Another day, another financial institution in the dumps. Here’s how to protect yourself against the economic crisis.
Photo from demian
Some so called Wall Street experts and doomsayers are announcing a major financial meltdown on Wall Street which could engulf not only the U.S., but also the rest of the capitalistic world. While a crisis is quite obvious, remember that this is not 1929; there are multiple layers of protection for the small guy like you and me.
What can we — the small investors, the good guys — do to protect ourselves? Unfortunately, I learned the hard way in 1987, when the stock market crashed in various countries. My whole capital was wiped out in one day, now called Black Monday. It wasn’t much by George Soros standards, but to me it was a catastrophe.
Steps To Survive This Economic Crisis
1. Buy low.
Fortunately, my wife had kept a little reserve behind my back and I saw a great opportunity to get some money back from the market, no less. Call me dumb or foolish or both, but when the stocks, even the blue chips, were at their lowest, I chose a superior company and invested every penny in its stock. I knew, gut feeling if you wish, that at that time, the stock price did not truly represent the value of an excellent company. A year later, I sold it at 12 times the amount I had paid.
If you don’t want to take the same risk, please remember that the big financial sharks are delighted to see a crisis; that’s when they pounce to snap up incredible bargains. So why shouldn’t you? In retrospect, it would have been more prudent to do some asset allocation, but I took a risk and won. My gains aside, it’s best we manage our risks in a volatile market by keeping diversified even as we buy during the dips.
2. Keep within FDIC and SIPC limits.
Please do not act precipitously. That’s the worst thing you can do. The fact is, your money is protected in banks by FDIC up to $100,000 per depositor, and is protected from fraudulent activity in investment houses thanks to SIPC, for up to $500,000 per account. One positive from Lehman Brothers’ impending bankruptcy case — the SEC assures that for the most part, clients’ accounts are protected.
So be smart: if you have more than $100,000, divide the money among different bank accounts to avail yourself of FDIC. Have an emergency fund and keep cash available in those various savings accounts; liquidity will allow you to play in the big leagues. As I’ve mentioned, a crisis is an excellent time to grab opportunities, whether it’s a house at a fantastic price, or blue chip stock (Apple anybody?) that cannot help but rebound. Keep your eyes open and do not hesitate when Lady Luck comes knocking.
3. Keep calm and collected. Do not panic!
I did it once in my extended life: I sold short, which means that I panicked and sold my mutual funds at a loss as the market was going down. Of course — naturally, obviously, as fate would have it — it rebounded a month later and I keep kicking myself for being stupid. So DO NOT sell your stocks or mutual funds when the market has already taken a beating; this the worst time to sell. Quite the opposite: buy more stock or mutual funds at more attractive prices, but be choosy and selective.
4. Be conservative with your finances.
Now is NOT the time to acquire more debt; when it comes to your money, tread carefully during a serious national financial crisis. If you have the chance, pay off those pesky credit cards and tighten up the family budget. Eliminate unnecessary expenses for a while — vacations, fur coats (they still have them?), diamond ring for your beloved wife on your 30th anniversary (or earlier), new car (unless it’s a gas miser), hiring new personnel, salary increase, or expensive new school for Junior — until things go back to normal, as they always do.