Everyone is feeling the pain of the market's dramatic decline right now, but how you manage the situation can ultimately make a difference. These five steps can help you get your footing back:
1. Breathe. I'm not kidding. Take several, slow, deep breaths. This relaxation technique works by slowing your heart rate and your racing mind.
2. Take control. Separate things you can control from those you can't. Bank of America (NYSE:BAC) cuts its dividend. GE (NYSE:GE) reduces its earnings guidance. The Dow drops 7% in a day. You have no control over these things, and there's no point in remaining fixated on the event. Once they've happened, the only productive use of your mental energy is to assess them in the context of the long-term health of your portfolio, and decide whether or not you want to make any adjustments. That's your sphere of control.
3. Always come back to the business. Nearly all stocks are taking a beating right now, but not all businesses face the same risks in this crisis. Some face an existential risk or a shift in their business model, others don't. It should be clear that Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) aren't in the same position as ExxonMobil (NYSE:XOM) or Wal-Mart (NYSE:WMT).
Look for mines in your portfolio – in particular, among financial firms and companies that are highly leveraged. Regardless of the market environment, there are two main causes of bankruptcy: an unprofitable business model and excessive leverage. In an environment where credit has dried up, the threshold for "excessive" is that much lower.
4. Valuation matters. Review the valuations of the stocks in your portfolio. Ignoring the direction and size of stock price movements for a moment, ask yourself whether the current valuations of the stocks you own make sense in the context of the company's earnings power.
As I watch Microsoft (NASDAQ:MSFT) – which I own -- change hands at 10 times consensus earnings for the current fiscal year, I don't see how such a depressed valuation is sustainable over the long term. This gives me great confidence that I should continue to hold the stock. For every stock you own, ask yourself: "If I didn't own this stock today, would I want to own it at its current price?"
5. Don't track your portfolio on a minute-to-minute basis, and watch less financial news. The extraordinary immediacy and availability of information is the boon and the curse of our age. Continually watching your portfolio is corrosive to the kind of mind-set you need to adopt under these circumstances. Repeated doses of negative feedback simply play havoc with your hormonal system.
Stay calm, stay focused and you'll make better decisions. Oh, and don't forget: the market is just one part of your life. Make sure to continue allocating time to the activities and people you love.
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