The headline appears and suddenly you feel one of two things: (1) a rush of investor euphoria, accompanied by squeals of "we really can retire!" or (2) the nauseating, gut-wrenching fear that in fact, you'll never retire. Both are normal investor reactions to big news events -- from the Japanese earthquake and tsunami, to the announcement of Osama bin Laden's death or even the more mundane economic-related items like jobs reports and housing data.
To protect myself and fellow investors, I have developed a checklist that hopefully will prevent you from making any major money decisions that could come back to haunt you. I call it the "9 Steps to Sanity," which is equally useful when you feel like panic-selling on the way down ("I don't care how much it costs me, but get me out of the (fill in the blank) market!" or make irrational buys on the way up ("I can't believe that I've been on the sidelines this long--I'm going to miss the entire upside move of the (fill in the blank) market and I have to get it!)
You don't have to break the glass to obtain this 9-Step Plan, but keep it handy because you never know when you'll need it. It's also quite useful at times when market indexes or commodities break above or below a major level (Dow 10,000; $150 crude oil; $50 silver).
9 Steps to Sanity
- Take a deep breath.
- Do not make a trade.
- Repeat Step #1.
- Ask yourself: will the news impact the economy over the long term?
- If economic impact is significant, review long-term investment allocation to determine if your portfolio can weather the changes.
- If allocation needs to shift, review your risk assessment and determine new allocation.
- If you plan to reallocate your portfolio, review all trades after markets close and submit orders before they open--you are making long-term changes to your portfolio, so don't get spooked by the daily market gyrations.
- If you have no idea how to answer questions 4, 5, 6 and 7 consider speaking to a financial advisor.
- Remember my father's famous saying: "It's never as good or as bad as you think!" (Why listen to my dad? He was an options trader on the floor of the American Stock Exchange for three decades and has seen his share of crazy up and down days!)
Feel free to add some of your own tips for investor sanity!
Image by Flickr User ken ratcliff, CC 2.0