Set Higher Standards by YogiRavi

If you have watched the news at all lately (which I’ve actually been great at avoiding!), you’ve noticed that the financial markets have teetered off of their precipice and fallen into the dark abyss. I wrote a little about this in an earlier post.

The Dow today was down 700 points at one point after the $700 billion governmental bailout package was shot down by the House. Chances are that the planned re-vote will also fail.

What do you do in situations like this? Well, I have a philosophy around how to deal with these type of situations. It’s based on over 10 years of active investing and general interest in how financial markets work.

The first thing you do in a situation like this…is DO NOTHING. A common reaction is to immediately sell to avoid further losses. Getting rid of the assets gives a false sense of calm since the loss is no longer visible when you check your brokerage account and look at the performance of the individual assets you still own!

Another common reaction is to buy or dollar-cost-average. That is to say, assume that the market can’t go down any more and buy low with assumption the coming gains will offset your loss. Again, this strategy rarely works.

In situations where there is massive panic and market reaction, I DO NOTHING. I do not buy or sell. I sit with what I have.

What I do DO, is I plan. I think about what kind of assets I have. What industries am I invested in? How much money do I have in commodities like Gold and Oil-related assets/industries? How much cash do I have? Where is my cash invested? Is my cash in a money market? If so, is the money market “safe” (i.e. investing in assets that are not exposed to the financial turmoil under way)? How much exposure do I have in US vs Global markets? Is my money in FDIC insured accounts/assets?

I plan like crazy.

Planning gets you out of your emotions and gives you  a way to logically think about where you are at financially. You then are in a much better position to make prudent decisions with your money once the markets have had a chance to digest all the news that is current hitting the airwaves.

Normally, markets over-react to news (both on the upside and downside). Right now, I am guessing that we haven’t seen the end of the decline. However, I would also guess that we will see some degree of recover after the markets have settled. I don’t know when this will happen, but for now I am waiting this out. Once the news stops trumpeting impending market doom as the big front-page headline, I’ll adjust and take any required action on my portfolio.

If you’ve taken a look at the news over the past few days, you’ve noticed that the US financial markets have been in a bit of a tailspin. I can’t say I’m surprised at any of this, the writing has been on the wall for a long time coming.

I worked at Merrill Lynch (just for a summer) about 10 years ago, and the thought of that company EVER getting bought or going out of business was the furthest thing from my imagination then. I also had an offer to work for Lehman Brothers before coming to Microsoft that I almost accepted. Now, that company filed for bankruptcy as well. A few years ago the thought of that happening would have been unfathomable.

The financial markets are reeling. Even those who didn’t invest directly in those companies shares are affected, since even index mutual funds have a fair exposure to the financial services industry. With almost half of all American adults invested in the stock market in some way, this means that a lot of people are losing money.

What to do at times like this?

I am no financial expert, but I tend to approach situations like this the same way I approach other situations filled with stress and fear in my life.

First of all, I think about what my long term vision is. In the case of finances, I am looking to grow my assets over the long term. I’m not looking to try to get rich quick through my investments or take excessive risk. I take enough risk in my job every day, and prefer to place my energy there. I expect my “day-job” to be the source of my real wealth over the long-term, not short-term portfolio gains.

Next, I think about the things that I can control, and don’t worry about the things that I can’t control or have already happened. If I have assets that have already lost tons of value, I don’t worry about the loss, but instead think about what I can do right now, which is either do nothing or sell to prevent future losses. Generally, if I don’t think an asset that I own is compelling enough to buy right now, I sell it.

Lastly, I think about how I can better set things up so that a dire situation doesn’t happen again in the future. In the case of finances, proper asset allocation would ensure that you are not overexposed to any single asset class. At the end of the day, I have my own opinions about where the US financial markets are headed over the next 3-5 years, and it is NOT a positive outlook. I’ve focused on investing in fixed income assets (for the first time ever!), commodities (gold), the energy sector and funds that are global in nature. This has been my strategy for the past few years, and it has served me well.

So this is what I do, what is your approach to finances at a time like this?

We all have our stories. Some of these stories give us strength. Other are draining. Most of them are the later not the former.

Our stories will take us out, if we let them. They will take us out of what we really want in life. They will take us out of the situations that help us to grow. They will come to the fore even faster than we can think. They grow over time and become further entrenched until it is hard to distinguish who we really are from the stories we tell about ourselves.

Our stories ultimately provide our mind with a rationale for why we are not in good physical shape, smart, successful, in a happy relationship, financially secure or otherwise living up to our dreams.

Our stories are a crutch.

Start taking note when you start “explaining” to someone why you aren’t doing something are being in a manner that you know you should be doing/being. Chances are your story is rearing it’s head. The more you can become aware of your stories, the less energy you’ll be feeding to them. The less you feed them, the less of a grip they will eventually hold over you.

Stop watering your plants and they will eventually die. Stop feeding your stories and the same will happen to them.

Once your stories drop away, you’ll be living a life that is authentic, and in tune to the person you really are.