The Sky Is Falling!

EDIT, 10:40pm PST: obviously I'm the worst speculator ever, as the S&P500 was up 0.70% when I woke up this morning.  Blame the release of some strong domestic manufacturing data.

Some politicians have decided that they don't want to come to work tomorrow because they just can't get along with their coworkers.  Their intransigence is now our pain, as the federal government prepares to shut down.

During the shutdown, government offices will be closed and anyone working for the government—including graduate students like me on National Science Foundation fellowships—just won't get paid.  My trip to Yosemite this week will have to be cancelled too, as the national parks will also be closed.

Boo hoo, right?  But this is a lot more than cancelled vacations and minor inconveniences.  There will be substantial negative economic consequences, especially in the short-term.

The New York Stock Exchange opens at 9:30am, which is 6:30am my time (Pacific).  I am not an early bird, so I will probably wake up an hour or two into the trading session.  And oh, what a trading session it may be!

Okay, maybe not as bad as the Crash of 1929, but I wouldn't be shocked by a one-day drop on the order of 1.5-2%.  With the amount I have invested, there's a very good chance that the market valuation of my investments will drop by more in a single day than I make in a month at my Real Job.

Fortunately, I have a plan for events like this: do absolutely nothing.

When the markets go nuts, this is the only sane strategy.  Here's why.

0) This Is Normal

Over the last hundred years, the mass of humanity and high-speed trading robots that make up the stock market have lost their minds pretty regularly.  Short-term returns are all over the place, but those who sat tight and waited out the short-term storminess have historically been rewarded for their patience by stable long-term returns.

1) Day-To-Day Ups And Downs Don't Change The Plan

I am investing so that I may retire several years from now.  Toward this goal, the only thing that matters is how much the market valuation of my holdings change between the days I buy and the days I sell.  My emergency fund is sufficient to cover my expenses for several months, so even if I were to lose my job during a market free-fall, I would not need to dip into my investments.  If I won't be doing any selling tomorrow, then what does it matter what tomorrow's valuations are?

The famous investor Benjamin Graham used the allegory of "Mr. Market" to explain how one should view short-term fluctuations.  The allegory goes something like this: each day, Mr. Market comes to you and makes you an offer for your investments (their current valuation); it is entirely up to you whether you wish to accept or reject Mr. Market's offer.  If you don't like today's offer, just wait for the new offer tomorrow or next week or next month.  Mr. Market may set the price, but you are in control.

2) I'm Already Doing What I Need To Be Doing

I set up automatic regular investing a long time ago.  Regardless of what the market does, I invest as much money as I'm able to each month.  When investment valuations drop, this means that my constant dollar investment amount will buy more shares than usual—the stock market is on sale!  As Warren Buffett has said over and over again, "be fearful when others are greedy, and greedy when others are fearful."  This strategy allowed me to buy lots and lots of investments at bargain prices during the 2008 Subprime Crisis, while many investors were panicking and fleeing the markets in droves.  These investments have appreciated enormously over the last five years.  You can't afford not to invest.

When valuations start dropping, I stick to my well-diversified, low-cost index mutual funds; I'll feel the whole market's pain on the way down, but this strategy ensures that I won't miss the eventual upswing.  By keeping my investment costs as low as possible and staying away from pointless speculation, I can stay relaxed and optimistic knowing that I maximize my probability of coming out ahead in the long run.

3) Worrying (And The News) Is A Huge Waste Of Time

Watching the stock ticker is a pointless exercise, as is listening to economic 'analyses' performed by TV news network hacks and speculators.  The market is going to do what the market is going to do, and there's nothing you (or anyone else) can do to predict or change that.

Mass media today is just entertainment, and not worth any of your time.  Accept that unexpected events like these are just part of the game, and go find something more productive to do (like coming up with more ways to save money, so that you can buy more on-sale investments!).

Maybe the S&P500 will drop 3% tomorrow.
Maybe the markets will take the government shutdown in stride, and nothing will happen.
Either way, make it a good one and DON'T WATCH THAT TICKER.