Over the past few months, the news has been almost incomprehensible. It’s hard for many of us to make sense of the failure of major Wall Street firms and large banks and the $700 billion bailout of the financial sector. And it’s hard for investors to be calm when stocks have fallen more than 40 percent between October 2007 and Inauguration Day in 2009. What can you do to cope? Consider the following “checklist” for surviving a financial crisis:
Close your ears — but open your eyes. These days, you may hear some so-called “experts” talking about end-of-capitalism scenarios. Try not to listen to these doomsayers. We still have the most powerful economy in the history of the world and we will recover from these setbacks. However, even if you close your ears, you should keep your eyes wide open. Specifically, look for opportunities. Stock prices are down now, but they won’t always be — and, all else being equal, investors who buy into the stock market at lower prices are likely to earn higher returns than those who buy stocks when prices are higher.
Focus on things you can control. During a financial crisis, your success at weathering the storm depends on your ability to stay calm and concentrate on the things you can control. For example, you can control your emotions so that you aren’t panicked into making unwise, short-term decisions, such as putting all your money under your mattress. And, to a certain extent, you can even control your portfolio’s ability to withstand volatility. How? By diversifying your holdings as broadly as possible. The wider your range of investments, the less you’ll be hurt by downturns that primarily affect one asset class. (Keep in mind, though, that diversification, by itself, cannot guarantee profits or protect against loss.)
Review and rebalance your portfolio. During this market decline, some of your holdings have probably fallen more than others. As a result, you may now own a lower percentage of a specific asset class than you had originally intended when you built your portfolio. Consequently, you may want to meet with your financial advisor to determine if you should rebalance your portfolio by adding more money to those asset classes that have fallen the most. You may also want to rebalance if your risk tolerance or long-term goals have changed.
Look for quality investments. In this economic environment, it’s more important than ever to focus on quality investments. When you buy stocks, look for those companies with strong balance sheets. If you’re purchasing bonds, stick with those that receive high credit ratings. If we are entering a prolonged economic downturn, these types of investments will, in all likelihood, fare better than lower-quality stocks and bonds.
Be patient. No one can predict when a bear market will end, but history has shown that turnarounds can happen quickly and unexpectedly. So be patient. The most successful investors have the courage to stay the course and take advantage of opportunities while others are “bailing out” of the financial markets.
We may still have some rough roads ahead of us. But if you can check off every item on this list, you can smooth out some of the bumps you’ll encounter on your journey toward achieving your long-term goals.
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