Witnessing History and Ignoring the Panic Button

by Kevin on September 21, 2008

(Photo by cogdogblog)

A Recap of the Last Five Days

Well, what a crazy week we just had in the investment world. The market seemed to be in a freefall crash. Businesses being allowed to fail, others being shored up by the government. Valuations going all over the place. The media is all over it and I have five paper Wall Street Journals to document this piece of history.

We are living through history right this very second. The bigwigs in Washington are trying to get their greasy hands on $700 billion — with a b — to shore up the financial markets, and in their eyes, the economy.

Some have said this is Great Depression era intervention. Will we learn any lessons from this? Will the markets stabilize or are we just headed for a big downward spiral?

I can’t answer those questions. But I can tell you how to live through it. First, some perspective.

A positive trading week

What would you say if I told you the S&P 500 had a positive overall return last week? Sounds crazy, right?

Well let’s look at the S&P 500 index from the past five business days:

  • Monday: Down 4.7%
  • Tuesday: Up 1.75% (down 3% overall since Monday)
  • Wednesday: Down 4.7% again (down 7.6% overall since Monday)
  • Thursday: Up 4.3% (down 3.6% overall since Monday)
  • Friday: Up 4% (up 0.27% overall since Monday)

Monday morning the S&P 500 opened at 1,251.70. It closed Friday at 1,255.07. I didn’t believe it when I first saw it either. The way the media covered this past week made it seem like we were headed for the 1930’s all over again. Perhaps we were. Perhaps the Fed and Treasury Department averted the greatest financial crisis of all time. I don’t know. But if you asked the media, the sky was definitely falling.

Imagine Today’s Media in 1987

I can only imagine what the media would have said on that fateful day in October of 1987. Some call it Black Monday these days which can be rather confusing because that term also applies to the 1929 crash. It was October 19, 1987. Something happened in the Hong Kong markets and spread across the globe as the trading day opened up in each time zoon. The Dow fell 508 points. 508 points is nothing these days, but in 1987 that amounted to a drop of 22.6%.

Can you imagine the panic running through the American psyche at the time? Now put today’s media into the situation. It would be really, really ugly.

Compare a 7.6% drop over three days to a 22.6% drop in one day. A significant loss no doubt, but about 1/3 of the pain over three times the time period.

Avoid the Panic Button

As all of this unfolded this past week, I forced myself not to look at any of my investment or retirement accounts. My fear was that panic stricken instinct would kick in and I would sell, sell, sell as fast as I could to avoid further losses. Instead I forced myself to stick with my investment path. Panic selling only helps the people who buy your shares, in my opinion. (That holds true, of course, unless your position goes completely underwater and you lose everything!)

As Wednesday rolled around and the market had dropped more than 7% it became increasingly difficult to avoid checking my balances. Questions roll through the brain at times like these: Exactly how far down was I compared to the market? How quickly could I sell? When will the downward trend reverse? Will I be able to retire? What if I sell and then the market rebounds?

I didn’t have good answers to any of these questions. I was already in the hole and with the fluctuations in the market I did not want to miss a big runup because I got scared. My retirement is many years (20+) in the future. I could ride this sucker out.

Sellers are Kicking Themselves

For those who could not ignore the panic button and sold, they must be kicking themselves today. If you cashed out around Wednesday when the market was at it’s lowest point this week, you not only locked in all of the losses for the week, you also missed out on all of the gains on Thursday and Friday. A double whammy on your portfolio returns.

If they repurchase the shares Monday morning, they’ve not only lost money, their shares are higher on a cost basis for the future.

I’m not saying this may not be the best move in the long run. I can’t predict what the future will hold. If the government’s plan doesn’t work we could see the financial markets drop 20%. Then again, they could go up for a third day straight. In the long run, these small fluctuations are just that. Small. It’s just hard to see that when you’ve got red charts all over your computer screen. So avoid checking your balances every hour or every evening. Stick with your investment plan unless you see a significant, unemotional reason to deviate. Heartburn or antacid medication optional.

Tomorrow the Carnival of Debt Reduction is here on No Debt Plan, so Tuesday I’ll be back with some tips to help you avoid hitting the panic button.

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Kristy’s Weekly Roundup | Master Your Card
September 22, 2008 at 11:07 am


Ray September 21, 2008 at 6:12 pm

One of the biggest news in this part of the world is Oei Hong Leong’s buying 1 million shares of AIG at around 1.80. Last time I checked, he had more than doubled his investment there 🙂

Shaun Carter September 21, 2008 at 7:26 pm

@Ray – I was considering taking a position in AIG under $2 but decided against it after seeing what happened to Fannie & Freddie’s share prices. But now it looks like AIG may be the exception here.

Kevin September 22, 2008 at 8:52 am

AIG is trading @ 4.92 currently. Tidy little profit from 1.80! $1.8 million turns into nearly $5 million… $3+ million profit.

I thought about it, but not gutsy enough and doesn’t match with my investment plan.

Ray September 22, 2008 at 9:19 am

Yeah… ah well. A guy like him must have a bunch of people performing the homework for him to come up with the conclusion that it’ll be a smart buy. It is indeed easier to get richer when you’re already rich, eh? 😉

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