What to Do If I’m Scared The Economy is on the Brink of Collapse?

by David@MoneyNing.com · 2 comments

Unless you’ve been living under a rock, the stock market has been roaring higher in the last few months. The move’s been so violent that some of my friends are actually talking about how much money they’ve made recently, forgetting that it’s only been a few months since the dark days when everything seemed to be falling off a cliff.

On the other hand, some of us are extremely worried right now because it seems like the economy is about to collapse and the stock market prices with it. Sure, it’s safe to say that the stock market as a whole offers positive returns over the long run.

But if you have invested money you need in the near future into the market, then now is the time to think about slowly transferring it to safer investments. The reason has nothing to do with whether the market will go up or down in the near future but rather the fact that no one can predict what stock values will do in the short term.

In a year from now, no one has any idea whether stocks will be higher or lower. There are many people who will take a guess at it and pretend they know but no one can make guarantees because there are too many variables that will affect the outcome.

Putting money needed soon towards the stock market is too risky. If this is you, seriously think about whether you could afford to lose it when you need the cash.

And what about longer term? What if there’s a long term decline like what happened in Japan?
It’s always hard to ignore Japan’s stock performance since 1990 whenever there’s a crisis. Back then, the boom of the housing market and excess lending fed off each other leading to a housing bubble in Japan. Once it popped, stock market prices were dragged lower and what’s left was banks with unmanageable debts from a lack of lending standards.

The economy then went with it and what followed was ten years of no growth in Japan’s economy. In fact, the Nikkei 225, which is much like the S&P 500 of the US, peaked at 38,915.87 at the end of 1989 and it’s at roughly 22,000 after 30+ years. Yikes!

As to housing prices? My friend who lives there told me that his house was finally worth what it was when he bought it 30 years ago. It sure is scary to think about the possibility of it happening in the United States.

But is it that bad? That same friend actually retired last year. In 1990 (when the crisis happened), he was a mid level manager working hard in the corporate world. When the crisis hit and headlines of doomsday were appearing everywhere, I’m sure he was worried much like we are right now.

Unfortunately for him (and many other people), the unthinkable (at the time) and their worst fears actually played out, causing Japan’s growth to grind to a halt. What happened to my friend?

Having lived through one of the worst economic eras of Japan’s history and 18 years later, my friend retired as the President in one of Toshiba’s medical division. He has two daughters and lives comfortably in a beautiful part of Japan.

He came out of that national crisis just fine and retired comfortably. Here are a few things he did right.

He stayed positive.
Many people gave up during that time and none of the quitters came out better than my friend. While he lost money on paper like everybody else, he stuck with his strong work ethics and kept working. It’s safe to say that he came out of the crisis financially much stronger than he went in.

He didn’t sell his house nor his stocks.
Unlike many of his friends, he didn’t sell any of his assets. The index never came back in his working lifetime, but he still received dividends through the decades.

He also invested internationally, which has appreciated several fold through the years. As he worked hard and accumulated more money, he put his money into more investments like saving accounts and stocks. While these alone didn’t make him rich, it certainly helped increase his wealth.

He didn’t panic and became unproductive.
I keep saying this and I will say it again. I see so many people these days spending time worrying about their finances and not being productive. I even know people who aren’t working, haven’t file for unemployment, yet complain that they are being forced to stay at home and can’t make money.

Spend less time worrying because you can’t afford the time to do so. Use that time to improve your situation instead. The PPP, mortgage forbearance, unemployment insurance benefits, and job searches are all things that take time to apply for. Do everything you can since you have more time now. Work hard now and good times will come again.

While it’s difficult for anyone to predict the future, you can take comfort in knowing that plenty of people still prosper in bad times. Don’t give up, don’t panic and try not to worry. That’s what my friend did.

Other Things to Do:

  1. Add to your investments – The market has already gone up so much that it gets increasingly harder to be bold enough to invest. Even though it works against our emotions, investing according to your plan is the only way to make sure you are in the market when the next leg up occurs.
  2. Assess your risk tolerance – We all heard about the relationship between time horizon and risk tolerance but a big part of risk tolerance is personal. If you are losing sleep at night, then your asset allocation is too aggressive and it’s time to change it.
  3. Stop reading the news if it makes you sick – There are just too many things important in life. Tuning out the news might not seem like the best advice but if it makes you happier, then it is the most important advice.
  4. Remind yourself of what you have – The stock market going down doesn’t mean the end of the world. Your family and loved ones are still beside you so cherish them.
  5. Consider a small treat for yourself – I like ice cream, or an icy cold caffeinated drink for this purpose. I figure that there’s a small chance the ice might freeze my brain for some temporary relief.
  6. Examine the family emergency fund – If you still don’t have an emergency fund, don’t you think it’s time to start one?
  7. Concentrate on the job – Everyone is so lifeless these days as everyone is more worried about their 401ks and virus news than their careers. If you can be the energetic one, you will really stand out and be remembered as a capable employee.
  8. Do something nice for someone else – Many people are in a bad mood these days. Make someone happy by doing something for him/her. It would make you feel happier knowing you are helping others too.
  9. Stop listening to your financial planner’s new advice – I am always amazed when the so called experts change the advice they give based on current market conditions. The right adviser will have already made a plan with you that works through good AND bad times. We need a proactive financial planner, not a reactive one.

During the Great Recession, a hedge fund manager named Bill Ackman invested $2.4 billion in 9 stocks, subsequently losing 50% in the crisis.

11 years later in 2020, he turned $27 million in hedges into $2.6 billion when the Coronavirus shutdown hit. He then used his proceeds to buy into the market, when the S&P was some 40% lower.

What do you think his hedge fund’s ability to gather new assets is going to be going forward? If he were to wave the white towel in 2009 and gave up, then I bet he wouldn’t be worth more than a billion dollars now.

The lesson here is simple. Don’t give up. Keep positive, and stay invested.

We will get through this better on the other end whether the economy collapses or not.

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  • Paul says:

    Great article David. I work with high net worth clients and certainly have those who are afraid of the market. One of the features of having someone manage your money is separating yourself from your money. Emotions/fears can cause investors to make ill informed decisions, so we act as a buffer. Still, there have been those who demanded we sell all their investments and move to cash. Unfortunately, they lost out on a lot of gains.

    Your “to do’s” 1 & 2 are spot on. Averaging into the market over time is a great strategy. Trying to time the market is not a strategy most investors should use.

    Understanding your risk tolerance is huge and really sets the stage for your investment strategy. I love your point that if it keeps you up, change it. Even if it means giving up gains, if you just don’t feel comfortable with the risk, don’t do it. It’s important to know that about yourself as it may mean you need to save more money to accommodate that aversion to risk.

    • David @ MoneyNing.com says:

      Good points Paul. Your clients are better off listening to you. I know of a few people who’ve missed out on gains of the past few months as well. It’s sad, but buying high and selling low unfortunately happens in every crisis.

      Hopefully, more and more people will listen to what we preach and there will be fewer people who sell at the worst possible time.

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