Smart Investing in a Market Panic
Stop, breathe in and learn what to do to keep your cash.
Sept. 23, 2008 — -- Allow me to introduce you to Mr. Panicked.
He went on a wild Wall Street ride last week, worrying himself sick over his portfolio. He heard those smarty pants financial advisers on television and radio urge small investors to avoid rash investment decisions.
They talked about the dangers of selling low and buying high and locking in losses. But what did they know? If they're so smart, they'd have jumped out of the market last year, never mind last week.
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They all said the same thing.
And Mr. Panicked was right about that last statement. Last week, I sounded like everyone else. I joined the chorus of financial writers and advisers warning small investors to resist panic and the urge to liquidate their portfolios in favor of all cash.
Unoriginal as my advice was, I stand by it. I stood by it when the Dow Jones industrial average dropped 504 points last Monday and then rose 141 on Tuesday, fell 449 on Wednesday and regained 778 on Thursday and Friday.
And I will offer the same, unoriginal advice the next time the stock market appears to be in a free fall.
That's not to say you should never makes changes to your portfolio, but rather that investment decisions are best made amid calm reflection.
Where I think financial writers and advisers like me fall short is explaining why it's unwise to panic when your portfolio has fallen tens of thousands of dollars in a short spell and appears almost certain to fall even more.
I'll use my friend Mr. Panicked and last week's events as an example of what might happen when you panic during market turmoil.
I'll assume my imaginary investor, Mr. Panicked, started last week with an even $100,000 in the Vanguard 500 Index fund, the widely held, low-cost fund that tracks the performance of the Standard & Poor's 500 Index.
He awoke that Monday morning to the news Lehman Brothers had collapsed and Bank of America had taken over the iconic bull of Wall Street, Merrill Lynch.
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