What To Do If The Market Crashes – Your Emergency Instructions

emergency_instructions
Go ahead and extract the instructions in the envelope

I think the Dow being down 1,000 points at the market open this morning (however temporarily) puts everyone in the frame of mind. Is this THE BIG ONE? Should I break the glass and read the instructions in the envelope labelled ‘IN CASE OF EMERGENCY?’

Sure, go ahead, you have my permission. Break the glass. Easy now. Watch your knuckles and wrists don’t get slashed. That stuff’s sharp. Ok, now, gently, carefully, extract the envelope. Very good.

It is labelled ‘IN CASE OF EMERGENCY,’ so go ahead and open up that bad boy. I wrote it just for you.

For just this situation: I mean, Greece is a kick-the-can-down-the-road catastrophe. Is any financial number out of China even real? Chinese investors obviously don’t think so, with limit-down market days a regular occurrence. Oil’s in a race-to-the-bottom as a result of the Saudi’s aggressive dumping, which would have been great if the US hadn’t just become the world’s biggest oil play in the past 4 years. US Presidential candidate choices cover the entire range from Family Oligarchy to Buffoonery. Stocks have moved one way toward ‘priced for perfection’ nosebleed valuations since 2011. For that matter, so are bonds. And the Fed’s still planning (as far we know, and, as of today, at least) to take away the punch bowl of cheap money in September. I mean, panic, right?

Let’s see what the instructions say….

PANIC! SELL! SELL! SELL! 1

(just kidding. That’s not the real instructions)

Ok, what are the real instructions? Here they are:

“1. Do Nothing

2. If you’re having trouble following directions, go back to Step 1.

Thank you for reading these emergency instructions. Good luck.”

That’s what the envelope that I left behind the glass says.

—-

Ok, but, if you absolutely MUST do something, and  you can’t sit on your hands – because you’re panicked and you managed to invest some money for your kid’s college fund or you actually have money socked away in a retirement plan and a 1,000 point DOW drop would keep you working eight more years on the job or whatever – if you have to take action, then I recommend the following, which I learned (I think) from a newspaper column by Jonathan Clements, author of the excellent 25 Myths You’ve Got To Avoid If You Want To Manage Your Money Right. Or maybe it was Jason Zweig, or James Stewart. I’m not sure. Anyway, it doesn’t matter.

The point is, take some symbolic but affordable amount of money ($100, $500, $2,000, $500,000? Everyone’s different) and transfer it to your brokerage account today, and buy some broad stock market mutual fund. It doesn’t really matter the amount, and it doesn’t really matter what fund.2 Just something symbolic. And write down your amount invested, and the level of the broad index (like the S&P500 for example). Then you can revisit it at a later date.

Like I’m doing right now. Because, during the 2008 Crisis, I did this three times and it made me feel better.3

October 8 2008, I sent $250 extra to my daughter’s 529 account. Pow! S&P 500 at 900! Down 38% Year to Date!

October 23, 2008, I sent another $250 extra to my daughter’s 529 account. Biff! S&P500 at 875! Down 41% Year to Date!

March 3, 2009, I sent another $725 extra to her 529 account. Smack! S&P500 at 725! Down 50% since the beginning of 2008!

It shows you are fearless. It shows you are a long-term investor. It shows you know how to buy low and sell high (or better yet, sell never.)

Of course, I had no idea whether, when, or if the market would begin to recover in 2 weeks (it did), 2 years, or 10 years. I mean, things looked grim. But psychologically, I think my little purchases were helpful in making me feel less panicked.

So that’s my real advice on a day or month like this.

 

Please see related post:

How To Invest

Volatility In The Stock Market: That’s A Good Thing

Book Review: 25 Myths You’ve Got To Avoid If You Want To Manage Your Money Right by Jonathan Clements

 

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  1. When we were about 13 years old, a childhood friend as a lark used to walk past phonebooths on the street and just pick up the receiver a suddenly start shouting “Sell! Sell! Sell! I said Sell Godammit!” We always thought this was hilarious. It still kind of is. But I know what you’re thinking: What are phonebooths?
  2. I wouldn’t recommend an individual stock because, man, you could really get cut on a falling knife this week
  3. Granted, not a lot better since my business sunk during this time, but at least I felt better about my kid’s college fund.