You Should NOT Be Losing Sleep Over This Market Crash

by Darwin on August 8, 2011

Markets are in turmoil and may well be for the foreseeable future.  Over the past few weeks, we’ve had the confluence of a burgeoning debt crisis in the Euro region with the impending debt ceiling deadline looming.  The deal the President and Congress agreed to was not digested well by global markets or by one of the big three credit ratings agencies S&P – they downgraded the US (It’s About Time) which resulted in mass selloffs in equities Monday (likely to carry through into Tuesday given what we’re seeing in After Hours and Asia).  I’m hearing from various friends, family and web followers about how they’re in despair over these market moves and they’re starting to panic – and lose sleep over the situation.

I’m not going to beguile you with tales of how I’m making money in any market and how I can predict the future.  Nor do you want to hear, “Just hang in there, everything will be alright”… because it may not.  This market may suck for years.  However, I can say with assurance that I’m not distressed over recent paper losses in my accounts.  Life’s too short.  Here are my thoughts on why you shouldn’t be losing sleep and if you are, what to do about it:

Remember 2008?  That wasn’t too long ago.  I had a lot of friends around the office who pretty much sold at the bottom.  They claimed the stock market was rigged, a Ponzi scheme of epic proportions.  By early 2009, when indices were approaching 50% off their prior highs, they unloaded everything – and they were damn proud of it.  It was almost a badge of honor around the office as these otherwise rational analytical thinkers were acting on pure emotion and giving a big middle finger to the man (Wall Street).  As time passed, we’d have conversations here and there and they steadfastly denied any interest in stocks and were satisfied with the 3% they were getting in CDs with their taxable money and the 3-4% they were earning in bond funds.  By 2011, we hit about a 100% gain since the lows.  I repeat – stocks just about doubled in 2 years.  Low and behold earlier this year, a few of my friends started talking about putting money back into stocks and some of them did just that – right at the recent highs before the most recent decline.  They made the classic error in selling low and buying high.  I haven’t talked to them yet this week, but I do wonder if they’re ready to sell again after Monday’s losses.

Long-Term Money – I’m close to 100% long equities in my 401(k) which comprises the bulk of my investable assets.  Why?  I have almost 30 years until I’m gonna see that money – (maybe longer if we live to 150!).  Why the heck would I be in the most conservative allocation for money that I won’t touch for an entire generation?  History (and logic, and valuations, and fundamentals, etc.) dictate that over a 30 year period, retail investors are best-served in equities over other conventional asset classes, especially in what I predict will be an era of increasing inflation, which should destroy bonds and cash completely.  At least US corporations have repaired their balance sheets and are sitting on record hoards of cash (much more than can be said of the US government with Treasury bonds as the proxy).  So, yes, for the heck of it, I checked out my 401(k) balance today and it is off quite a bit from the peak a few weeks ago.  But it didn’t hurt to look at.  It’s still a nice large number and it’s going to be a nicer, larger number in retirement.  I have no plans for changing my allocation, nor am I stressed about that balance at this stage in my life.  I just focus on diversiviation, low fees (including keeping ADR fees low) and not reacting emotionally to near-term market gyrations.

Life is Too Short – If the thought of market volatility and fluctuations just causes you too much stress, then you should accept less risk.  Obviously, your risk tolerance dictates that being heavily invested in stocks isn’t for you.  You may well pay for it in the long-run with low returns, and possibly even losing money to inflation in cash and bonds (see how to account for inflation in your retirement assumptions), but is that the worst thing in the world?  It beats an ulcer.  You need to do one of two things – either get over your fear of loss – or be willing to accept lower returns.  But you can’t have it both ways.  You can’t achieve high “real” returns with low risk.  The world doesn’t work that way.

So, in closing, I’m not gloating over some options plays and my volatility play that have helped mute my losses this week (investment details here).  I’m losing money in both my trading account and my retirement accounts.  Well, at least my kids’ 529 Plans are making 6% a year because college tuition is outta control!  But my net worth declining 5 figures a day, I’m not losing sleep.  I have a strategy and time on my side.


Are You Losing Sleep Over the Recent Market Panic?

{ 14 comments… read them below or add one }

krantcents August 9, 2011 at 11:46 am

I realized a long time ago that I can not control the market, but I can control what I do. I can control my asset allocation and whether I buy or sell. I will continue to contribute to my 403B, IRA and Roth IRA and dollar cost average into the market. Investing is for the long term and I am okay with my choices for the long term.


Darwin August 9, 2011 at 11:04 pm

Right on; set it and forget it!


Jeff @ Sustainable life blog August 9, 2011 at 12:14 pm

Mondays crash for me was a non event – I wont need the money for another 40+ years, so it doesnt really matter what the market does (though I wish I had a bit of coin to buy on monday). The market will be better over time, and if it’s not, I’ll have diversified my income in other ways (most likely by shifting production of needs to my house via livestock, gardening and other means)


Darwin August 9, 2011 at 11:04 pm

You and I both – we rallied 4% back today! Who knew!


cashflowmantra August 9, 2011 at 3:40 pm

I have about 28 years before I need to touch my money, so I am heavily in stocks as well. In 2007, I started buying protective puts on all my stocks and have not regretted it one bit. It helped me in 2008 and recently as well. I am thinking that a four-digit Dow will be seen sometime this fall so I am expecting I will be sleeping well regardless.


Darwin August 9, 2011 at 11:05 pm

Oh, puts have been a beautiful thing in my trading account. I obviously don’t mix them with a 401(k) (I can’t), but it’s kept my beta under control.


MoneyCone August 9, 2011 at 6:06 pm

The best time to buy is when the markets are down! What goes down has to go up! Good advice Darwin!


Darwin August 9, 2011 at 11:06 pm

Thanks, my best move ever was buying 100 shares of Apple at $89 during the 2009 low. I just wish I didn’t sell most of it on the way up! I thought $200 was a good sell, then $300, now I’m down to 14 shares left! Quite the capital gains on that one…


MoneyCone August 11, 2011 at 11:07 am

That is awesome Darwin – to buy when there was pessimism all around! When you realize gains, it is never a bad thing! 🙂


Jon - Free Money Wisdom August 10, 2011 at 8:24 pm

Exactly right. It is a great time for those who want to jump in on the stock market. I, for one, am not too phased. It is part of the game!


Darwin August 12, 2011 at 6:41 pm

Only 1% down on the week, when people were crying Armageddon following the S&P downgrade. Just 1% and I’ll bet many sold at the bottom…


retirebyforty August 14, 2011 at 2:44 am

I’ve been through a couple of market downturn now and I’m not losing sleep this time around.


Invest It Wisely August 16, 2011 at 8:07 am

Nah, I’m not losing any sleep over this. If others want to push the markets down making it cheaper, then that makes it more attractive for me. It reduces my paper wealth but I’m not touching that for many years to come so it’s ok.


20's Finances August 29, 2011 at 9:08 am

I agree with this! In fact, I am in my twenties and everytime I have jumped into investing, there has been a significant fall in the market. It won’t keep happening and now is a great time to buy for long term. I can’t wait to see the growth out of this year’s investment.


Leave a Comment

{ 7 trackbacks }

Previous post:

Next post: