how to invest – here, at the end of all things

“I’m glad to be with you, Samwise Gamgee… here at the end of all things” -Frodo Baggins

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If you are not familiar with the Lord of the Rings, in this scene Frodo is woefully clinging to Samwise on the floor of the New York Stock Exchange. He is speaking – in a woeful, heartfelt manner – of the recent US stock market meltdown. We are, truly, at the end of all things. Within days I expect the streets to be ruled by mobs and the only “sure thing” investments will be canned foods and shotguns. It will be like “28 Days Later” with crazed 401(k) holders playing the parts of flesh-eating zombies. We will all be Teenage Girl #3 walking through a dark corridor at night while the subprime boogeyman lurks in the shadows. Drusilla lurks.

To be honest, I don’t believe any of that will happen. My portfolio has taken a brutal beating, no doubt. The frenetic contortions by the US government to intervene in the “free markets” are embarrassing. But a market turndown like this one only serves to reemphasize what works and what doesn’t. If you have a steady, non-emotional investing plan that you refuse to deviate from you will do just fine. If you suddenly take the strategy that was “working so well” during the upswing and chuck it in favor of putting your money in a savings account, you will miss out on the upswing. Do you think the Patriots are benching Tom Brady in the Super Bowl after a bad game in the AFC championship?

If you were investing 10% of your pay in your 401(k) each month – keep doing it. You will be buying into your funds at bargain rates. If you were investing in index funds before, keep doing it. If you were aiming for dividend-paying stocks before the downturn, don’t assume they will all disappear. If you were using an investing newsletter, stick with it. Don’t shriek and run for the exits, because that’s a sure way to get trampled.

Many investors probably expect that this is a “time for bargains” – a veritable white sale here at the end of all things. Yes and no. If you think you can buy just any old stock now and it will zoom back up, remember the dot-com crash: some of those companies are gone for good. But in good markets and bad there are always bargains to be found. Of course there is panicky selling going on; in bull markets there is panicky buying going on, too. Careful study and strategic investment are always going to yield the best results.

I own index funds. I will keep owning index funds. They are doing really badly right now. How badly? I lost more in a few days than I make in 3 months. However, I will keep buying at the same steady pace I did when times were flush. I haven’t changed my 401(k) contribution percentage, I haven’t decided not to contribute to my Roth IRA, and Bubelah and I have not suddenly cashed out our brokerage accounts and invested it in gold futures.

Full disclosure: I did make one purchase of a bank stock recently, which is not part of my usual investment plan. But I had studied it in depth a year ago – I know the financial services industry pretty well – and told myself “if it ever hits the laughably low price of $X I have to buy it.” Well, it hit it, I bought it. But again, that was strategic thinking; I have a core group of companies I follow closely and given the right opportunities (and spare cash) I might buy them too. But I am not rushing out to buy them just because I think they are “on sale.” I set a buy price a long time ago and knew the time was right (for me). There are other bank stocks I follow where I look at the current prices and shudder to think anyone might be buying in EVEN with these low stock prices. So it’s not just random investing.

Simple steps: keep being frugal. Keep your head up at your job, or your business, because that’s your greatest asset. Keep paying down debt. Don’t incur any new debt. Keep adding to an emergency fund until you have enough to pay 6 months or more of expenses. And don’t start buying or selling stocks or funds or any other investments unless it’s part of your overall investing strategy.

(image props to jillconway )

  • http://plonkee.com plonkee

    Revisiting your investment plan doesn’t hurt, as long as you ignore the actual performance in the first instance.

    If you think the market fall has exposed some weaknesses, then address them, but in working out your new plan, don’t give any heed to the current stockmarket until you’re at the stage of picking actual stocks/funds.

  • http://remodelingthislife.wordpress.com Emily

    Good advice! So you think Brady is playing huh? :)

  • http://www.bripblap.com Steve (Brip Blap)

    @plonkee: I agree revisiting your investment plan doesn’t hurt, but it’s the kind of thing you should do on a regular basis rather than in a fearful reaction to swoons in the equity market (which is what you said).

    @Mike: I only own a couple of ETFs. The bulk of our investments are in index funds. I have several international index funds in the accounts I manage (Bubelah and I have overall strategy meetings but basically manage our own investments) and broad-based Vanguard US stock market index funds. My portfolio is large enough (for now!) that shifts like the one in the US market can result in substantial losses for us (or gains). The volatility is annoying, to say the least! Where’s the 10% annual growth all these financial calculators are always promising! :)

    @Emily: Of course he’s playing. I would hate it if he didn’t play because then people would always wonder if the Giants could’ve beaten the Patriots with Brady playing. :)

  • http://www.moneysmartsblog.com/ FourPillars

    What kind of ETFs do you own? I didn’t think any broad based ETFs went down all that much – of course if your portfolio is huge enough then even a small percentage decrease could wipe out three months of salary.

    Mike

  • http://hunternuttall.com/ Hunter Nuttall

    It will eventually be the end of all things, but up until now, everyone who has declared it to be so has always been wrong. And if you’re ever miraculously lucky enough to correctly call it, it won’t matter. I just assume the world will always bounce back.

  • Shawn @ SoScooter.com

    Steve, could you pleeeeeease tell me what bank stock you bought? I’m just so curious! E-mail me if you want to keep it more private. Thanks!

  • http://www.rather-be-shopping.com Kyle

    Great advice. My SEP IRA took a huge hit as well. Lost 2 months salary, at least, in the past couple weeks. But the way I look at it, I can’t touch it for 25 years and this downturn just means that I will be able to buy more shares with my dividends and capital gains.

  • http://smallstepstohealth.com/ Asithi

    I am taking the ostriches approach right now. I know that I have a good asset allocation for my age and I am investing regularly in my 401k. I know that once I start tracking the movement of the funds that I own I will become emotional and start moving things around. The best thing at time like these for me is to just stand still.

  • http://www.paperchase1.blogspot.com paperchase

    Great advice. I was just noting that I need to turn off the ability to see my investment account balances real-time because watching them shrink is killing me. I used to avoid this agony by only looking at the balances once per month or quarterly. I need to go back to this method….

  • http://www.thewriterscoin.com Writer’s Coin

    The idea is to do the same thing when the market sucks as when it rocks.

    May I inquire as to the particular bank stock? I was on the brink with Bank of America but never pulled the trigger.

  • http://earlyretirementextreme.com Early Retirement Extreme

    WFC? BAC? ;-) Nah, no need to tell me. Yeah, it’s interesting to lose or gain money at 50 times the hourly wage rate. Puts the day job in perspective.

  • http://earlyretirementextreme.com Early Retirement Extreme

    Oh, that would be 5, not 50 .. I’m not that volatile :O)

  • http://www.bripblap.com Steve (Brip Blap)

    @Hunter: Absolutely. It never is the end of ALL things, is it? Just a couple of days after this post, the US market is already inching back up.

    @Kyle: Looking at the reinvestments is a good way to stay encouraged – and a good argument for automatic reinvestments!

    @Asithi: You laugh, but the ostrich approach is a great approach! If you are confident in your asset allocation and invest regularly, DO stick your head in the sand! It’s not a bad idea at all.

    @paperchase: Just join Asithi in the ostrich approach :)

    @WC: I’ll send you an email – I’ve just refrained from posting the name of the stock here to avoid giving investment advice that will linger in google search results for the ages.

    @ERE: Glad you posted that clarification! 50 times would be a reasonable level to start ‘freaking out’ – to use a technical term…