How to Steer Clear of the Investment Panic Button

by David Ning · 7 comments

Do you get paranoid about your finances, try too hard and end up hurting your chances for a comfortable life?

Sara was sick, or at least so we thought. During one morning, she was having trouble breathing and sneezing, and getting very frustrated. The caring dad yelled at whoever came his way, pushed everyone aside and rushed her to a walk-in clinic. When they got there, Sara was quietly asleep, without a hint of trouble. But that’s not the end of it. Everyone else there was sick. Kids were running around sneezing, coughing, and spreading their viruses around the room. That’s when it dawned on daddy.

Is Sara fine all along but made sick because I came?

Then another thought came to his mind. Has anyone else done this with their finances? Panic, overreact and then swiftly push their finances down the slope of destruction because they just felt they needed to break a sweat?

At the beginning of 2009, when we were still scared out of our minds about the economy, financial system and our retirement, how many of us really did what we were supposed to and stay the course (or better yet, put more into our investments)?

Before you jump up and claim victory because YOU did. How old were you and how much value did your portfolio drop from the peak in 2007? Staying the course after a 50% net worth drop when you are 55 takes a vastly different mental toughness than doing the same when you are 22. If your early retirement hopes were destroyed and you are worried about your future, how much faith can you put into the “everything is just a cycle” theory?

Ignoring the short term was hard, but it’s precisely what we needed to do then. I’m not talking about those who bought Citigroup stock when it was $1, because the majority of those people just made a bet and won. I’m talking about the ones who, despite fear, trusted their experience and knowledge and just stayed heavily invested in diversified investments. The question really is, how do we get there?

Truthfully, there really is no right way to go about this, but at least I know these will help.

  • Been Through it Before. The more bear markets you go through in your life, the more you understand how the whole system works. While there is no magical way of gaining experience, you can help yourself by slowly increasing your risk exposure within the same asset class as you age. This is counter intuitive, but what I mean is, start off your exposure to equity investing with index funds. Then, as you feel more comfortable with the up and downs, then move onto perhaps different types of ETFs, and finally into stocks (if you so inclined). It’s much easier to feel safe in an index fund than putting your faith in one particular company, and having the needed experience may just make the difference of selling low or selling high.
  • Have a Plan. You seldom hear about people being proactive with their investments, but having a plan really helps. Investing has nothing to do with disaster recovery, but simulating a disaster recovery plan will increase the chances that you don’t panic at the worst possible moment.
  • Don’t Sweat It. Chances are good that you are underestimating your investment horizon. If you are retiring in 5 years, you need to account for the fact that the majority of your funds will still be invested for the next 25 years. In the long run, stocks win. Stay the course, and you will come out okay.

In the end, the doctor said Sara was fine, and for daddy not to worry. “Whew” he thought. I will be ready during the next crisis.

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{ 7 comments… read them below or add one }

marci357 April 12, 2010 at 7:25 am

Over 55 – stayed the course. Period.
Asked questions, lots of questions, and followed the old advice –
Slow and steady wins the race.
An OLD Aesop’s fable.

I subscribe to the theory that you don’t actually lose the money until you withdraw if from your investments…. The numbers might change on paper, but you still own the assets – meaning you still have the same number of stocks, you still have the same number of shares, you still live in the same house…. you have the tangibles, just the numbers change. Unless you are withdrawing $$, it’s only numbers that are changing, not the tangible assets. I have faith in myself and my financial decisions, as they are based on the Long Term, not the quick market ups and downs. And I am very diversified. I lost NO sleep over the economy – I just let it ride.

There are those who are going to argue with this outlook, but it really doesn’t matter to me. It’s worked for over 35 years for me. It’s how I look at it, it’s how I invest, it’s how I am comfortable, and as I KNOW my stuff is all conservative and increasing, I am not worried about it. It’s what works for me. And that’s all that matters to me.

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Sandra April 12, 2010 at 9:19 am

If I panic every time there’s a market meltdown, I’d be in the hospital by now. Experience does help, but it’s the fact that I thought about my investment plan that helps the most. Otherwise, I would be clueless and afraid whenever account balances shrink.

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Cd Phi April 12, 2010 at 9:20 am

I know exactly what you’re talking about. It’s that rush of panic that really makes people paranoid.I think you make an important point in that you have to ride it long-term because just investing short-term, you may panic and withdraw money when it’s not a good time and lose out.

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James April 12, 2010 at 4:21 pm

you hit the nail on the head. i wish i pt more into the market in 2009. i did the opposite well not the opposite but i did nothing and it sure feels like i did nothing.

i personally thought the market would not come back for at least a year and it came back way faster than that.

lesson learned :(

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Signals April 12, 2010 at 7:32 pm

I think it is just pretty normal to have some form of a panic when there is a financial meltdown. But the key is to always look at the bigger picture, the longer term goals and projections.

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Roshawn @ Watson Inc April 12, 2010 at 10:11 pm

I think financial education is key in reducing your stress from changing markets. For example, history shows that these cycles of boom and bust are completely normal.

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Robert Wasilewski April 18, 2010 at 4:22 am

Nice article. I would emphasize the “plan” part especially for those nearing retirement. You want to have figured out how much you want to draw from your nest egg and to have at least 9 months in payments in a short-term fixed income investment. You also want to have at least 60% of income needs met by dividends and interest. People panic if they are forced to sell at extremely depressed prices.

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