The stock market is a highly efficient mechanism for the transfer of wealth from the impatient to the patient.” Warren Buffett

September 15, 2008 the financial markets worldwide seized up and began melting down.  The economy had been slowing for months though still positive.  Then on Monday Lehman Brothers filed for bankruptcy.  The Federal government had bailed out others but over the weekend they decided to let Lehman fail.  When it did a tsunami shattered the world financial markets.

Two years before if you could “fog a mirror” you were qualified for a loan.  Now banks stopped loaning even to each other.

The media pounded out nonstop news about the end of the world.  “Worldwide Depression 2.”  We had reached “Armageddon” according to some ultra conservative (read wacko) bloggers.

By March full panic gripped the financial markets.  The stock market was down over 50%.  People lost jobs and consumers were hording money at alarming rates.  Which, by the way, consumer spending was the great cause for alarm only two years before.

I said to friends, “In all my years of investing I’ve never seen this kind of sheer terror.”   People asked me, “What do we invest in if the whole U.S. and possibly world economy collapses?”  And they were serious.

I responded, “If everything fails buy water, food and guns.”  For some that got their attention.

Evidently I wasn’t alone in that thought.  Gun sales skyrocketed and ammunition  grew scarce.

On March 9 the stock market hit bottom.  On March 10, with the world looking the same as it did the day before, the market started up.  The people who got out at the low and said, “I’ll get back in when it all looks better,” didn’t get in then.  Everything still looked horrible.

Now a year later the stock market has nearly recovered to the pre Lehman levels.  Panic has subsided.  Hysterical news coverage of the recession has waned.  The new crisis is health care.

I said to a friend, “It’s almost like it never occurred.”

Yet, for the people who panicked and sold out they’re devastation is real.  If they’re still hoarding cash they will never make up the loss.  They did meltdown.

Those who didn’t panic are almost even.  People like Warren Buffett have become legends for riding out the storms and capitalizing on them.

So how do you protect yourself? How do you keep your investments from melting down?

In a word, don’t panic. I know, easier said than done when the storm is raging and the only light is lightning striking around you.

Remind yourself we have been through this before.  Our economy is the strongest in the world.  It’s highly diversified and resilient.  And if your portfolio is set up correctly, which we’ve discussed in other posts, it will be resilient too.

Second, turn off the TV. Seriously, if you continually fill your mind with the hysteria that passes for news reporting you won’t stay calm.  So turn it off.  Take a walk.  Play with your family.  Enjoy a hobby.

Third, stop calculating your net worth. Don’t look it up on line.  Don’t read your statements when they come.  Your portfolio is down.  Get over it.  Give it time and it will come back up.  Then look at it.

Fourth, wait it out. In the middle of stressful times don’t make long term decisions.  Often you’ll make mistakes.  Don’t change anything until you can think calmly.  If your investment plan was right before the crisis then it’s probably still right.  So change it only after research and consultation.

Will this keep your investments from going down?  No.

Will you be positioned for the recovery?  Probably.

Will you do better in the long run?  You should.

The most successful investors practice this.   They are not overnight wonders but long term investors who have weathered many storms.

Think it’s a good idea?  Prepare yourself right now for the next difficult time so you’re not surprised.  You’ll weather the storm and your investments will be poised for recovery when it is over.

If you have questions let me know.  Tell me your story.

“Careful planning puts you ahead in the long run; hurry and scurry puts you further behind.” Proverbs 21:5 (The Message)

If this blog helped you please share it.  I appreciate it. D

Important Disclosures:

Douglas Armey, the LPL Financial adviser associated with this website, practices in Fresno, California and may discuss and/or transact business only with residents of the following states:  California, Idaho and Oregon.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results.

Securities offered through LPL Financial, Member FINRA/SIPC.  Member of Securities Investor Protection Corporation (SIPC).  For an explanatory brochure please visit www.sipc.org.          www.finra.org