The Market is Crashing Tonight, What Should You Do?

Pro traders should know what to do. Cut your size, trade small-and pick your points. This post is designed for the average Joe Six Pack citizen sitting at home and wondering if his mattress is better than the market to build wealth.

First some background. Here is why we are where we are:
We have a lot of debt.

US Public Debt as a Percent of GDP Chart by YCharts

We have significantly increased our money supply

Monetary Base Chart by YCharts

We have gigantic debt to pay off

Federal Surplus or Deficit Chart by YCharts

There is a lot of fear out there. Understandably so. Fear isn’t something that drives stock markets higher. You are sitting there tonight, and if you are watching business channels, you are seeing stocks continue to plummet overnight in foreign markets.

What should you do?

Well, tonight you can’t do anything. Your broker is watching tv just like you and American cash markets are closed until 830am Central Time tomorrow morning.

First, don’t call your broker when the market opens. He won’t know anymore than you. If you get through, they will parrot talking points given to them by their research department prepared last night.

Second, don’t sell. That’s what the pros want you to do, panic. The end of the world isn’t near-although we are going to continue to go through some really rough patches. If you are looking at your retirement wilt away, don’t worry. Someday it will come back. I have seen my retirement funds get clocked several times, I am 49 and don’t plan on hanging it up for a minimum of 15 years anyway.

Third, a lot of the selling tomorrow morning will come from funds that have to sell to raise cash for margin. They have to put up cash to hold positions-only way to raise it is sell.

Fourth, This is not a stock picker’s paradise. If we have learned anything over the past two years is that no one single person can beat the market. You are much better off in a no load fund that replicates the S&P 500. It’s called the Efficient Market Hypothesis. Eugene Fama proposed it in 1962 at the University of Chicago, and there is enough research to prove it over the years. If you are inclined, sell any individual stocks you have, or focused funds you have tomorrow morning and roll them into a no load fund that replicates the S&P. Virtually every major mutual fund company has one. Your accounts value then won’t be beholden to a stock-but simply the broader market. Over time it tends to return 12%.

Fifth, if you are out of work and panicked, I empathize with you. Take cash you have and bet on yourself. Start a business. Get any job. It will keep your mind off the ups and downs of the market and if you start generating some cash it will make you feel a lot better.

Sixth, hold your elected officials feet to the fire. Write letters. There is only one way out of this mess. Cutting spending, and growing the economy. Too much spending and debt got us into this mess, less spending and growth can help get us out of it. Treasury Secretary Tim Geithner is a schmuck. He is a career bureaucrat and there is nothing we can do to get him out of there until November of 2012. To add insult to injury we will owe him a pension. The President is incommunicado since last Thursday. He is not deft when it comes to economics. He can get shown the door in November of 2012 too.

It’s really his failure to reform entitlements, and passage of Obamacare that has decimated the budget. If you were a businessman, it would be criminal. Think Enron criminal.

A lot of folks out there will say this whole thing is politics. Some of it is. But most of it is simple math. By the way, 70% of the political donations at S&P went to Democrats. Well over 60% at the other ratings agencies went to the donkeys. Politics wasn’t the major piece in the downgrade.

My last word to you: Calm yourself down-you can’t control any of this. It’s a horror show that you choose to watch. The sun will come up, and eventually, things will straighten themselves out. If you have to, re-balance your portfolio. In the long run statistics will tell you that all your money will come back plus some.

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