Oct 8th, 2008
I have written in the past that Jim Cramer is scum and yesterday was no deviation. He said on the air yesterday for people to sell their investments and stash any cash you need for the next five years. There is no question the financial market is essentially in ruins right now but there are a bunch of reasons not to pull out.
1) Its dangerous – for you, for me, for the entire country. A run on the stock market is just like a run on anything else: it disrupts the economy and is bad for everyone. If I take all of my money out, it will drop and further push Joe to take all his money out which creates a bigger drop and so the cycle continues. There are some things in place to make sure there is not the kind of massive crash that happened on black Tuesday but essentially our biggest enemy right now is fear.
2) Regardless of what happens right now, the market will go back up. This is not the case for each individual company, but assuming you have diversified investments and are invested in index funds, you will see brighter days in the future, I promise.
3) As of this writing, the dow is under 10k and you and I have both already lost a massive amount. Unless there is a total and complete collapse of the markets I think the probable bottom of the market is not too far off.
Let me reiterate: Despite what you might hear, we are NOT on the brink of financial apocalypse. History will not repeat itself.
When the risky lending of the 1920s happened, there was a striking difference between what they were borrowing against and what the risky lenders of today have borrowed against. I was fairly shocked to learn that in the 20s the risky loans were borrowed against STOCK. Thats right, something that has the ability to go to absolutely zero worth.
Now lets contrast that with the ridiculous lending thats happening today. The risky loans were put up with REAL ESTATE as collateral.
Lets put two and two together: we cannot replicate conditions leading to the great crash of 1930 unless real estate value goes to absolute zero. This has never in history happened….quite the contrary land is the one thing throughout history that has held some sort of value. Though the real estate is overvalued and correcting, it will not go to absolute zero.
Another huge difference is that back then there were absolutely no insured deposits. There was no FDIC. People that had any money in banks and were unable to withdraw it lost everything. Thats simply not possible today.
There have been tough times before (Tech crash anyone?) but do not panic. Stay the course and stick to personal finance fundamentals: reduce debts, save, invest, and keep your head above water.