The Important Thing is to Remain Calm

February 22, 2008

The U.S. economy is like a zebra that has stumbled into a spot of quicksand. The more it struggles, the faster it will sink, but if the zebra can be patient, help may come along sooner than it knows.

A lot of people are worried about the economy, and they should be. We are in tough times right now and people are losing their jobs. People are also losing their homes, their cars, their speedboats and their second vacation homes. Some of them had it coming, for buying more than they could afford under the assumption that the good times would keep going on forever, and for failing to save a little for a rainy day.

The important thing is to remain calm. Don't panic. Keep investing in the stock market, keep saving money for retirement and keep buying things you need and can afford. If investors panic and everyone pulls their money out all at once, the system will crash.

The last two big stock market crashes in 1929 and 1987 were caused by a sudden drop in investor confidence. Our current situation is very similar. Many areas were overvalued and were more expensive than they were worth. The market corrected itself, as it often does, but the country and the world panicked, turning a snowball into an avalanche.

Or to stick with my metaphor, the zebra stirred up the quicksand and sank so fast it drowned before help arrived.

I was reading up on stock market crashes today and learned that in every instance, the markets recovered within months, but the damage to investor confidence had been done. People lost confidence in investments and started stuffing their money under their mattresses.

Those who reinvested after The Crash, and those who kept their money invested the whole time, saw their money grow. Those who sold when the bottom fell out and stayed out ended up losing everything.

Nobody wants that to happen again, especially the "doom and gloom" media. People need to stay calm and stay invested, or our fears of a Depression will become a self-fulfilling prophesy.

Prudent investors should continue to have a diverse range of investments. Buy stocks, bonds, mutual funds, exchange-traded funds and alternative investments like real estate, gold and other commodities. Have some of your money invested overseas and some invested in the U.S. The more spread out your investments are, the less you will be affected by a sudden drop in any one sector.

But don't expect that the market will always go up. The world has been very fortunate to have such strong growth in the last few years, but markets go up and down. Currently they are headed down again, and probably have a bit farther to go. But this is a good time to buy, not sell.

Markets will go back up again, and if you buy now, you can get into some great investments at bargain prices. But be prudent. You probably don't need to buy a new car every year if there's nothing wrong with your current one. If you've got money, now is not the time to be having $800 dinners and riding around in limousines, if only because it will create unwanted tension between the haves and the have nots.

Don't buy things you can't afford, pay off your personal debt, and think about where you want to be in a year and what you need to do now to get there. With any luck, this down cycle will be over before we know it and those who were patient and planned wisely for the future will find everything came together, as it always does.

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