December Newsletter
Keeping Your Cool During the 2008 Financial Crisis
EAPTools.com
November 2008-11-25
The historic severity of this year’s market meltdown has left few unscathed. Credit has tightened, housing prices are plummeting, and investment portfolios are in tatters. There’s no denying that things are bad, but this is no time to panic. In fact, financial experts almost unanimously agree that your greatest asset in troubled times is the ability to remain calm.
Keeping Perspective. Are you thinking with a clear head? The more you’re dialed in to daily financial events, the worse your short term decision making may be. All of our decisions are filtered by a cognitive bias called the “recency effect” which causes us to place greater emphasis and importance on our most recent experiences and (often incorrectly) project them into the future. The way to beat this bias is to maintain a big picture, long term view of both the financial markets and your own personal financial goals. While things may look rotten now, history tells us that the trend is likely to reverse. The average recession lasts about one year; the average bear market 18 months. While neither of these are guarantees this time around, the long term trend for the stock market is upwards.
A Plan For Success. It’s difficult to stand by and do nothing as you’re taking a financial beating, but making sweeping portfolio changes while under duress is a recipe for disaster. If you’re approaching retirement, now is a good time to consult a financial advisor. In the meantime, here are some tips to help you maintain both your sanity and your net worth.
1. Separate long term from short term goals. Experts usually advise that money you plan on needing in the next five years shouldn’t be invested in the stock market.
2. Accurately assess your risk tolerance. You may have overestimated your stomach for wild swings prior to this current crisis. Adjust accordingly for the future.
3. Avoid putting all of your eggs into one basket. Diversification among different investment classes generally reduces risk and volatility.
4. Don’t obsess over daily market fluctuations. Avoid checking your portfolio everyday. It can lead to impulsive decisions and anxiety.
5. Keep the guesswork out of trying to time the market by continuing to make investments at regular intervals. An automatic
contribution is a great way to “set it and forget it.”
6. In tough times, nothing calms like cash. Try squirreling away at least 6-8 months of living expenses in highly liquid accounts. True, this is a tough assignment for most people, but you’ll sleep better at night and make better financial decisions knowing that you have that cash cushion.
7. Make small, incremental changes when rearranging finances. Buy and sell investments in small blocks, rather than all at once. Never make an impulsive financial decision - give yourself a one week cooling off period between decision and execution.
8. Use this as an opportunity to trim excess fat from your budget. Reining in spending will reduce worry and help you regain a sense of control. Here’s how: Go online and view your checkbook register made available to you by your bank. Sort the columns by size of purchase, from smallest to largest (check card purchases.) Notice all expenses under, say $75. There will be many. The amounts
are small, but they add up. Many were unnecessary purchases. Now you can see where you can save beginning today.
Investment guru Benjamin Graham once remarked that in the short term the stock market is a voting machine, while in the long term it acts as a weighing machine. When a panic is in full force, investors tend to overreact to the constant drumbeat of doom and gloom, indiscriminately purging the good along with the bad. For those with long term investment horizons, troubled times are opportunities to buy good companies cheaply. If you’re patient and disciplined, the investments you make today may be the most profitable ones of your lifetime.