ve been hearing that alot, that if you don’t need the money, don’t worry, but if you need it sooner than 5 years to not put it in stocks.
    my kids are currently in college and had all their money in a Vanguard index fund. they need it over the next few years but i already missed the best time to pull it out and set it somewhere else, so do i bide my time and hope it recovers a little and then take it out, or do I cut our losses (really theirs)and take it out now.
    BTW: this is their money from summer work etc, not what we contribute for them. we pay 1/2 and they pay 1/2, except any scholarships etc they receive go toward their half.
    thanks,

  8. I almost pulled a bunch of money out of the stocks in my 401K last week, (expecting even BIGGER losses), but fortunately I didn’t, I’m still no where near where I was, but if I would have pulled then I would be doing worse then I am now. Thank you Simple Dollar for helping me keep my head on straight.

  9. @Beth: As long as you keep up the 401(k) contributions and other regular investments, you (and I and all the other ‘automated paycheck schmucks’) have about as good a chance as getting in on the market bottom as everyone trying to play ‘time the market’. Probably even better ;)

    Great advice, all important points that people seem to forget when things start to get a little wonky in the financial sphere. I’m hoping that the gains on Monday will remind everyone that (a) things are unpredictable in the short run, (b) pulling your money out of the market can cause you to miss the gains when (not if) the market resumes its slow upward climb, and (c) trying to time the market and figure out how it will react is difficult even for professionals (compare Jim Cramer’s prediction to where we actually are, here on Tuesday night). Be calm, stay invested (with money you don’t need for five, or even ten years), and you will be alright.

  10. These are all good points, but I have a better idea. Don’t let your worth be found in money. If your worth and your emotional attachment is found solely in your money and your possessions, when you lose these, you lose your worth.

    As a Christian, I find my worth in God. God never changes. Many are probably familiar with the verse Matthew 6:19-21:

    19 Don’t store up treasures here on earth, where moths eat them and rust destroys them, and where thieves break in and steal. 20 Store your treasures in heaven, where moths and rust cannot destroy, and thieves do not break in and steal. 21 Wherever your treasure is, there the desires of your heart will also be.

    Even if you’re not a Christian, it would still be beneficial to derive your sense of self-worth from something other than money, something lasting. Maybe your family, your children. Maybe your friends. But don’t depend on money, but as we’ve seen the past several weeks, this is not something we can depend on. If we do this, we will remain completely calm in a turbulent market, because the market doesn’t even matter anymore.

  11. Stay away from pundits – great all-around advice to stay sane and balanced in this spin-crazy world!

  12. Great Advice! I agree with all 10 of your steps. The only challenge is that… sometimes… your emotions can override any and every criteria you may have developed when things were calm. It’s like you just through all sense of (what you thought was very sound and calculated) reasoning out of the window and make investment choices that you soon come to regret. I’m new on my investment journey and learning so much about staying calm in the midst of the storms. Great Post!

  13. I can see where fear can take over, especially for those who are close to retirement, I am still in my twenties and have more than adequate time to make up my losses as the market rises and falls, but people who are close to retirement can’t afford to lose 35% like I did…

    tux – http://mymoneymylife.wordpress.com

  14. Your advice No2: “When the market isn’t turbulent, develop an overall investment strategy”.
    Everything I have read within this sight is very wise. But the above advice is one of the wisest thinks.

    Last week was a hell with the Greek stock Market: Every day 4-5% losses. After the announcements of European leaders, a great increase took place in Monday and in Tuesday. My husband proposed to put in market a part of our savings (we plan to buy a house): If we buy now cheap, with the current increase we will cover our losses. We discussed and we decided not to proceed.
    Today the Greek stock Market closed with a loss -3.27. We are lucky people…
    Adventurism with stock market is only for people that have money to throw away.

  15. I’ve noticed you a lot of people here give Cramer a pretty hard time. I think its because we think of the stock market as a long-term, dollar cost averaging tool, rather an active trading forum like Cramer.

    Even in the article Trent cited, the first line says (paraphrased) “Its the Sunday after the largest point drop in world financial market history, and no gov’t financial authority in the world has proposed a solution. Unless something changes between now and tomorrow, we could see the Dow plummet to as low as 4700.”

    A few hours later, England provided 37M in liquidity to its banks in exchange for a financial stake in the banks, just as he recommends in the article! That was a game changing policy that prevented the Dow going to 4700, just like it says in his article.

    I think Jim Cramer has two roles. First, he attempts to help people understand why markets are behaving the way they are in their current state, and occasionally offering recommendations or predictions. His lightning round is more of a “if you’re going to try to trade in that sector of the market, I would buy ABC stock instead of XYZ stock” not “here are the stocks everyone should buy tomorrow.”

    Second, he attempts to call attention to critical situations using his publicity as a sounding board. You’ll probably recall the “they [the fed] know nothing” outburst, but not necessarily his call for the fed to open the discount window before Bear Stearns collapsed or his plea for world financial authorities to take a stake in the companies they bail out (oh wait, that was in the article Trent cited).

    He is criticized for changing his mind…but that’s because market conditions change! Think of it like gardening. The season and conditions are right to plant a tomato plant. After a while, the tomatoes grow to a reasonable size. You pick them when they are ripe. Did you change your mind about growing tomatoes? Of course not, you have merely reached the point where the tomato is finished growing, and ready to sell at Farmer Cramer’s market.

    That’s what stock picking is about, and that’s what Mad Money is about. Instead of a tomato you have a stock, and instead of a farmers market you sell on the stock market. Maybe you pick your tomatoes early and get them to market before anyone else…and you can sell them for a higher price. When a lot of people are selling tomatoes, the price goes down. When your tomatoes are rotten, you didn’t pay attention to changing market conditions, and are stuck with that loss. Wouldn’t it have been a good idea to diversify your vegetable/stock holdings?

    In summary, you should listen to what pundits are saying, but don’t take it as absolute…conditions change much too often and much too quickly. You’ll notice all pundits will preface their predictions by saying something to the effect of “In the market conditions that exist at this second in time, while I’m being filmed in the studio, I believe _____.” They give their insights based on specific market conditions. Some insight (like the Dow going to 4700) will be obsolete hours after it is spoken, sometimes more quickly, while other insight (like low-cost index funds dollar cost averaged and invested over many years) will be timeless.

  16. Good ideas, but I understand why people are getting upset. When our idiot President and his financial adivsers equate what’s going on in the stock market as an accurate measure of the economy, it’s no wonder there is so much worry.

  17. Good advivce, but be careful with #9. People have lost money on bonds. I’m sure a lot of people take advice from this site.

  18. @Kevin: save the political comments for your posts to the other boards you visit. We all have opinions in that realm, and I for one like to come to Simple Dollar for a break from the screed that poses as modern American political discourse. No matter who wins next month, over 1/3 of the country will have voted for the other guy, and will no doubt feel vindicated when something “goes wrong” (as it inevitably will…); and I don’t want to hear from them, either, regardless of whether they are “Blues” or “Reds”.

  19. I think times like this are great for people to get down to the nitty gritty and really understand what they are investing in. Just like you say in your point #7. My mom is old and she works two jobs and contributes what she can to a retirement fund. She started very late so there is not much int here in the first place. I came home the other day and said my 401k got murdered and she got worried b/c she wnated to know if she should move it. She is going to retire for at least 10 years so I told her the best advice is to just leave it alone for now. People need to understand what exactly is in there and it takes turbulent times for them to get to it! Great post.

  20. Well, my investment strategy is long term, so I’ve got time to make up. However, I have shifted to a more conservative portfolio at this time. The money I’ve already invested, I’m not going to reinvest. That would be silly. Since my retirement horizon is 30ish years off, I’m certain my investments will catch up over time. Fortunately, I didn’t invest those at the peak, so it won’t be that bad. My new 401K contributions, however, are 100% cash. The reason being is the economy as a whole is just not that healthy. I believe it will recover over time, but not within the next year. So my contributions are going into cash. When the signs of the economy are healthy – meaning we are creating jobs, not losing them – I will reinvest my cash (with employer matched contributions) back into index funds.

  21. How to stay calm? DO NOT look at your 401k until all this calms down and the market recovers. I know it’s hard, but that’s what I’m doing.

    Just
    don’t
    look!

  22. 10 Steps are always a nice, clean way to organize thoughts to prepare what to do next. In response to the second tip about making goals and planning, I thought I’d recommend Thrive, the site I work for, http://www.justthrive.com, which let’s users do just that. Even though it is contrary to your tenth step, I don’t think there is any harm in people knowing about their day-to-day spending and being aware of their money.
    A big problem people have is that no one really has a clear sense of what their finances look like. It might be helpful to have it spreadout for them in a user-friendly space that could potentially assist in their long term goals.
    It’s one thing to look at your statements on 10 pages of paper and another to see all your expenses on one screen.

  23. This piece is good on how to remain calm. But I have a slightly different question :

    How to determine whether its okay to stay calm ?

    I find that I have a capacity to stay calm but I come across writing that often says “Staying invested wasn’t perhaps a good idea” or “Regular investing doesn’t work always” or “Indeed, Timing is everything”. For example, another news item says “Japanese markets at a 20-year-low”. Now if something is at its 20-year-low, a person who has invested 20 years ago and opted to remain calm and stay invested in the meantime, turns out to be a fool, no ? Is something wrong here ? Would the same person, have benefited by cost averaging if he had continued to invest small amounts regularly during the same period ? It’s often said equity has the most potential for return in the long term than other forms of assets, but is there an “optimal” long term, below or above which “being a goodie goodie long term investor” doesn’t work ?

    Trent, would you please book this as a Reader Mailbag question too, though I haven’t posted this as a comment in the mailbag post ?

  24. Everyone always says to find a fee-only financial advisor, but I can’t ever seem to find one or anyone who knows one. I’ve asked around and all I ever seem to come up with is one that gets commissions on what they sell. Anyone got advise on how to find a good one?

  25. 11. Invest in a bit of knowledge. Revisit the great writers and minds of liberty…Ayn Rand, Murray Rothbard, Garet Garrett, Ludwig von Mises (www.mises.org), Friedrich Hayek, etc. Lest we repeat the errors of the past and present, consider the predictions of Ron Paul (check out his website on house.gov where he accurately identifies the cause of the present and past financial bubbles) who influenced by the Austrian school of economics clearly understands where your money ought to go. Learn then teach your friends and children.

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