Investors Should Stay Calm

Whenever a major world event occurs, it's natural for investors to ask how it will impact the economy and their own personal financial situation. After all, financial markets abhor disruption and uncertainty.

What should investors do in the wake of the terrorist disasters in New York and Washington? Our first answer is to gain perspective. Not to diminish what's happened, but non-financial tragedies have shaken financial markets before. There have been wars and war scares, and each time in the last 100 years, the U.S. economy and its people have emerged stronger and more successful. That may seem like Pollyanna right now, but it's true: Major non-financial events, however tragic or devastating, historically have only a short-term effect on the financial markets.     

That's what Philip Fisher said around 1960, addressing wars and war scares with words that apply today: "Through the twentieth century, with a single exception, every time major war has broken out anywhere in the world or whenever American forces have become involved in any fighting whatever, the American stock market has always plunged sharply downward.... Nevertheless, at the conclusion of all actual fighting -- regardless of whether it was World War I, World War II, or Korea -- most stocks were selling at levels vastly higher than prevailed before there was any thought of war at all."

About war scares, he added, "Furthermore, at least ten times in the last twenty-two years, news has come of other international crises which gave the threat of major war. In every instance, stocks dipped sharply on the fear of war and rebounded sharply as the war scare subsided."     

Bottom line? Don't panic and sell your stocks on the basis of recent events, and it may even be time to buy. The Motley Fool offers the following resources to help you gain perspective.

Our Resilient Economy, by Brian Lund
While previous disasters have sometimes met with immediate sell-offs, the market and the economy have emerged stronger from each. They can do so this time as well.

In the face of a market decline...
Foolish Words for any Market Decline
Whatever the cause of a market drop, find reasons to decide whether to buy or sell, words from a cautious investor, the advantages of going against the herd, the role of shorting stocks, and how having a cash cushion puts you in control.

Are things different "this time"?
The Day the Sky Fell, by Bill Mann (TMF Otter)
On the 70th anniversary of Black Monday in 1929, Bill Mann identifies all the institutions spawned by the Great Depression to prevent it from happening again. A real confidence builder. 

Foolish community member tantal identifies the many differences between the world economy at the start of the Great Depression and today. 

The rules for successful investing don't change
The Great Regression, by Jeff Fischer (TMF Jeff)
The manager of The Motley Fool's Drip Portfolio (dividend reinvestment plan) uses the lessons of the Great Depression to remind investors that there is no short cut to investing success: Regular saving and investing over periods of many years -- preferably decades. Sound advice for uncertain times. 

Market Crash, by Chris Rugaber
In the middle of the late 1990s stock market runup, this former Foolish writer pointed out the impossibility and absurdity of predicting the market's short-term direction. It's a reminder that despite the importance of recent events, we can't predict their effects on the markets.

Is It a Nifty 500? Part I  and Part II by Jim Surowiecki
Former Fool writer Jim Surowiecki explains how the index fund was born and why it's hard to beat a low-expense S&P 500 index fund over the long term. 

Keeping your financial house in order to avoid trouble
Could You Lose Everything? by Tom Jacobs (TMF Tom9)
The title expresses many investors' worst fears. In this family tale, Tom Jacobs relates his family's Great Depression experience for a timeless lesson about taking care of your personal finances.

Finally, should the individual investor just steer clear?
The Stock Market and the Great Unwashed, by Sarah Wilson
With tongue in cheek, this Foolish community member from the U.K. suggests that the market's volatility -- regardless of the cause -- means that individual investors should steer clear of the market and trust the government to care for them. Not!

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