Don't Panic!

Why the Stock Market Is Just Like Real Life


As I was driving home from work yesterday, the day that the Dow Jones Industrial Average dropped around 1100 points at the opening of the market and closed down a mere 588 and a half, I heard the moderator on my favorite financial show say something like:

"Today was the day the markets stared down into the abyss."

I get it, but that sure didn't help things any.

Actually, it kinda did, because it made me laugh, which put things into perspective.

Anyway, after all my talk about struggling with risk in the stock market and how I've been on the sidelines forever, I had finally made some moves. A couple weeks ago, I put myself about 40% into the market and bought some long-term holdings that I had been keeping an eye on and were selling at a bit of a discount.

This was before the China turmoil that started things on a quick spiral last week, and for a few days, I was actually up, and happy about my decisions. Then all hell broke loose and, as I'm writing this, I'm down a little over 10%.

Just like that.

There is a side of me that can't help checking the market, can't turn off the ticker, can't stop watching the losses pile up. It's a bloodletting. It's carnage. And while I will survive, there's something gut-wrenching about how it happened.

Stay on the sideline for months, then the moment I get in, the exact thing I was afraid of happens.

I could have sold everything last Wednesday, when it all started, and been up a little. I could have sold on Thursday, when the drop really kicked in. I could have sold on Friday, when they were already talking about keeping an eye on how bad Monday would be. In each case, had I sold, I would have more money in my account than I do now.

In any case, that stupid sinking feeling in my gut would be gone. It's not taking a lot of my focus, but it's taking some of my focus, which is more of my focus than it deserves.

But I didn't sell. Any of it. In fact I went back in on Friday and bought a little more. A year ago, I would have been out immediately and I would have chalked up my losses to a learning moment. But I'm not a kid anymore and I've been investing too long to have too many learning moments.

Besides, that would have been a bullshit excuse anyway. Had I sold, it would have been panic. Here's why I'm not going to panic:

• The fundamentals behind my decision to invest have not changed.

• The money I invested was investment money, earmarked for investing and only for investing.

• I've got a long-term horizon.

• Fear is good. Panic is bad.

Fear is something you can't escape. You live with it and work with it. Panic is fear without bounds. If you are panicking, and we all panic at some point about something to some degree, you should do nothing. You should freeze. You should exit the arena until you can lose the panic and once again find the fear.

Fear is healthy. I love roller coasters, but my brain still floods with fear every time I reach the top of the first drop. It's fake fear, which is why roller coasters are fun.

When I wake up in the morning feeling real fear, which feels a lot like fake fear except it comes with getting out of bed and not 10 Gs of force on my face, I know that it's my brain and body telling me something is out of alignment somewhere.

So every morning that I feel fear, I use my morning time to mitigate. In this situation with the investing, I come up with three or four things that I need to do to eliminate the fear. In this case, they look like this.

1) Sell everything!

2) Buy more because they're cheaper today than they were yesterday.

3) Move some money around to erase the psychological impact of a three-day 10% drop.

4) Take a damn breath and ride this out.

Three out of those four terrible down days, I chose #4, and like I said on Friday I chose #2 because I'm an idiot -- NO -- because of all the reasons I listed above not to panic.

In other situations where the fear creeps up in more important facets of my life, the list looks a lot different, and each item is a strategy that may or may not be valid, as long as I'm sure that I'm not making a second mistake to erase the initial mistake.

See #1 above.

Bear in mind that if events unfold to the point where the market essentially undoes my thesis, I'll have to sell. There won't be a damn thing I can do about either, except move on. But it won't be because I panicked.

Over the weekend, when we were putting the kids to bed, I was giving the wife an update on what had happened on Friday and what was likely to happen on Monday (that's another good rule of investing, keep the wife or husband involved, even if they don't like hearing it).

My 10-year-old daughter overheard a little, and she freaked out. I mean literally freaked out. She is my saver, the one who always has money in her wallet and has hundreds in her savings account because she hasn't blown it all on Barbies and Froyo.

So I told her the exact things I put in my Don't Panic list, in a way that a crying 10-year-old kid could understand. And when I simplified it down to that level, hearing it out of my own mouth, it made so much sense to me that panic seemed stupid.

Panic always seems stupid in the end. You just have to wait for it to pass.