World Markets Plunge: What should investors do (a multiple choice question)?


World markets plunged yesterday. Just to recap:

  • Britain’s benchmark FTSE-100: -5.5%
  • France’s CAC-40 Index: -6.8%
  • Germany’s blue-chip DAX 30: -7.2%
  • India’s benchmark stock index: -7.4%
  • Hong Kong’s Hang Seng index: -5.5%
  • Canada’s S&P/TSX composite index: -4.8%
  • Brazilian stocks: -6.6%
  • Argentina’s Merval index: -6.3%

About the only market not to decline was the U.S. markets, because they were closed for the holiday. Tomorrow, the U.S. markets are sure to follow suit. The real question is this: what should investors do?

A. Sell: Convinced that the falling dollar, rising inflation, credit market crisis, and the growing account deficit will surely plunge us into a recession and tank the stock market, we should sell. If you follow Rich Dad’s advice, plow all your assets into gold. Reality: If you are a long-term investor (10 years or more before you need your investments) does this week’s or this month’s or this year’s returns really matter?

B. Buy: A falling market always encourages many to sagely conclude that a “buying opportunity” has arisen. With this advice, some investors feel as if they’ve risen above the fray of the market’s ups and downs. It makes some believe they are in control, as if such swings matter only to the inexperienced investor. We might even quote Buffett when he talks about being greedy when others are fearful. Reality: We have no idea if this is a good time to buy. The market is down, but trust me, it can go down a lot more.

C. Watch American Idol with the family: This is my choice. True, the show after a number of years has grown rather predictable. It wasn’t really all that good to begin with. But for some reason I still find it entertaining. Reality: I predict we’ll hear a lot of contestants who sound rather “pitchy.” Paula may very well cry, and Simon will scowl. But I won’t do anything stupid with my investments.

A falling market certainly isn’t any fun. And we may be in for more declines. If it helps, don’t look at your investment balances each day. As long as you have an appropriate asset allocation plan in place, in the long run, I believe the investments will do just fine. That said, what do you do when the market is falling: buy, sell or nothing?

Topics: Investing

8 Responses to “World Markets Plunge: What should investors do (a multiple choice question)?”

  1. My old co-worker used to say, “If you don’t know what to do, don’t do anything.”

    I was fifteen, working at the local movie theater and couldn’t decide whether I wanted plain or peanut M&Ms.

    It’s still practical advice.

  2. Kevin @ Change Your Tree

    I hate it when people claim that gold is inflation-proof, recession-proof, and market-collapse proof.

    It simply isn’t the case.

    IF the market collapses and we’re in a depression with people simply trying to survive, gold isn’t going to be worth jack. We’ll be back to bartering and simply trying to feed our families. Water and food will be worth more than gold.

    Gold is a horrible investment. It’s long term growth barely beats inflation.

    At a time like this, you either hold on to your current investments or buy more. If you’re selling, you’re investing wrong. Investing is long term. The market isn’t going to crash and it’s always going to go back up.

    Selling here and buying gold would be a huge mistake.

  3. I work for a firm that invests in venture capital. I’ve just upped my 401K contribution to the max ($20,500 – just turned 50) and my employer will match it 50%. I am gonna buy, baby, buy while the market is low. Dave Ramsey is my hero – no debt but for a house payment, which is way lower than “they” say I can afford. I’m living like no one else so later I can live like no one else.

  4. I’m with you about gold, Kevin. Gold is shiny. That is all.

    It has the advantage that people like its shinyness and want to take advantage of it. And that people are stupid and actually might take it over trading for food or water. Because they are so attached to the shininess they forget that they can’t eat it.

    I’ll be doing C. I might be tempted to buy, but I don’t have any investing money right now, which is probably for the best.

  5. Hey, I’m watching Idol too!

    I think buy, sell, or hold depends on what kind of down market you’re looking at. It isn’t a matter of market timing so much as personal risk tolerance. If you’re a more risk-averse investor, can you really be sure that seizing today’s buy opportunity won’t be a huge mistake if the market drops big over the next week? Can you be sure that you won’t sell in a panic? If you might do just this, then it’s not so much market timing as knowing your own psychology to avoid putting more money in the market now.

    I’m still investing same as always in my 401(k) and IRA, but I’ve held off on “discretionary” taxable investments for now. There is somewhat of a “perfect storm” element to the current trading environment that I’d rather not tango with. I’d been planning to put more into cash savings anyway for a couple of short-term goals.

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