The Sky is Falling: Reacting to Recent Stock Market Turmoil

Unless you’ve had your head buried in the sand, you’re aware that United States financial system is in the midst of an ever-worsening crisis, and that the stock market has gone a bit haywire. In fact, we experienced the largest single-day drop in the stock market since the markets re-opened after the September 11th attacks.

Why? Because Lehman Brothers (LEH), an investment bank that pre-dates the Civil War, filed for bankruptcy over the weekend. Moreover, Merrill Lynch (MER) was taken over by Bank of America (BAC), American International Group (AIG) is reportedly on the cusp of failure, and Washington Mutual (WM) is still struggling to avoid failure.

What this means for us

Other than the fact that our investment accounts have taken an absolute beating, we’re trying not to sweat things too much. The money that we have in the stock market is intended to be there for the long term so, thus far, we’ve only experienced paper losses. Our investments are all automated, so we’re just going to keep on keeping on. Our retirement contributions go in on the 1st of the month and our non-retirement investments taking place on the 15th.

As far as “regular” savings goes, we have a couple of online savings accounts that are held at relatively healthy, FDIC insured banks. We also have a few CDs at PenFed, which is an NCUA-insured credit union. In both cases, we’re safely below the insurance limits, so nothing is really at risk.

What about you?

How are you reacting? Have you changed your investment strategies over the past few months, or are you staying the course? If you’ve made changes, what are you doing differently, and why? Are you trying to load up while the market is down? Or are you getting out in a panic?

35 Responses to “The Sky is Falling: Reacting to Recent Stock Market Turmoil”

  1. Anonymous

    @kimiyasdad, i’m against puts as well, because they create artificial bubbles. i for one think that real numbers should rule the market, not speculation.

    @Dan, you can’t use gold or silver for anything, so it really is worthless. you could sell it for scrap value at the end of the day. Moreover, gold/silver has not kept up with inflation (although it’s supposed to be inflationary protection). supply/demand does not justify the current prices just like they didn’t in the early 80s. gold/silver will again drop, and drop quick and fast, to $300-$500 band again and probably will remain there for the next 30 years until we get another artificial spike. gold/silver has no inflationary protection, because number one we are no longer on the gold standard, and two it isn’t tradable for goods and services unless of course we go back to ancient times where gold and silver are used as currency.

  2. Anonymous

    Wow! Surprises me that everyone is staying with various forms of paper/”e” stuff.

    A few yeas back I upped my long-term savings to 30% silver/gold (in safe-deposit boxes, NOT an ETF, etc,) and sleep well every night as a result. (I also own nice, fertile land with it’s own water source, 20 miles from town, just in case.)

    Tried to go get more gold/silver this week and was told it was “unavailable”, (at EVERY place I went!) Was told I could pay now and have it delieverd in “ten to twelve weeks” but it would be priced at 20% over current market value!

    Never seen this before, not ever, in my 30 years of being involved with metals.

  3. Anonymous

    nothing personal. now that they are talking about stopping short trading. you are a bull. so am i. but the main thing you must learn about stocks, especially if you are in and out like me, is follow the trend. if everything is down, dont look for things going up, FOLLOW THE TREND! even if they stop short trading i will buy puts. when everything breaks recent highs i will BUY. if you really want to be an investor, LEARN to invest. read books, do research online, join investools, whatever you have to do to learn more about $$$. deal with the market, dont let it deal with you.

  4. Anonymous

    @kimiyasdad, yup, and the bastard short trader should be punished and prevented from doing so. same with long sellers, because they create inflated bubbles. i’m staying with a long term view and keep buying at a discount along the way. the sky isn’t falling. unemployment is still low, yeah ok it has been increasing and with the consolidations it will increase a little more, and there are plenty of companies out there with huge cash reserves and are strong. although we are probably in a recession now or will be in the next quarter, the economy has been extremely resilient even when people have been saying for the past nearly 4 quarters that we were in a recession. there is much more rhethoric right now because of election year. take away the chatter.

    the one thing i know for certain, is that whenever we have these hiccups, and i do see it as a hiccup, our economy comes back in force and strong. i will tell you that our economy is much more resilient and better positioned than many other western countries. yes, there will be a period of consolidation, re-evaluation which is good.

  5. Anonymous

    Changed my portfolio so it was more focused outside of the United States. Currently looking into stocks that might be discounted. Staying the course with index funds. Trying not to bite nails. Criticizing the government to help me feel better. Oh, and buying discount plane tickets, because I think travel prices will get prohibitive in the next few years.

  6. Anonymous

    @Tim – bastard short traders and hedge funds.

    this “bastard” short trader now has YOUR $$$. you keep buying and ill stay short. i think everyone should reconsider the “buying at a discount” way of thinking. everything is only getting worse. that seems to be all you hear on tv. this bank closing, these chain of stores shutting down, jobs lost, etc. all these companies have stocks and stocks are what makes the S&P and DOW. why buy something that is being talked about so horribly? buying for the long haul is just a way to get you to NOT SELL, when you should have sold at least 6 months ago. NEVER give back half your profits EVER. i short now but all in all i am a bull and believe me, as soon as car dealerships report better numbers, and banks steady out, and things appear normal again, then yes, buy at a discount. news never has anything to do with what news used to be, its always some bank or store closing down. since when has regular local news channels even mentioned the stock market in the past? well they sure do now.
    i agree with Chad, Christmas #’s will make things even worse. the best thing to do if you want no risk, stay in cash. buy all you want, ill take the other end, im staying short.

  7. Anonymous

    Those of you professing confidence are failing to recognize the gravity of the situation. Look, only one of two things can happen at this stage: companies are allowed to fail or they get nationalized (whether directly or indirectly through bailouts) and we get massive inflation. There really is no middle ground.

    That’s not to say that you are going to wake up and the DOW is going to be zero. I’m just saying don’t buy into the argument that stocks always go up more than you should. Systemic shock can be the changing factor.

    The bottom line is that we are going to have a huge re-allignment and no one knows which direction things will go. But it will definitely hurt. And it could hurt in the long run not just the short run. By all means stay in the market, but don’t do it so naively as in “golly gee, I’m invested for the long haul”. Yeah, you might be, and you might end up with nothing.

    Oh, and FDIC insurance is a joke. By all means stay in the policy limits. But don’t think for a second that it’s a secure system that can handle a huge bank’s collapse. It has similar underlying mathematical flaws as the Social Security system. Keep in mind the entire premise of insurance: I agree to pay you money in the event X happens in exchange for premiums because the risk of X happening is low. No insurance system can survive if everyone who has that policy all file a claim. WaMU would swallow the FDIC’s fund (which is of course just US Bonds, so we are talking essentially more inflation, because the government doesn’t have cash, and will have to borrow, when to pay off those bonds when they get cashed in).

    Again, by all means follow the present wisdom. There’s no clear indications of what is better right now. But don’t be polly-annish about it. Perot wasn’t a kook when he was talking about the deficit some 16 years ago and it’s only gotten a lot worse since then.

  8. Anonymous

    I’m just staying the course. Our primary bank is Wamu but its all FDIC insured. I’m fairly confident Wamu will pull through or merge with someone but if they don’t then the money is safe.

    My investment strategy isnt’ changing at all. Stocks are a very long term investment and should be diversified so that one sector dying doesn’t pull you down with it.


  9. Anonymous

    We’ll need some cash next summer, so we took out a little last week and put it in a six month CD. I’m glad we didn’t wait. But for long term gains and the bulk of our investments, we’re pretty much sitting pat. If I had any insight into which way energy is going, I’d invest in some energy companies.

  10. Anonymous

    @Kev – “Pay off debt, Rebuild EF, Pray every night that I remain employed”

    I’m with you. I have started some job skills study on my own to be ahead of the game if my job dries up. If I lost my job that WOULD make me panic! Our debt payoff is currently projected for June 2010, so no sinking thousands of “extra cash” into the market for me. My small emergency fund is too precious to raid for that.

    On the investing front I think I will finally open that education savings account I have talked about for months funding it with a small amount each month, I figure money added now will have more bang for my buck.

  11. Anonymous

    The real issue is panick not fueling itself. If that happens we have serious problems. There are lots of pontificators out there who are screaming the sky is falling without having a basis for doing so and inducing more panick into the system. i’m hoping we get to the point of crying wolf rather than a self licking ice cream cone.

    my feeling is that the market is at the same mark as it was 20 years ago, so i haven’t lost any ground having been naive and young and in debt a while ago, b/c now i have opportunity to make up for it.

    there will be lots of asset liquidation and in the end there will be lots of money made. this is inevitable in a down turn that companies fail and companies merge and consume others. this isn’t anything new, so people shouldn’t be surprised by it. people should take it as a good sign, because eventually this too shall pass. it may take longer, so definitely cannot plan your long term horizon by short snapshots. now if all the pros who constantly hark the same line actually stop panicking, then we’ll have some stability. unfortunately there is so much money being made on short selling that these wild swings are going to be norm until real valuations occur on the mortgage back securities.

  12. Anonymous

    what happens when the FDIC fund is gone? That is sure to happen if more banks fail:

    Apparently they will just have the treasury print more money for the fund to borrow. Huh?!

    The reason why commercial banks have been buying investment banks is because they can now use your deposit money to cover their bad debt (the Fed has just jettisoned portions of the federal reserve act that prohibited this!) This means that your deposits at Bank of America can now be used to shore up losses that Merrill Lynch has on its books.

    How is this a good thing when we have no clue how much bad debt there really is out there?

  13. Anonymous

    I’m about 60% cash in all my investments (retirement and regular accounts) and have been since last fall. This is going to get bad, but before that happens we will probably experience a small bounce from here and then the financial problems will combine with extremely low Christmas sales. Welcome to the worst recession since the 70’s. More banks will fail, so don’t be surprised.

  14. Anonymous

    I recently shifted funds and a higher % of my future contributions to small cap funds, with the theory that they usually lead the next bull market. In other words, small caps are cheap now (good buy time), but may be the first to rise.

  15. Anonymous

    bastard short traders and hedge funds. they should get rid of short and long trading and put hedge funds on a leash to follow the same rules as everyone else and get more transparancy in them.

    aside from that, i keep buying more funds.

  16. Anonymous

    I’m staying the course and looking at high paying dividend stocks. Although BofA has just made a major purchase, they have a very attractive dividend at the moment with a 7.6% yield.

  17. Anonymous

    Shareholders have lost money, but at least they can claim the capital tax losses and move onto their next investment. It is it is the unfortunate employees who suffer the most at the end of the day because not only do they rely on the company for their paycheck and livelihood, they also tend to be long term stock holders (via ESPP)

  18. Anonymous

    If I had some extra cash reserves laying around, or even if I had an emergency fund I would throw some extra money into the stock market. The market will rebound eventually and I have a lot of time left to invest.

    Tiiiiiiiiiiiiiiiiiiiiiime is on my side. Yes it is.

  19. Anonymous

    I’m buying dividend growth stocks like an absolute banshee!
    I’ll take all I can get of blue chips that continue to grow earnings and dividends – GE hasn’t traded at this low of a P/E multiple and this high of a yield in my lifetime.
    This might be a once in a lifetime buying opportunity for those of us with 15+ years until we need the money.
    Canadian bank stocks are healthy and actually raising their dividends, but since financial stocks are “out of favor” these gems are offering yields upwards of 4.5% and growing!

  20. Anonymous

    Eh. I’m not worried about it. We are continuing as normal, with a couple of small investment adjustments. I generally just turn the talking heads off. It’s too easy for me to get panicked and make stupid decisions when I listen to that junk all day.

    I know what I need to do, and I’m just holding firm and doing it.

  21. Anonymous

    For longterm investors, this could be a blessing in disguise. If I had some extra money laying around, I would definitely use this down time to max out my Roth on the cheap! Maybe I’ll just have to scrounge around in the cushions of my couch to make a bigger contribution this month.

  22. Anonymous

    Just hoping the 0% Balance Transfer on my WaMu credit card stays intact for a few more months. I’m sure that deal would be history if they go under.

    No changes other than that. I’m sticking to the original plan I made back in January (when the world was only “slightly” coming to an end) – Pay off debt, Rebuild EF, Pray every night that I remain employed.

  23. Anonymous

    I just bought $2000 of a S&P 500 Index fund! I just hope the S&P doesn’t drop any further, or I’ll deplete my savings! (Just kidding, this was “extra” cash I came into this week.)

  24. Anonymous

    I have checked my portfolio for excess exposure to the troubled financial sector and to confirm non-correlated movement of different asset classes yesterday.

    Also suggest that you confirm that none of your insurance coverage is through AIG. If so, you need a Plan B.

  25. Anonymous

    No reacting here. It sounds like this month might a good chance to add to investments for people with cash on the sidelines. I certainly would be if I was finished getting out of debt, but that is my priority right now.

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