If you are invested in the market, you know it has been a roller coaster ride the past week. Today (8/10/11), the DOW Industrial Average cascaded down another 500 or so points – the third significant drop in the past week. Are we on our way to an actual depression (as opposed to the Great Recession)?
Even if you aren’t invested in the market, you wonder if this will ripple down to you in the form of more job losses, higher prices, inflation, benefit reductions and belt cinching.
What Should You Do In a Market Downturn?
At times like these my first tendency is extreme and it is to drop back into survival mode. Do I have enough food, water, heat, light and shelter to last through depression like conditions? Can I meet my sanitary needs if sanitary sewer and water infrastructures collapse? How will I defend my homestead if intruders invade?
Am I just weird or do some of you also react that way?
In fact, my first draft of this article was going to detail just that. If you want to read up on that stuff, plenty of it was written in 2008 and 2009. Here are a few links.
My next tendency is to try to figure out how I can benefit from the situation. Because I recently retired, the stockpile of cash I collected in preparation for retirement is still sitting there. Is now the time to put that in the market and make it grow?
Why Not Do Both?
In the end, I will do a bit of both. I will prepare for the worst, but plan and take action for the best.
It’s Time to Re-Stock for Emergencies
I will go to the bank and stockpile some cash. I will re-stock the pantry and re-fill the water jugs we keep. I may replenish our supply of fuel oil, matches, candles, lamp oil and wicks. Most likely that is as far as I will go.
Occasionally, hubby and I have discussed digging a well, building an outhouse and putting in another wood stove and I have on rare occasion considered buying a generator. Although useful when needed, these to me are somewhat extreme and we won’t go so far as to execute them unless our country’s situation degrades considerably.
This Is An Opportunity to Build Family Wealth
Some of you may know that I am on a mission to build wealth across generations in my family. A dip in the market such as this can provide an excellent opportunity to do just that.
Using the older generation’s (ye gods how did that get to be me!?) wealth to invest for the future benefit of the next generation is a key concept introduced by several authors of books about the super wealthy – books such as Strategy for the Wealthy Family by Mark Haynes Daniell and Family Legacy and Leadership by Daniell and Sara S. Hamilton as well as Family Wealth – Keeping It in the Family by James E. Hughes, Jr.
This economic downturn is just the ticket to accomplish some of those actions.
Actions I Could Take to Build Family Wealth
Here are some of the actions I could take and financial goals I can set during this downturn in the economy to benefit the long term growth of our future family members:
Set up a family investment partnership or company, fund it and help the grown kids invest it’s assets.
Give cash gifts to my adult children with suggestions to buy in the down market.
Sell gold and silver and invest the proceeds.
Buy real assets (such as artwork, antiques, tools and etc) at reduced prices and hold to sell later.
Hold family conference calls to discuss the situation and opportunities with our adult children and their spouses.
Dollar cost average that saved up cash into emerging companies that I think will flourish in the next fifty years.
Be available to provide counsel to our adult children and their spouses (if they are interested) to compare the situation to others we and our parents lived through.
Write down my life experiences on economic downturns for the future benefit of my grandchildren.
Write a book about our experiences during the Great Recession and the Great Recovery and the aftermath of it and offer it for sale.
Share what I know of the family history during the 1920 – 1930’s depression and prior recessions with our children and grandchildren.
Share tips on surviving economic downturns within the family.
Do you think this is the start of a new recession, a slide into an actual depression or just a temporary blip in the economic landscape? How do you think it will affect you? How can you benefit from it?
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Comments
How to Handle the Stock Market Roller Coaster Ride? — 16 Comments
Hmm…I’m not sure. For the short term, I definitely think we have another drop in the stock market. And for the long term, I think we will be in this nasty 1-2% Gdp range for the next decade. We are definitely trying to protect ourselves by creating multiple income streams, so that if one of us lost a job it wouldn’t matter much.
Well, you were right on the short term – as I write this comment on 8/18/11 the DOW is again down under 11K! Multiple income streams is what we are trying for as well.
I’m hoping it will be another recession at worst, but I could be wrong about that. My husband works for the state in the unemployment office, so we’ll certainly be aware if there’s an uptick in claims. His workload still hasn’t decreased significantly from before, so we’ll have to see how all this goes.
I tend to react the same way as you, at least a little bit. It makes me feel better, and I figure at the very least if there’s a power outage or whatever we’ll be prepared. I think this is just a temporary blip. Or at least I hope so!
I probably wouldn’t invest too much of your money in emerging companies. You’re retired and probably should invest in safer dividend paying blue chips.
I’m also skeptical about “real assets.” I don’t have any experience here and who knows if the price will go up or down.
Retire by forty – thanks for the advice, but I think you might have overlooked my stated goal.
If I buy growth stocks it is in an attempt to plan for the next generation, not mine. We are (and will continue) to protect assets for our lifetime as well. Plus – I don’t think a horizon of 20 years is too short for growth stocks – do you? Personally I plan to be invested until my 80’s 🙂
You are right to hestitate about real assets, however, I do think housing at least will eventually regain ground.
Good post… thanks. What I find interesting is that no one really knows the extent of this “correction.” The traditional options seem to be things like dollar-cost average, move to cash, look to silver and gold, etc. I prefer to take an approach that profits from whichever way the markets move. For example, I place orders at prices higher than where they currently sit… so if some of the solid stocks I’ve chosen go up in value and this really is a short-term blip, I’ll get in at a pretty cheap rate. However, I also place orders for inverse positions (like SH or DOG or PSQ, etc) at a slightly higher rate than where they currently sit… so if the markets drop, and continue to plummet, I’ll get in these positions and make money. In fact, I exposed my Weekly Newsletter subscribers to this strategy a few weeks ago just before the markets began their drop… and we’ve made some significant returns as a result and protected our capital at the same time!
Dr Stock, what you are doing makes sense to me, but I am not really a trader and it seems like what you are recommending would work better for traders than folks who buy and hold?
Thanks for the interaction Marie… I understand where you are coming from. But no one is a buy-and-hold… we all eventually sell, making us (traders) of sort. I prefer to be an investor, but I’m not going to hold an investment that is crashing 20% or 30% or… I’d rather sell and reengage when it begins to show signs of recovery again. If you bought and held the S&P 10 years ago, you’d be basically even (or a little down). That doesn’t seem like a great investment… so I encourage conservative, weekly reviews.
We’re retired, in our 60’s, & are not making any changes yet. We continue to advise our grown children when asked & to support them with babysitting & helping make repairs. We keep our own expenses fairly low so we don’t have to touch our 401K for as long as possible. Those funds are managed for us to be appropriate in risk level for our ages. So the only changes we’re making is to not spend too much & buy only what is necessary. It migiht end up being another Great Depression, but if it is we’ll need cash. If it’s inflation we just have to cut our lifestyle more.
Maggie – sounds like you and I are at the same stage! If we do have another depression, we should keep in mind that some folks actually did well during the depression and look back at what they did differently than the ones that did poorly.
I’m thinking and hoping it’s a minor blip. Thanks for the reminder to get my disaster kit ready. Very inspiring how you want to help your family, regardless of age, grow their money. Sounds like a very healthy family dynamic.
Buck – I guess having a disaster kit is sort of like buying insurance, its a pain, you hope you never need it, but you are glad you have it when you do!
I haven’t been too concerned. I am positive the market will bounce back, so I haven’t done anything along the lines of emergency preparedness. However, I do plan to buy stocks now at lower rates!
Hmm…I’m not sure. For the short term, I definitely think we have another drop in the stock market. And for the long term, I think we will be in this nasty 1-2% Gdp range for the next decade. We are definitely trying to protect ourselves by creating multiple income streams, so that if one of us lost a job it wouldn’t matter much.
Well, you were right on the short term – as I write this comment on 8/18/11 the DOW is again down under 11K! Multiple income streams is what we are trying for as well.
I’m hoping it will be another recession at worst, but I could be wrong about that. My husband works for the state in the unemployment office, so we’ll certainly be aware if there’s an uptick in claims. His workload still hasn’t decreased significantly from before, so we’ll have to see how all this goes.
Stephanie, that is interesting that your husband hasn’t seen any decrease in claims. I be that might vary by location though?
I tend to react the same way as you, at least a little bit. It makes me feel better, and I figure at the very least if there’s a power outage or whatever we’ll be prepared. I think this is just a temporary blip. Or at least I hope so!
Jackie, I wish I felt the way you do, but I still think we are in for a long downturn.
I probably wouldn’t invest too much of your money in emerging companies. You’re retired and probably should invest in safer dividend paying blue chips.
I’m also skeptical about “real assets.” I don’t have any experience here and who knows if the price will go up or down.
Retire by forty – thanks for the advice, but I think you might have overlooked my stated goal.
If I buy growth stocks it is in an attempt to plan for the next generation, not mine. We are (and will continue) to protect assets for our lifetime as well. Plus – I don’t think a horizon of 20 years is too short for growth stocks – do you? Personally I plan to be invested until my 80’s 🙂
You are right to hestitate about real assets, however, I do think housing at least will eventually regain ground.
Good post… thanks. What I find interesting is that no one really knows the extent of this “correction.” The traditional options seem to be things like dollar-cost average, move to cash, look to silver and gold, etc. I prefer to take an approach that profits from whichever way the markets move. For example, I place orders at prices higher than where they currently sit… so if some of the solid stocks I’ve chosen go up in value and this really is a short-term blip, I’ll get in at a pretty cheap rate. However, I also place orders for inverse positions (like SH or DOG or PSQ, etc) at a slightly higher rate than where they currently sit… so if the markets drop, and continue to plummet, I’ll get in these positions and make money. In fact, I exposed my Weekly Newsletter subscribers to this strategy a few weeks ago just before the markets began their drop… and we’ve made some significant returns as a result and protected our capital at the same time!
Dr Stock, what you are doing makes sense to me, but I am not really a trader and it seems like what you are recommending would work better for traders than folks who buy and hold?
Thanks for the interaction Marie… I understand where you are coming from. But no one is a buy-and-hold… we all eventually sell, making us (traders) of sort. I prefer to be an investor, but I’m not going to hold an investment that is crashing 20% or 30% or… I’d rather sell and reengage when it begins to show signs of recovery again. If you bought and held the S&P 10 years ago, you’d be basically even (or a little down). That doesn’t seem like a great investment… so I encourage conservative, weekly reviews.
We’re retired, in our 60’s, & are not making any changes yet. We continue to advise our grown children when asked & to support them with babysitting & helping make repairs. We keep our own expenses fairly low so we don’t have to touch our 401K for as long as possible. Those funds are managed for us to be appropriate in risk level for our ages. So the only changes we’re making is to not spend too much & buy only what is necessary. It migiht end up being another Great Depression, but if it is we’ll need cash. If it’s inflation we just have to cut our lifestyle more.
Maggie – sounds like you and I are at the same stage! If we do have another depression, we should keep in mind that some folks actually did well during the depression and look back at what they did differently than the ones that did poorly.
I’m thinking and hoping it’s a minor blip. Thanks for the reminder to get my disaster kit ready. Very inspiring how you want to help your family, regardless of age, grow their money. Sounds like a very healthy family dynamic.
Buck – I guess having a disaster kit is sort of like buying insurance, its a pain, you hope you never need it, but you are glad you have it when you do!
I haven’t been too concerned. I am positive the market will bounce back, so I haven’t done anything along the lines of emergency preparedness. However, I do plan to buy stocks now at lower rates!