Chaos on Wall Street: What Should You Do?

by Kevin on November 21, 2008

The S&P 500 index has dropped 47% in the last twelve months. In the last five days alone (including half of a trading day today, as of the time of this writing) it has dropped 14%.

Some questions that may be running through your head:

  • Are we in the Great Depression II?
  • Should I invest my money now, or wait until later?
  • Should I cash out my investments now?
  • Should I stock up on food and weaponry?

I don’t know. I’m not an expert here. I don’t think we will have the 2nd round of the Great Depression. If that happens, in my opinion, the world economy goes with us. That could be bad. I doubt I would still be blogging after that!

As far as whether or not to invest now… I can’t tell you if the markets will go up or down today or tomorrow or next month. We’re — gulp — sticking to our investment plan and continuing to contribute to our 401ks and Roth IRAs. It isn’t easy seeing the amount you’ve invested so far continue to drop… no doubt. But I think it will come back eventually. I have 30 years to wait it out.

I wouldn’t recommend cashing your investments out now. If you are near retirement age, it is too late for you. Your investments have been most likely halved or taken down at least 25% (unless you were invested very conservatively). You will likely need to live longer or lower the amount you take from your accounts each year. If you are young, you have 30 years to see retirement so I would stay invested. We are.

In terms of preparing for the end of the world, that’s up to you. Canned goods are only good for so long. I suppose you could try meals ready to eat (MREs) that the military uses.

Again, I’m not an expert. Do what you want with your investments. But your actions should be fueled by logical, educated thought rather than emotional fear.

What are your thoughts during this crazy time?


Steve in Denmark November 21, 2008 at 2:45 pm

People need to get a grip. They’re now saying that the figures – on this stock market or that, possibly yours’ – are the worst in 10 years. 10 YEARS. Not ‘ever’, not ’50 years’, 10. That’s 1998. I can REMEMBER what I was doing in 1998 for goodness’ sake. And it wasn’t worrying about how low the US/world stock markets were. I do remember the 3 day week, the electricity black-outs to save money, the oil crisis and the miners’ strike. But that was 1973-odd. Not just 10 years ago!

One day the markets drop 200 points ‘on fears of a global recession’. ‘Fears’, for goodness’ sake! It’s already here and it’s happening. What on earth is there to ‘fear’? The banks’ stock take a bath. Then, lo! Next day, the banks stock surge up through the roof. Why on earth are these people in jobs if one day they think it’s a good idea, then the next it’s the worst idea they ever heard?! If I changed my mind so suddenly and completely in such a short space of time in MY job, I’d be put in the next available bed in the psychiatric ward I’m working on, not looking forward to a nice fat Christmas Bonus. Who’s buying the stocks? Different people seeing a bargain? The same people who sold them the day before? If it’s the latter, then we should be seeing prosecutions for insider trading, fixing or whatever you’d call organising the deliberate of selling stocks knowing you’re gonna buy ’em back for twoppence and a pickled egg the day after. That’s the way it looks to me.

And the really sick joke is that ‘we’, the tax-payer, are gonna have to lose our jobs, or if we still have a job and a house, give our hard-earned tax money to people to continue taking stupid risks/make cars no one wants, and carry on using private jets to travel to bail-out hearings to beg for our money.

Matt @ Steadfast Finances November 21, 2008 at 2:53 pm

Nice post as always. Probably one of the better ones to focus the frustration towards for the great “I don’t know” shoulder shrug that all of us are doing. That’s why I trade instead of invest.

I tend to find positives in any situation, but here is one idea to really consider… if you have a job and you’re not nearing retirement (as are most blog readers), things really aren’t that bad. There are exceptions to the rule obviously, but the commodities we all rely upon are basically dropping like a stone. Gas and food are less expensive which is a stimulus plan in itself, as well as the huge discounts found for the Christmas season will help us save a little more. It’s not a rosy outlook, but the data from the ground up looks fairly positive if you’re not relying on your investments and you’re concerned about higher prices for the immediate future.

[email protected] November 21, 2008 at 6:34 pm

Personally, I don’t think we’re coming back anytime soon from this. We’re looking at multiple waves of crises lined up ready to hit the beach we’ve all been sunbathing on. By the time we would normally have clawed our way out of this meltdown of the financial industry’s making, we’ll be facing a world without any cheap sources of fuel to drive a recovery. Anyone touting the historical trends would do well to remember that basically all the economic theory and history that we have data for was predicated on cheap oil – a situation that is about to change dramatically. These cheap prices we’re seeing right now are a blip; they won’t last. It’s all well and good to take the long view. Just remember to look back far enough to include those eras when the fuels that drove industry were relatively hard to come by.

Matt @ Steadfast Finances November 21, 2008 at 7:14 pm

@ Kate

While I agree w/ your for fundamental thesis on cheap oil, I’m having a hard time believing oil will rebound to previous highs anytime within the next few years, which should benefit the American public more than anticipated. It’s basically a tax cut and stimulus package all rolled into one.

OPEC is scared stiff that Team Obama and the Pickens Plan will destroy demand for their primary money maker, and will hope to fly below their radar as quietly as possible (except Chavez of course). Historically, any rise in oil prices makes an inverted “V” shape and the lows remain low for extended periods of time. Thus, keeping the cheap oil habit flowing as always and Obama has vowed to vanquish foreign oil dependence within 10 years.

I’m assuming your argument is based from the Pickens Plan (I’m a member myself), and while I love ol’ T. Boone Pickens as much as anyone, he’s been wrong on every trade relating to the price of oil this year. He’s lost billions with his hedge fund so I’ve become a bit leery of his energy price argument based on his performance.

Frugal Bachelor November 21, 2008 at 9:37 pm

I’m sticking to my investment plan. I haven’t cashed out, and I’m still maxing out 401(k) and IRA’s.

Having said that, the ~50% drop in the market has DRASTICALLY pushed back my plans for retirement & life in general, as it has probably everybody who has been investing for more than a couple of years. I’m rather angry & upset over that.

My biggest fear, though, is losing my cash (either through bank failure, hyperinflation, or devaluation of the US dollar). I lose a lot more sleep over that than the stock market.

Russell Fascenda November 24, 2008 at 9:04 am

We all wish we’d turned all our investments into money-market funds a year ago, and now we’d be ready to scoop up the bargains in the stock market. But having not done that, it’s clear now is not the time to convert stocks into cash. Although converting stocks into other stocks is not a bad idea at this time.

New investment should be a winner too, that’s my plan, I opened a Roth IRA in the past two months, and converted part of a traditional IRA into anothe Roth IRA.

Also consider if you’re reinvesting dividends in your investments, and you own good companies that are maintaining good dividend payouts, you’re buying more shares now. If you plan to live another 10 years or more, you should come out in good position by that time.

Jessie November 26, 2008 at 9:37 am

I think in such a situation it is most important for the investors to remain steady, calm and they do not really need to show their emotions. I personally agree to your comment that it isn’t easy to see your investments go down in value but then yet you need to keep positive thoughts and take proper decisions.

Kevin November 28, 2008 at 4:58 pm

@Steve: No one said your average Joe was smart enough to think about historical returns. Then again, sometimes history changes. That’s why people are spooked — what if this isn’t going to return to normal?

@Matt: I would prefer to be more like Buffett and see my shares as an ownership stake in a good business. What if your assumptions about the trade are wrong? I suppose you could say the same for your assumptions about a business… I guess I feel trading is more emotional than logical. That is “I’ve done the research and this firm is worth $XX per share” rather than “the charts show to trade here because of the moving average”.

@Kate: I guess we can hope you are wrong, but I have to admit there is a chance you are dead on.

@Frugal: But if you are continuing to invest while the market is at the low, as it goes up you should not only recover your original losses but also increase the growth of your investments. Hopefully that will right your schedule.

@Russell: Good point about the dividends. You would have to remember to reinvest if you get a distribution from your mutual funds as well.

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