10 Best Financial Strategies in Times of Crisis

Don’t Panic.

No one will ever forget where they were when they first heard of the tragic events on September 11, 2001. The knee-jerk reaction in the financial markets was to sell. For the week ending September 21, 2001, the Dow declined 14.26% for the week ending September 21, 2001 – the second worst weekly percentage decline in the history of the Dow. These sell decisions were made based on fear of the unknown future. Fear is an emotion that can control market movement – but only for a short term. David Dreman, who heads Dreman Value Management which manages over four billion dollars of funds, has studied the performance of the Dow after 11 major crises since World War II. On average, the Dow gained 25.8% in the year following such events. Although holding still in a panic is gut-wrenching, it is the best decision when one does not know all the facts.

Ignore the Media.

If you have ever driven on I-4, you know that sometimes there are traffic jams. Usually, these traffic jams are caused by accidents. Why does the traffic back-up always seem to continue well after the accident has been pulled to the side of the highway? Because of our inherent curiosity – we always slow down to stare at the damage. The television and print media understand this. They operate of the same principal – bad news, just like the car wreck we all stare at, is far more interesting than good news. One just needed to see the tape of the airplanes crashing into the World Trade Center once to have the image forever burned in our memories. Instead, the media has played the tape thousands of times. Remember television and newspapers are just businesses like any other – they are trying to sell themselves by over-hyping the news. Turn off the television and put down the newspaper – things are not as bad as the media dramatizes.

Diversification.

This is a concept that works anytime. Remember the maxim don’t put all your eggs in one basket. The same concept applies to your finances in good and bad times. Your future should not be tied to the fortunes of a small number of companies. A typical mutual fund owns the stock of several hundred different companies, thereby spreading out your investment across a broad cross section of the economy. For maximum diversification, invest in a variety of mutual funds. This variety should include funds which focus on different types of companies, such as large, medium or small sized businesses that operate locally, nationally or internationally, and which utilize different investment approaches, such as value, blend or growth. This approach provides a balance in any type of market conditions.

Prepare your Estate Documents.

The events of September 11, 2001 demonstrate that one never knows when life may end. Unfortunately, 42% of Americans do not have a will. It is crucial that one has a will and the following related documents: health care surrogate, power of attorney and living will. A trust may or may not be warranted – it depends on the situation. Often people are convinced that they need a trust when the only thing it really accomplishes is a higher attorney bill.

Consult a Financial Advisor.

Going it alone in times of crisis is no fun. Your advisor should be a sounding board and beacon of confidence and stability in times of crisis to help you get through the tough times and position you for what lies ahead. Tiger Woods is probably the world’s greatest golfer. Despite this, every day when Tiger practices, there is one person who meets him at the golf course – his coach. Let your advisor be your coach.

Invest on a Regular Basis.

Another concept that works anytime. By putting away a certain amount of money on a regular basis, you pay yourself first. This approach allows you to ignore what the market is doing at any one time. When the market is going up, you buy fewer shares. When the market is going down, you buy more shares with the same amount of money. This concept of dollar cost averaging helps to smooth out the peaks and troughs of the market.

Analyze Cash Flow.

When your investments are declining in value, continuing to withdraw money may compound the decline. If at all possible, look for ways to reduce your monthly expenses and consequently, to reduce your withdrawals from your funds. Tracking every expenditure requires a lot of personal effort but it is a worthwhile exercise. You may miss going out to dinner every Friday night for a while but preserving your nest egg for the long term is far more important. In addition, the current environment of low mortgage rates may provide you an opportunity to improve your existing cash flow by re-financing your home.

Remember its Time, Not Timing.

Don’t let what the markets do today throw your investment objectives out the door. The prices printed in the newspaper every day are for those people who are selling their shares. A long term investor’s price will not be in the newspaper for 5, 10, 15 or 20 years. Remember, over the 75 year history of the S&P 500, for every consecutive 20 year time period the probability of a positive return is 100%.

Maintain Perspective.

Our sense of personal security in this country is shaken and it may not ever recover to the level America felt on September 10. But terrorism is not a new threat. Other countries have been dealing with terrorism for decades. Our American embassies in Kenya and Tanzania were bombed on August 7, 1998 by the same cast of characters who acted on September 11. A band of 50,000 people cannot destroy a nation of 250 million that represents the world’s largest economy. It does not matter how motivated this group is – they will not succeed against the full resources of the United States of America.

America the Great

The United States of America remains the world’s largest economy and the leader of the free world. The entrepreneurial spirit that makes America what it is and what it has been – from Ford to Gates – is still alive and well. The New York Times recently printed a picture showing anti-American protesters gathering in Pakistan – the protesters were gathering under a Kentucky Fried Chicken sign. The attacks on America did not change the manner in which General Electric produces light bulbs, Colgate makes toothpaste, Ford produces cars and Microsoft sells software. It is our freedom that spawns this level of economic productivity. Our American spirit, freedom, creativity and productivity will not change - they are inherent traits of the soul of America.

The opinions and forecasts expressed herein are those of Joel Garris as of September 24, 2001. Where referenced, past performance is no guarantee of future results.