I know, it become difficult to keep your calm, to avoid getting overly excited or terribly depressed. How in the world can the market have its worst week in years last week with many calling the appocalypse and then follow that with an incredibly rally just days later. Did anything change? Not really! Sure, there are always rumors that Europe will come out with a huge package to help out Greece, the banks and everything else going on in the world. But would that stop the domino effect? I would say it’s unlikely. Things will continue to be crazy for some time and you do have to get used to it. You are bound to hear about appocalyptic scenarios, with gold coins being the only way out. If you did see the movie Contagion, you can easily imagine how quickly things can go downhill. How do you avoid becoming this anxious person that cannot go to sleep at night? Here are 10 things I would recommend:
#1-Keep Some Perspective: You are trading with a 10, 20 years or even long horizon. There will be huge rallies and major setbacks, do not lose sight of how crazy things will get. A 15% rally in a few days can seem dramatic but in the context of a few decades, it is meaningless.
#2-You Do Not Need To Follow The Markets At All Times: It becomes tempting to follow each and every tick but what is the point really? If you follow it for entertainment purposes only, that can be useful. However if each down day creates additional stress, you might be better off staying a bit further away from the markets.
#3-Only Risk What You Can Afford To Lose: No, the markets will not decline by 75% overnight. However, if you are investing more than you can afford to lose, you are a fool. Markets do NOT always go up, they do go up on average over long periods of time. That means that as you become older, you should start relying much more on passive income and less on stocks moving higher.
#4-Reduce Debt: One of the primary causes of stress for both individuals and companies in tough economic times is debt management. It’s difficult to manage high debt payments when you suffer market shocks. I would say that over time, your debt to net worth should diminish gradually. Leverage is great and can always be used, but it should never be used in excess.
#5-A Worse Case Scenario: Honestly, you might think that you need $75,000 per year at retirement to live off of. But what if you decided to travel a bit less, move to smaller town or house, keep working a year or two? Not ideal scenarios of course but I’m just trying to say that it’s easy to make things look much scarier than they should. It does not need to be that way. If you do end up suffering unexpected losses in the market or lose your job, you can still recover without any issues.
#6-Stick To The Plan: One thing that I can tell you is that any over-reaction is likely to be costly in these volatile times. Panic about a major crash will make some sell off big part of their holdings just before the market recovers. In a same way, hopes that the crisis is over will mean investors buying at the top. Stick to your investment plan, do not try to time the market perfectly.
#7-Hold Cash: If you can accumulate cash, it is ideal in difficult periods such as the current one. There will be plenty more as well. When you look at investors such as Warren Buffett, you get a pretty good idea of how great deals are available to those that have cash. You might not be able to call up bank CEO’s offering them your terms but you can buy real estate from desperate banks or sellers, you can buy distressed stocks or assets. All of those things are possible. They will likely decline after you buy, as timing the bottom would be nearly impossible. But if you expect to be up significantly 5 or 10 years from now, then you have a bargain.
#8-Read All Points Of Views: I’m telling you, it is very easy to find someone that believes the markets are going to zero and the end of the world is close. In fact, you could easily spend entire days reading all of the logical and well explained arguments behind that theory. In a similar way, I think it would be easy to find texts and commentary debating the exact opposite, that markets are undervalued, that a major rally will soon occur, etc. It’s important to be able to be critical towards all of those.
#9-Do Not Expect Governments To Do The Right Thing: You could probably think that governments will end up doing the right thing, that Europe can fix its Greek issue, that Obama and others can solve the fiscal deficits. I think we have seen too many examples of that not happening. The debt ceiling debate was one perfect example that did end up having massive consequences as all US creditors and rating agencies have issued serious concerns about the fact that the situation got this far. In the long run, that will result in higher interest rates and a weaker economy. No one had anything to gain by waiting so long. In a similar way, governments will be forced to revise some of the promises it made regarding pensions, benefits, taxes and services. Do not take anything for granted.
#10-Do Not Simplify The Debate: I don’t give any credibility to those that expect one or a couple of actions to be enough to reverse everything. Tax the wealthy? Sure, it will help raise more revenues, but at what cost and what will be the consequences. I’m not saying it shouldn’t be done, but all of these need to be done very carefully because it is truly not that simple.
How Do You Survive These Crazy, Volatile Markets?