What Should I Do in a Panicked Stock Market?
In a time of panic in the stock market, fear is the prevailing mood among stock investors, just as greed prevails when markets are on a tear. Today, fear rules with the Dow Jones Industrial Average dropping 513 points or 4.31%.
This was the worst day on the stock market since the financial crisis at the start of the Great Recession of 2008. The Nasdaq also fell 137 points or 5.08%, while the S&P 500 fell 60 points or 4.8%.
The fall in the indexes caps a string of declines over the last two weeks as the politicians bickered in Washington DC over the debt ceiling and presages a fall in Asian stock markets as well that has already begun.
The causes of this global selloff are many and varied. The first is the realization that the U.S. debt ceiling agreement of last week may not fully address America’s economic woes.
In addition, there has been a string of poor economic numbers, with unemployment remaining high and GDP growth still anemic.
Equally important is the Eurozone, with Greece having effectively defaulted, Ireland and Portugal bankrupt and needing bailouts; and over-leveraged Italy and Spain likely to need bailouts soon.
In short, Europe will need hundreds of billions of Euros and a lot of help from the International Monetary Fund in the short and medium term. The “c”-word, contagion, seem to to be the order of the day in Europe.
So What Should I Do?
The first thing you want to do is remain calm and recognize that to a great extent, the stock markets are cyclic. Recessions are followed by recoveries and investing in the stock market over the long term shows gains, regardless of various crises.
You should be investing for the long-term, so selling today in panic and taking a haircut is not the right aptitude for the stock market.
That said, you should reexamine your portfolio to see whether you have exposure in European stocks, particularly in the PIIGS countries – Portugal, Ireland, Italy, Greece, and Spain.
You may consider shifting out of these stocks or funds if you have them and/or curtailing future investments there, as most of these countries are in serious trouble and will be wrestling with massive overlevaraging for a long, long time.
If you are invested with large blue-chip companies, especially those with global operations, sit tight and ride it out. Companies like Walmart, GE, Ford, and Proctor and Gamble are invested across the world, particularly in rising economies like India, China, and Brazil.
Of course in the tech sector, Apple, Google and IBM here to stay and not going anywhere anytime soon. These companies too are invested globally, especially in rising economies and are generally safe places to be invested in.
In energy, Exxon, BP, Chevron and the other oil majors will be rewarding stockholders richly for years to come as energy demand rises steeply in developing economies and supplies become more limited. I would stay put.
Finally, as an earlier article mentioned, gold has been surprisingly rewarding as a safe haven in the past few years and looks likely to be more so in times of economic turmoil.
This piece though is not about specific stock selection however, it is about strategy or mindset. Remain calm as we may have further to fall. Economists now even estimate the probability of a new recession as 50-50.
Just modify your investments around the edges, avoid swathes of Western Europe, stay with profitable multinationals and as always, consult your financial adviser.
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Category: Bonds, Mutual Funds, Personal Finance, Stocks