What to Do In An Economic Crisis
First, don’t panic.
The cause of many people’s angst and misery during an economic crisis is surely money-related, but we also multiply it by worrying unnecessarily. Worry won’t change the situation, nor bring back any money you may have lost. In fact, worry can make matters worse, increasing your stress level and causing anxiety (which in turn causes irrational thinking and can lead to poor decision-making). So the last thing you want to do is panic.
Second, look at the big, long-term picture.
Yes, I know that’s easier said than done, but most people’s losses are in their 401(k) retirement funds. These are long-term funds meant to weather the occasional stock market storm. So even if you’ve lost a quarter or half of your retirement savings in the past month, rest assured that more than likely, most of that will come back in time. The worst thing you can likely do is to panic, and then worry that you need to re-invest everything in your portfolio. Doing so now means taking big, big losses for questionable potential gains in other markets or sectors.
This is hard to do, especially if you’ve taken more of a bath in the stock market directly. But if you buy high and sell low, you’re chasing your losses and not counting on the inevitable market improvement someday.
Third, remember the stock market is as much about human emotion as it is about financial data.
The stock market is as much about psychology as it is about finances and company fundamentals. Ask any broker worth his or her salt and they’ll tell you as much. When the market has a “down” day, it’s not as much about bad financial news that day as a whole bunch of people (because it’s always people who start the ball rolling in the market) who get spooked.
The psychology of the market has been well-documented in many books. It acts not unlike a crowd (or herd) mentality, that when people see enough others moving in a certain direction, they follow suit for fear of missing out or being left behind. At the point that the movement begins, all logic and reason go out the window. The market largely becomes at that point a simple study of crowd behavior.
Fourth, now’s a good time to stock up.
Believe it or not, this is one of the few times in history that is as much an opportunity as it is anything else. When stocks hit historic lows, that means that you can purchase a share of a company at a discount price. Since most big companies are usually fundamentally sound, this means you can grab a piece of them at a price that hasn’t been available in some cases for more than a decade.
Of course, don’t invest money if you don’t have it to lose, but don’t be scared by the market just because it’s going down. Nobody knows when it’ll hit “bottom,” so you can safely wait until it enjoys a few days or even weeks of gains. Even if you wait that long, you’d still be buying at some pretty discounted prices for many stocks.
Fifth, stay focused on the things that really matter in life.
It’s easy to start obsessing about things in our life that we have little to no control over. But it’s also quite fruitless. While we may feel the overwhelming need to engage in fruitless activities, it will reduce your stress and feelings of anxiety to find a way to redirect your focus to things in your life that really matter (and that you have some actual control over).
Spend some more time with your family and friends. Renew an old interest or hobby, or reconnect with an old friend or colleague. These things cost nothing and will bring you more reward than obsessing about current economic conditions.
I’m no financial expert nor adviser, so take what I say here with a grain of salt. But try and keep your perspective during these tumultuous times and remember, these things always come in cycles. While we’re in the middle of a down cycle right now, it will eventually turn around and head back up (probably some time after the election or after the new President takes office).
Grohol, J. (2008). What to Do In An Economic Crisis. Psych Central. Retrieved on May 26, 2015, from http://psychcentral.com/blog/archives/2008/10/25/what-to-do-in-an-economic-crisis/