When you’re on an airplane and hit turbulence or rough weather, the flight crew tells you to stay seated and buckled. Unfortunately, when the markets hit bad weather, there is rarely such a warning.
You might want to call it “Black Thursday.”
Yesterday, the markets around the world went into a tailspin reacting almost violently to the ongoing drumbeat of dour economic news.
On the radar, we’ve seen the storm clouds moving in for a while now:
- lower than expected GDP in the US last quarter,
- downward revisions of the GDP to a negligible 0.4% for the first quarter,
- lower business and consumer confidence surveys,
- sharply lower than expected new jobs created,
- higher unemployment,
- foreign debt crises weighing down our Eurozone trading partners.
There was a temporary distraction over the last couple of weeks as we in the US focused on the debt ceiling debate to the exclusion of all else. Self-congratulatory press remarks by politicians aside, nothing done in Washington really changed the fact that we are still flying into a stiff head wind and storm clouds that threaten recovery prospects.
Eventually, though, the accumulation of downbeat news over the past few weeks seems to have finally come to a head yesterday. No one thing seems to have caused it. It just seems that finally someone said “the Emperor has no clothes” and everyone finally noticed the obvious: global economies are weak and burdened by debt and political crises.
All of this has been creating doubt in the minds of investors about the ability to find and implement policies or actions by governments or private sector companies. And doubt leads to uncertainty. And if there’s one thing we know for certain, it is that markets abhor uncertainty.
While many commentators may have thought that the “resolution” of the debt ceiling debate in Washington would have calmed the markets, it seems that upon further review of the details the markets are not so sure. And in an “abundance of caution” market analysts who once were so OK with exotic bond and mortgage investments are now reacting overly negatively to any and all news and evidence of weakness by governments or companies.
What’s An Investor to Do?
Don’t panic. It may be cliché but it’s still true. If you hadn’t already put in place a hedging strategy, then what is past is past and move forward.
So the Dow has erased on its gains for 2011 and has turned the time machine back to December 2008.
If you sell now — especially without a plan in place — you’re setting yourself up for failure.
Here’s a simple plan to consider:
- Hold On: You can’t lose anything if you sell.
- Hedge: As I’ve said before in this blog and in the ViewPoint Newsletter, you need to put in place a hedge. There are lots of tools available to investors (and advisers) to help: Exchange Traded Funds (ETFs) on the S&P 500, for instance, can be hedged with options or you can use “trailing stop-loss” instructions to limit the market downside; another option – inverse ETFs that move opposite the underlying index. These aren’t buy-hold types of ETFs but can be used to provide short-term (daily) hedges.
- Rebalance: If you’re not already diversified among different asset classes, then now’s the time to look at that. You may be able to pick up on some great bargains right now that will position you better for the long-term. Yes, every risky asset got hit in the downdraft but that’s still no reason to be bulked up on one company stock or mutual fund type.
- Keep Your Powder Dry and in Reserve: Cash is king – an oft-repeated phrase still holds true now. Take a page from my retirement planning advice and make sure you have cash to cover your fixed overhead for a good long time. With cash in place, you won’t be forced to sell out at fire sale prices now or during other rough times. This is part of what I refer to as “Buy and Hold Out.”
- Seek Professional Help: Research reported in the Financial Planning Association’s Journal of Financial Planning shows that those with financial advisers and a plan are more satisfied and overall have more wealth. Avoiding emotional mistakes improves an investor’s bottom line.
As a side note: The old stockbroker’s manual still says “Sell in May and Go Away.” Probably for good reason. Historically, the summer months are filled with languid or down markets and volatile ups and downs.
While it’s tempting to give in to the emotional “flight” survival response that you’re feeling right now, don’t give in. Stand and fight instead. But fight smart. Have a plan and consider a professional navigator.
If you are seeking a second opinion or need some help in implementing a personal money rescue plan, please consider the help of a qualified professional.
Let’s Make A Plan Together: 978-388-0020