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.