Surviving the stock market crash with money & sanity

October 10, 2008

How to Survive the Current Stock Market Crash….With Your Money AND Your Sanity Intact & how it will affect your college savings programs.

By Ron Caruthers
Wednesday, October 08, 2008

In the last few weeks, I’ve taken more calls from nervous clients than I did in all of the rest of the 18 years that I’ve been in the financial industry put together. Especially given that the market has gone down in the last 5 straight sessions, and 6 out of the last 7, I thought I’d take a moment to address what’s really going on, and why you’re probably better off staying put, even if you hate me for saying it.

First, let’s start with the obvious: the NASDAQ is off its’ last high by 38%, and the S & P is off by 36%; and that sucks, no matter what I try to say about it to cheer you up.

So, if your money is predominately in stocks, you’ve experienced a loss of at least 20%, even if your manager is doing an excellent job of protecting you against the downside. And most likely, you’ve lost a whole lot more than that. Just like George Bush Sr. used to talk about a rising tide lifting all boats (at least, I think it was Bush senior, although it could’ve been Reagan), a lowering tide is going to lower all boats as well, even well-captained ones.

However, before you rush out to sell everything and put it in your mattress, it’s probably helpful to review the history of the market and what’s really going on. There are several reasons to stay the course with your chosen plan and not abandon ship just because the market is down, no matter how stressed out you may be right now.

So, with that in mind, this is the first of a several part series I’ll be writing to hopefully help calm you down, and make you understand just what’s happening, and what YOU should be doing or not doing about it at this moment. In this installment, we’ll discuss the reasons for not selling in a panic right now.

Reason #1: Historically, good markets last longer than bad markets.
Since World War 2, the average bear market--which is what it’s called anytime the markets slide over 20% off of their highs--has lasted 332 days, or right around 20 months. However, the average bull market (what they call it when the market is trending up) lasts around 1,738 days or 57 months. Put another way, the average bull market lasts almost 3 times as long. So, the longer you are in the market, the more historical up days that you’ll have, by a margin of almost 3-1. So, even though it may seem like the end of the world right now, especially with what’s going on around us, the odds are still in your favor that you’ll have more days that you’ll make money than days you’ll lose money.

Reason #2: Good markets tend to go up further than bad markets fall.
Again, since WW2, the S&P has fallen an average of 34.1% during a bear market. However, the average bull market logs gains of 150%, which far outweigh those losses.
So, following this, here’s a hypothetical example of how this would affect YOU:
If you started this bear market with exactly $100,000 and it was all invested in an index fund tied to the S&P 500, you’d be down to around $64,000 as off close of business yesterday. Now, this doesn’t take into account fees or anything like that, I’m just trying to illustrate a point. Put another way, you’d be down just about the average of a normal bear market like we’ve been discussing.

But, following this same historical average, if you stay put and ride out the storm, once the market turns around, by the time the next bull market is done, you would have around $160,000.

So, you would have made all your money back, and then some. Now, remember, anything can happen, and as FINRA (the new name of the old NASD) loves to make us say: Past performance is no guarantee of future results. However, the reason there are averages in the first place in this life is because history tends to repeat itself.

Reason #3: You’re already down, so you might as well hang tough.
Another way of saying this is the old phrase ‘In for a dime, in for a dollar’. If you’re this far in, even if the market continues to fall or stay flat for some time, you’re better off riding it out than moving to some other investment, like cash or bonds.

Here’s why: first, historically, you’ve already lost the majority of your investment that you’re likely to lose. Back to the averages: the market is down right now about the average that it normally falls during a bear market. So, realistically, how much further down can it really go? No matter what happens, it can’t go to zero, correct? Now, don’t get me wrong, it can still go down further. But right now, we’re sitting on what it averages going down. So, if you’ve been in the market more than 5 years, you’ve already been through this before and you’ve seen it recover with your own eyes on your own financial statements.

Plus, once the market begins to recover, it often recovers quickly and extremely. Tomorrow, we’ll talk about the danger of missing the best days of the market, and how this can hurt your overall return dramatically. But, back to the history books again: once the market begins its turnaround, it typically takes an average of 23 months to get back to dead even. The next 34 months of the bull market on average are net gains on your portfolio.

Reason #4: This isn’t any worse than what we’ve seen before
Yeah, I know, you’re ready to throw rocks at me now, but I’m serious. See, every time something like this happens, everybody acts like it’s the end of the world. So, right now, y’all are getting worked up over the subprime mess, and the housing meltdown, and the credit crunch. Now, don’t get me wrong, it’s pretty bad. But is it really any worse than the DotCom meltdown coupled with 9/11 that we went through during 2000, 2001, and 2002?
We tend to forget just how bleak everything looked back then. But it seemed like the end of the world then also.

What about Black Monday in 1987, where the market fell 27%....in one day! That seemed like the end of the world also. However, what most people don’t remember is that the market still finished the year up, even though Black Monday hit in October.

Yes, there have been some recent bank and brokerage failures, mainly due to these Wall Street asses thinking they’re smarter than everybody else. But is it really any different than the meltdown of Kidder Peabody? Or E.F. Hutton…remember them? Or Long Term Capital Management—the hedgefund that collapsed that everyone said was going to bring down the whole economy? And, I could go on and on, but the point is don’t look at this and think that we’ve never seen a crisis like this before. And you can’t tell me that this one is different because this one is global. They were ALL global at the time.

(By the way, this is also why we do NOT use any of these Wall Street Morons to handle our clients’ money. We use boring Midwestern companies for the majority of our fixed money, and an Los Angeles based manager for the majority of our clients’ retirement assets: We want them as far away from New York as possible because we don’t want them infected by the incestuous thinking that goes on in Wall Street and that led to this mess in the first place.)

So, I’m not going to give you some speech about tough times never lasting, but tough people do. However, I will remind you again that it’s not as bad as the media portrays it. Lately, there’s been talk about how this is as bad as the Great Depression; but again, the facts say something different.

Right now, unemployment is right around 6%. Now, obviously, that sucks if you’re one of the 6%. On the other hand, during the depression, unemployment was over 20%...for three solid years. So we’ve got a long ways to go there.

And right now, even with as bad as the housing market is—and no doubt, it will get worse before the dust settles—foreclosures make up only 3% of the total housing market. During the depression, it was over 50%. And, think about what happened before the housing market began to crash: it was fueled by ridiculous increases in housing values that were well above the averages. Even now, housing values are still well above where they started before the runup. They’re just off they’re highs.

And, just like the dotcom runup of the late 90’s, anytime you have significant increases above the mean average, it has to be offset by similar significant decreases below the average to bring everything back to, well, average. If you went to church, they taught you the same thing: 3 years of feasting were always followed by three years of famine. So, what you’re seeing is some of the excess being cleared out of the system, but you are not seeing anything close to the Great Depression. At least not yet, so the comparisons are NOT accurate.

My next article, which will come tomorrow or Friday, will discuss why you still need the stock market, even if your about ready to retire; why Suze Orman is a big hypocrite; and why the bond market is more treacherous than a psychopathic, cheating wife or girlfriend (substitute husband or boyfriend if you like).

In the meantime, just be cool. You may be dying to get out of the market, just like an airsick passenger can’t wait to get out of the airplane. However, ripping open the emergency exit door and jumping out without a parachute isn’t the best way to get over that feeling. Neither is immediately selling everything you own just to get over your discomfort. In an upcoming article, I’ll also be discussing how to bail out of the market smartly if you really have had enough and can’t take it anymore, and what to do if you have a 529 college savings plan that’s down a huge amount, and why it isn’t the end of the world.

(Ron’s note: I wrote this as quickly as I could to respond to market conditions and without the normal time that I would allow for ‘seasoning’ and editing that I give when I write anything. So, in advance, I ask your forgiveness for any typos or sentences that aren’t perfectly clear. I read it out-loud twice and it seemed OK, but I’m sure I missed something. I’ll clean up any miscommunication in a follow up article tomorrow.)

Ron is a noted colleague and college planner.

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