Why post something with this title now? After all, the DOW hit all-time highs last week. Am I predicting a collapse? Nope. I’m simply preparing you for how to respond when it happens so that whenever it happens, you’re ready.
- Revisit your risk tolerance We love risk when our monthly statements are going to the moon, yet when values plummet, we wake up to the downside of risk. If you saw meteoric gains you should not be shocked by potentially massive dips. Every type of investment carries varying levels of risk with varying levels of reward. The value of the house or land you buy goes up and down. Sometimes significantly. You just don’t check it as often as your portfolio. The price of gold rises and falls. It just tends to get more press when people are afraid. And stocks are volatile. This is a feature—not a bug—of their potential for return.
- Remember that historically the stock market goes higher than it was pre-crash. Whether it’s the Great Depression of 1929, the one-day crash of 1987, or the Great Recession of 2008-2009, pervasive pessimism in the stock market was a buying opportunity for the long-term investor. This has been the story of the US stock market. Is it a promise for the future? No, of course not. But we can learn from it. Paste the good news of that history alongside all the bad news headlines you come across.
- Go on a financial media diet. Turn off the television. Don’t endlessly scroll through social networking or news feeds reading every scary headline. Fear sells, but no one can force you to buy it. A big dose of financial fright keeps the networks and pundits paid. And it keeps you clicking yourself into a panicky whirlwind that may put you on a pathway to a bad decision.
- Be watchful of financial gurus that are selling something in the middle of the crisis. There is a lot of money to be made off of people’s fear, and the financial fear mongers will be there ready to pounce. You should know that they’re always there. Predicting and prophesying stock market collapse is normal. They chirp in up markets and preach in down markets. It’s just that they get louder because the media gives them a megaphone during crises. Guard yourself against the possibility of making a major financial decision when you hear them. Haven’t we been told that we should not make major decisions in the middle of emotional and relational drama? You may not want to do so with your finances either.
- You haven’t lost until you’ve sold. I know…that line feels pretentious. I don’t like saying it or writing it. But it’s true. The moment you sell you’ve made the prices on the ticker tape a reality. And now you have another decision to make: when—and, most importantly—how will you know when to get back in? Before you decide to binge sell, you should probably decide on when you will get back in. And what makes you think that binge selling is more prudent now than buying?
- Reprioritize your values. Obviously, the value of your portfolio is important; however, take the collapse in your portfolio as a reminder that the value of your relationships should always be higher than the value you place on your portfolio. Money is an essential tool, but it’s a terrible god. Do you own your money or does your money own you? True wealth is holistic. It’s not simply the size of your pocketbook.
- Ask yourself if you trust your advisor. Would you trust your physical health with a doctor you don’t trust? Why would you trust your financial health with an advisor that you don’t trust or never talk to? Communication is important in every relationship, so find an advisor that doesn’t just know financial lingo but seeks to know you.