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


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 )