What Should You Do When The Financial Market Is Down?

I entered the investment world in 2007, late in life at 39 years old. It was a baptism by fire as I was just in time for the economic meltdown of 2007/8, so I quickly had to find an answer to the question : “what should I be doing when the markets are down?”

Ironically, I was lucky enough to experience first-hand the real life scenario that unfolded in front of me and the range of reactions and behaviors that the financial crisis brought. Most of all, I saw and sensed the fear of losing wealth in the eyes of investors.

What followed the meltdown was a rollercoaster of economic changes that we had never seen before or read about in textbooks. A wave of new terms, such as the New Normal, Quantitative Easing (QE), QE Infinity, Zero interest rate environment, Negative interest, Black Swan, Conundrums, the Volatility Mystery, the Changing Nature of Risk, Period of Significant and Simultaneous Historical Aberrations, the Disposition Effect, etc. hit our intellectual shores, some of which we had to look up in dictionaries to find the meaning.

However, perhaps the most important lesson that I learned from what I saw and lived through during that time was and still is the phrase “In the Financial World, there are two kinds of risks: Risk and Unknown Risk.”  I will talk about this one and how to counter it in the next blog.

What really stuck in my mind, other than John Alfred Paulson earning four billion dollars in 2007/8, was that I saw those clients that saw the collapse as an opportunity investing more and not capitulating when the market was down, recovered their losses and made a significant returns. And now, eight years later, the US markets are at all-time highs as the result of bull market that seems to have never been appreciated and only added to general nervousness in the market. So, what sort of advice would I give?

My advice lays in the story about a broker who kept a brick on his desk. He would tell his clients, “One of these days the market will go down and you’ll be upset. In fact, you may be so upset you’ll want to throw this brick right through my window. But, before you decide to throw this brick through my window, I want you to do just one thing: I want you to write a cheque to your Mutual Fund Company and tie it to the brick, because when the market falls, you need to be thinking about buying more shares.”

So when the market is down: throw a brick at my window and don’t forget to write a cheque!

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