Guest Author - Guido Deboeck

When the stock market collapses, turns around or jumps a few percentages down, the worst thing you can do is panic.

Remember October 19, 1987? It was a Monday, right? If you can’t remember where you were or what you were doing that day you probably were not involved in the stock market. The Dow, the S&P500 and the NASDAQ all got seriously beaten that day. Over the weekend a disagreement on interest rates between Mr. J. Baker, then Treasurer of the US, and his German counterpart had become public; the following Monday the stock markets zoomed down…23% in a day. Selling continued on Tuesday morning, until right after lunch some institutions started buying. The market bounced back a bit and ended the year not too badly. The worst thing you could have done on October 19, 1987 was panic.

Maybe 1987 is too far back to remember. What about the last week of March 2000? Do you remember the NASDAQ closing at a high of 5,132 in March? By the end of April a month later the NASDAQ reached a low of 3227, that is 1905 points lower or a 37% drop in one month. The story from there on was not pretty. By September 2002 the low was 1160, which was 77% below the high of March 2000.

None of this has any relevance in regard to what happened in the market today: Chinese stocks dropped 9% on Tuesday in Shanghai, the market’s worst drop in a decade. Some $140 billion in value was wiped out. All of this amid fears that the authorities may crack down on speculation that drove the market to all time highs.

Markets in Europe followed suite and by the time the markets in the US opened (six hours after Europe), the S&P500 dropped from 1450 to 1427 (1 PM), a 1.6% drop in just a few hours, The NASDAQ dropped even more and was down about 2.5% by 1 PM. Let me repeat, the worst thing you can do is panic.

What you should do is: review all your holdings, see which ones dropped by 3-5%, or a multiple of the drop in the market at large; sell all holdings that are below their original purchase price without necessarily waiting until they reach the magical seven percent down. Get out of holdings that under the circumstances may be considered highly risky e.g. Chinese holdings, emerging markets, and the like.

Keep holdings that are most likely to bounce back (e.g. ETFs that are broad based such as S&P500, Vanguard Global Stock Market Index, EAFE Index). When the market collapses, there is no time to panic! What is needed is cool headed decision making on what to keep and what to sell!

Most important of all : in the coming days and weeks assess what the market direction will tell you (do not anticiapte, let the market tell you where it is heading). I refer to earlier articles on this site about market direction. If the market recuperates rather rapidly, there will be new opportunities to invest; if on the other hand this is the beginning of a turn in direction then the wait will be longer (i.e. the time in until we "get the ball back"). This estra time can best be used to study new market developments e.g. the rapid evolving world of ETFs.

610 words 2 minutes.