Friday, October 10, 2008

It's The End of the World and I Feel Fine

I've been humming REM's song a lot these days. It's no wonder since 60% of those polled think that we're very or somewhat likely to experience another Great Depression.

Whether we're in a recession or depression is really irrelevant when:

  1. I'm about to be laid off,
  2. my 401k is now down 35% from the end of last year and quickly cascading towards nothing,
  3. I only have about 4 months of emergency fund saved up (including my investment account and ESOP), and
  4. I'm up to my eyeballs in debt.

When I started writing this post, I was going to question all the relentless cheerleading going on right now by many financial writers who encourage people to stay in stocks despite the cascading market crash, like Liz Pulliam Weston of MSN Money and Brett Arends of WSJ. The advice is rooted in historical data that supports how those who pull out of the stock market during a severe downturn never get back in time to benefit from the rebound.

But as we all know, historical performance doesn't necessarily guarantee future performance. (I even state that in my disclaimer.) What if this market crash is different than before? What if our free market system, our banking system and stock market is irreparably damaged? What if the global community no longer considers the U.S. a safe haven of investments and stop investing in our economy?

I was curled up in a fetal position sucking my thumb until suddenly I just said, "F#(@ it. If I lose it all, I lose it all."

Once I said this to myself, I felt much better. Of course, I have the benefit of knowing I have decades to make up for such a catastrophic loss. But this is a key step to overcoming my fear, particularly my fear of making a mistake. This reminded me of FDR's seminal speech: the only thing I have to fear is fear itself.

A Wall Street Journal article writes:

During the Great Depression, an entire generation became convinced that owning stocks was dangerous.
Depression-level stock phobia might be making a comeback. Will you suffer from it or conquer it?
First and foremost, Americans are afraid. ... As finance professor Meir Statman of Santa Clara University says, "Fear increases pessimism."
[I]t is hard not to be bullish. As an intelligent investor, you must always ask: What is my edge? What information or skill do I possess that the people on the other side of the trade don't? In normal times, that is a high hurdle. Today, however, you need only two things in order to have an automatic edge: cash and courage.

For people who have the courage but not cash (like me, he he), the article recommends rebalancing my investment portfolio by selling a little of anything that's gone up and buying more of whatever's gone down. Since that's already part of my plan, I'll remain on course.

The Wall Street Journal article points out: if you were among the courageous few who bought and held stocks during and after the Depression, you earned spectacular returns.

To be frankly honest, I'm not looking for "spectacular returns". I'll be happy with returns that beat inflation by the time I retire. :-D

Regardless of what the market does today, I wish you all an excellent weekend.


Sallie's Niece said...

OMG I was contemplating writing a post with the same title as I have been singing that song to myself lately as well! I think you said it best though - whatever comes will come and it's not use getting too scared about it. Is the layoff a definite thing and do you know what kind of severence will be available?

Shtinkykat said...

Thanks for the compliment. It means a lot from someone whose writing I admire. :-D

I'm 90% sure about the layoff. The formal announcement will come in about a week or two. Just like people speculating about the market bottom, there's been rampant speculation about who will be affected and who won't be. The severance is pretty generous. (I'm slated to get about 30 weeks.) But according to people who've already been laid off, the severance gets taxed like a bonus, so I'm expecting to see about 60% or about 18 weeks. It's better than nothing though!

Anonymous said...

It's hard to not get freaked out about it! I can't even bring myself to look at my retirement accounts right now.

And for all the cheerleading going on, if we had pulled out in January, we'd all have more money right now! At this point, though, I've given up on worrying about it!

Money Beagle said...

The way I figure it is this: I'm in my 30's and will not need my retirement for probably 25-30 more years. In the long run, what's happening today sucks but in 25-30 years, the price of my assets is probably going to be the same regardless. If the Dow were at 5,000 or 15,000, in 30 years, the assets are going to be the same price because over time, it will even out. That's what keeps me stable and avoid panic selling.

To address something the last poster said, if we'd have all pulled out in January, then many people would still be facing losses, because we would have just started the selling back then instead of now. Individually, yes, someone selling then would be better off today, but collectively, a down market is a down market.

Shtinkykat said...

Paranoid Asteroid: Of course, I don't know what the future holds for us but I suspect that market is NOT going to collapse completely and the Dow/NASDAQ/S&P500 is not going to go to 0. Had we pulled out in January, we still would have captured some loss since the market peaked exactly 1 year ago. I truly believe that people who stayed in the market will come out ahead.

Money Beagle: Hmmmm... When you say, "If the Dow were at 5,000 or 15,000, in 30 years, the assets are going to be the same price because over time, it will even out.", do you mean that it will the same price adjusted for inflation? If so, yes, I totally agree with you. If it's not adjusted for inflation I'm totally scr*wed!