Four Ways to Fight Panic (Yours and the Market's)

Last Updated May 10, 2010 8:32 AM EDT

Maybe it was the end of Western Civilization as we know it. Maybe it was a typo. Explanations for last week's plunge in the Dow covered the spectrum from panic to shrug: It was Lehman Brothers all over again, with Greek sovereign debt in the role of global sinkhole. Or like the 1987 market crash (still worst one day loss in percentage terms), it was the result of computer trading run amok. Or it was market manipulation. Or it was the hung election in the U.K.

While the size of the loss (in points) and the speed of the decline were unprecedented, what was all too familiar was the feeling in the pit of your stomach as you watched your retirement savings vaporize. The Dow's partial rebound in response to a new Eurozone rescue package hasn't totally eliminated concerns--at least not yet. If that sense of icy fear starts to grip you again this week, here are a couple things to keep reminding yourself:

  • Explanations about market moves say more about the explainer than the market: Sovereign debt worriers like Mohammed El-Erian and Nouriel Roubini went public to explain how the plunge proved their world view. Re-regulators like Senator Ted Kaufman of Delaware used the occasion to blame Wall Street traders and advance their case for more federal oversight. But the truth is, no one knows for sure. And everyone talks their book.
  • Decisions taken in a state of panic are always wrong: Had you even been able to react quickly enough to sell when the plunge was at its most sickening, you'd have missed the snapback. You need to set your strategy when you're calm and stick to it when emotions run high. As Allan Roth suggests in this MoneyWatch post, you can't listen to that sick feeling in your gut; it will always steer you wrong.
  • Markets always surprise: Nothing seemed more obvious at the beginning of this year than that the dollar would tumble and Treasury bonds were a loser's bet. In fact, both the dollar and the U.S. bond were safe havens again yesterday, as they were in the 2008 crash. That the Greek debt crisis is a global risk now seems obvious, too. But as recently as last week, it appeared to be under control.
  • There is no obvious in investing, except in retrospect. And the only investing strategy that has always looked obviously wise in retrospect is to set a portfolio that matches your risk tolerance and then rebalance into risk as markets fall and rebalance away from risk as markets rise-exactly the opposite of what your instincts tell you. That would have offered you some comfort in short-term panics like yesterday's and will keep you out of harm's way in the long run.
More on Money Watch:
Investing is Painful-Remember?
4 Things to Do When the Dow Plunges
Wall Street Spirits Remain Unnervingly High After Plunge