The Panic Problem

August 11th, 2011

The debt problems, both here and abroad, have been stirring investors, along with Washington’s inability to do much to resolve anything lately. Then, Standard & Poor’s lowered our country’s credit rating over the weekend. Economists are predicting all kinds of bleak outcomes, and as a result, the market took a considerable hit.

Investors are spooked this week with Asian and European exchanges down sharply and the Dow tumbling more than five percent. “Markets are either driven by fear or greed, and we’re definitely in the fear period right now,” says Matthew Rubin, director of investment strategy for Neuberger Berman, quoted in the Wall Street Journal.

If you’re a long-term investor – and you should be, considering the average life expectancy for a 65-year-old couple is 30 years – you have to learn how to weather the dips in the market. Moving up and down is what the market does; that’s its nature. No one can consistently and accurately time the market, so getting out and back in when your emotions (or your software or your financial advisors) tell you to is a fool’s game. There is no lighter way to put it.

Market volatility in itself will not ruin your portfolio. Sure, it may temporarily lose value, and your retirement may be delayed if a bear market just happens to occur at the same time you’ve planned to resign; however, acting out of fear and selling in a panic would lock in those losses permanently and doom your golden years.

Let’s not forget that most of the losses incurred in 2008 have now been regained. The market rallied for over 24 months to bring values back up, but all those who sold out in 2008 missed the mark and were sorely regretful. It’s easy to get caught up in short-term problems, but remember that markets are cyclical. Historically, for every downturn, there has been an upswing.

The lesson here is that the market is going to do what it’s going to do. The question is: What are YOU going to do?

In order to live comfortably, you must do the thing that you fear, which is put your capital at risk – because profit is the reward for risk. Without risk, there is no risk premium. And you must earn the risk premium in order to be able to live when you no longer have a paycheck. In spite of what your emotions are screaming, there is much less risk in the stock market for the long-term investor holding a reasonably diversified portfolio. Market risk only exists in the short term.

Therefore, your choices are really quite simple. In order for you to avoid running out of money, or at least purchasing power, you must commit a substantial portion of your assets to an equity-based investment strategy and keep them there for the long term – through the ups and downs and all of the panic buying and selling. We firmly believe the only way to make the required return is to always be in the stock market, actively managing a portfolio of quality companies over your entire lifetime and that of your spouse. Not market timing. Not stock picking.

Regardless of what the market is doing, consistency in your investment strategy is going give you the highest chances of achieving the desired result. And, regardless of what the market is doing, you have to be able to control your emotions and avoid knee-jerk reactions.

Discipline is key.

Sensationalism in the media turns everything into a crisis these days. Fear is human instinct, but you don’t have to give in to it or act upon it. Selling when things are bad and buying when the market is doing well is the exact opposite of what you should do if you want to be successful. In fact, this is one of the most common of irrational investor behaviors.

With all this in mind, there are other things you can do to weather the storm and ease your fears when CNN is telling you that we’re on the verge of another recession:

1. Turn off the TV. If it’s really giving you grief, eliminate the noise.

2. Don’t forget about your brain. Think logically. Remind yourself of the tried and true fundamentals of personal finance and investing. (i.e.: Bear markets will happen – about once every 5 years. Invest for cash flow. Keep a long-term outlook. Don’t sell assets at a loss and incur reverse compounding. Buy low, sell high. Etc…)

3. Be sure you’re living within your means. Don’t be afraid to spend money, but don’t overextend, and be careful with your credit cards.

4. Maintain liquid assets to fall back on. A separate FDIC-insured savings account with at least one year’s worth of expenses should be set up for an emergency fund. This money is to be used only in the event of income disruption. In retirement, this means the cash can be used to fill any gaps and smooth out the ups and downs of the market when your portfolio does not produce the level of income that you need.

5. Secure the proper insurance coverage. Depending on your age and stage of life, you should conduct an insurance review and make sure that you have the right kinds and plenty of it.

As stated before, market dips create huge potential for some of investors’ greatest opportunities. Warren Buffett once wrote to his shareholders, “We have usually made our best purchases when apprehensions about some macro event were at a peak.”

So, don’t panic. In this moment, remain rational and calm because you know the truth: fear is your friend.

This is not financial, legal or tax advice. Our goal is your financial success, but all investments involve risk including the possible loss of principal and results will vary. If you are interested in the Snider Investment Method, please read the Owner's Manual for a complete discussion of risks and benefits. More information can be found on our website or by calling 1-888-6SNIDER. Past performance is not indicative of future results.

Reading: The Panic Problem

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