What NOT to Do in an Economic Downturn - Black Enterprise

What NOT to Do in an Economic Downturn

MW-MellodyHobson-V2EXCThere’s little question–the financial markets in 2008 have been scary. The stock market has fallen sharply; giant, well-known companies have gone under; banks have failed; supposedly safe bonds have lost value; and the government has intervened like never before. These unprecedented events have scared millions of investors. This fear has led to panic. If, however, you’ve been prudent, you’re resisting the urge to act rashly. Today I’m going to focus on things NOT to do right now.

Don’t hide money UNDER your mattress
Through Oct. 27, 16 banks failed in 2008. Nobody wants to have money in a failed bank, but most people’s money is safe. The federal government’s 75-year-old Federal Deposit Insurance Corp., covering 8,500 banks and thrifts, insures savings and checking accounts up to $250,000 per depositor, per institution. So, if you have less than $250,000 in the bank–$500,000 if in a joint account–relax. In the FDIC’s entire history, no one has lost one penny of an insured deposit.

Your money market fund is also likely protected. On Sept. 16, the Reserve Primary Fund–the first money market fund–”broke the buck.” This means that an investor who put a dollar in wouldn’t get the full dollar back–as most people assume is the case with these funds. When word got out, many pulled dollars from other money market funds, creating problems. So the Treasury Department guaranteed all deposits, with no cap, held in money market funds as of Sept. 19 for at least three (and up to twelve) months. So regarding your “sleep at night,” you can go back to sleep.

Don’t sell your stocks or mutual funds based on recent performance
Plenty of you probably thought of cutting and running from the stock market. At a time like this, remember the motto of great investors, such as Warren Buffett and the late Sir John Templeton: “Be greedy when others are fearful and fearful when others are greedy.” I know not everyone will load up on stocks while they are down, but don’t sell in a panic.

When a stock or mutual fund has fallen sharply, go back to the original reason you bought it. If your rationale is still true, inaction is better than a knee-jerk sale. If your thesis is in tact, why would you sell just because the stock is down? If you bought a mutual fund with a sound strategy, seasoned portfolio manager, and low expense ratio, there’s no need to sell based on recent results.

Don’t stop contributing to your 401(k)
If you’ve checked your 401(k) balance, you may be thinking, “I’m losing money! No way am I putting more in there!” Long term, that would be a poor decision. And if you check constantly, you might want to lay off–checking every quarter or year is fine.

More importantly, there are some big advantages to 401(k) investing over the long term–besides the tax benefits. First, 78% of employers match some portion of your contribution. If your company matches at 50 cents on the dollar, that’s an automatic 50% return on your money! Second, by contributing a set amount regularly, you are dollar-cost averaging. That means you buy more shares of a mutual fund when it’s cheap and fewer shares when it’s more expensive. It’s an automated way of being greedy when fear is high and conservative when greed is rampant.

Sticking to a disciplined investment plan is key during times of trouble. Had you invested $1,000 in a market-tracking index fund on Oct. 20, 1987–the day after Black Monday when the stock market fell more than 20% in one day–you would have had more than $6,500 by late September 2008.

Don’t Panic
Ultimately, you have to keep in mind two key things. First, where stocks are concerned, you have time: Over long periods of time, equities rise in value. Second, the government is clearly doing its best to set regulations in place to protect your money and allow it to grow. Maintaining faith in the market and the government, even when they slip a bit, can help keep your hand off the panic button.

Mellody Hobson is president of Ariel Investments L.L.C., a Chicago-based money management firm serving individual and institutional investors. She is also a regular contributor to ABC’s Good Morning America.

This article originally appeared in the January 2009 issue of Black Enterprise magazine.