Nine Survival Tips for the Crash of 2008

The have strange and eerie examples of symmetry in this stock market crash of 2008. On Wednesday, the Dow Jones Industrial Average dropped 508 points—the exact same point drop as the crash of 1987. Then yesterday, on the one year anniversary of the all-time high of the Dow Jones Industrial Average, stocks plunged in the last hour of trading, leaving the blue-chip measure is down 39.4% from its record a year ago.

The day did not start off so bad, despite global big sell-offs that preceded the opening bell. Then at about 2:30 or so, the selling accelerated as hedge funds had to sell holdings to raise collateral and reduce leverage, mutual funds had to execute redemptions as smaller investors reduced exposure or bailed out completely and computerized trading kicked in as stocks traded below specific benchmarks. The damage was severe and intense: the Dow Jones Industrial Average dropped 678.91 points, or 7.3%, to close at 8579.19, the S&P 500 shed 7.6% to end at 909.92; the Nasdaq Composite Index fell 5.5% to 1645.12, the small-stock Russell 2000 tumbled 8.7% to 499.20. No sector was spared in the broad-based selling.

What’s an investor to do in the midst of this mess? Here are nine survival tips for those who want to take action right now to help control their destinies:

1) GET PERSONAL: Sure the market is in turmoil and it is scary, but your personal situation should guide decisions made in this very emotional time. The first step is to figure out where you stand and more specifically, you should understand the status of your "BIG THREE": 1) Emergency cash reserves 2) Current level of debt 3) Current retirement contribution. If you have very little cash on hand, consider stockpiling your reserves so that you have 3-6 months of living expenses--this is especially important if you think that your job is at risk (i.e. EVERYONE). If you have consumer debt, make sure that you pay off higher interest loans first. For some, this may necessitate making some tough decisions--but the exercise will lead you to...

2) DEVELOP A CASH FLOW: This is an empowering part of the process. Considering that everyone feels out of control right now, the simple technique of identifying what is coming in and what is going out can help you come up with a short, intermediate and long term game plans. The process is hard, but well worth the effort and should leave you understanding that which is in your power to control.

3) RETIREMENT: If cash flow can afford it, DO NOT PULL-BACK ON RETIREMENT CONTRIBUTIONS. I know, this is hard one, but you can identify choices within your retirement plan that may have somewhat reduced levels (fixed accounts, bond funds). Your specific time horizon and risk tolerance will help you come to a proper allocation.

4) REVIEW YOUR ASSET ALLOCATION: For some people the process of selecting investments was not well thought out. It's time to see how much money is allocated to stocks, commodities, bonds and cash. If you need your money within two years and all of the investments are in stocks, this is going to hurt...you MUST reduce your exposure and bite the bullet. Unfortunately, if you needed your money within that time horizon, you probably should not have had an allocation that was heavily invested in risk assets. Now that mistake is behind you, so you are going to have to fix it.

5) IDENTIFY YOUR RISK TOLERANCE: During years when the stock market is rising, I have seen clients gloss over the question, "How would you feel if your account dropped by 30% in a given year? Of course now you know exactly how you feel and maybe you aren't so able to assume risk. That said, remember if you shift your allocation, maybe from growth-oriented to more balanced, you can't second-guess yourself and switch back to Growth when things smooth out. This is so hard, because as human beings, we always get greedy at the top and fearful at the bottom. But if you choose a portfolio with a lower risk level, you must assume that when the market recovers, you will not participate as fully in the upside. The idea of sleeping at night is pretty important, so if your accounts are keeping you up, rake action. MOST RETIREMENT PLANS OFFER A RISK ASSESSMENT ON LINE--TAKE IT!!!

6) WHERE TO HIDE NOW: Cash or cash equivalents may seem great (hey, they are not going down, right?) but of course over the long term, staying in cash will not help you grow your money faster than inflation. That said, remember that FDIC insurance recently kicked up to $250K per account and that the government is backing up money market accounts. You can also buy bills, notes and bonds directly from the US government at http://www.treasurydirect.com/

7) BEWARE BIG SALES PITCHES: When we are fearful, we tend not to make the greatest decisions. So if someone (a broker, salesman, etc) is pushing something right now that "guarantees your principal," you should understand that most guarantees come at a cost. Try not to tie up your money for a significant length of time right now.

8) TURN IT OFF SOMETIMES: The current crisis is replete with scary music and graphics. Once you have assessed your personal situation and made some choices, its OK to tune out from the 24/7 coverage.

9) And my personal favorite: Y & A: During tumultuous times, try to find ways to relax...for me, it's yoga and alcohol, but not at the same time!