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Four more ways to stop a financial crisis derailing your money goals

So you’ve done your four financial crisis checks [1]:

Time to turn over and fall back to sleep?

Possibly. I’m serious! It’s often too late to Do Something once a financial crisis is underway. If you follow the daily advice of the financial TV channels and churn your portfolio, the only person who’ll get rich is your stockbroker [2].

It’s better to calmly consider where you’re at, financially, and where you’re going. It’s certain you’ll encounter several testing times during your investing lifetime, and a cool head could save you a fortune.

In this post I’ll look at four more ways to deal with a financial crisis:

1. Check your portfolio… calmly

At times of financial crisis, stock markets fall

If you’ve investments in funds or shares, you’re likely well down:

Are these falls rational? Can a big supermarket retailer, a provider of networking technology, and a manufacturer of metal cans ALL really be worth 10/20/50% less than just a few months ago?

Of course not. They were either overvalued then, or they’re undervalued now. Remember, the markets are driven by sentiment – fear and greed:

No crisis is all bad news, financially-speaking, since different asset types respond in different ways.

In this current credit crunch of 2007/2008:

This varied performance is why we’re urged us to diversify our portfolios [4]. One asset going up will ease the unpleasantness of something else going down, just like sugar in a child’s medicine.

What this means for our investments:

Action plan

2. Consider buying more shares while they’re cheap

At times of financial crisis, some shares look very cheap

Nobody really knows why or when exactly a bull run will turn into a bear market. Even with the current credit crisis, it’s hard to tell if say the sub-prime collapse [8] is truly a cause or just a trigger. We’d been broadly going up since 2003, which is a long bull run in historical terms.

The common wisdom is that the credit crisis has spooked investors into reconsidering the risks they’re taking, yelping, and then selling out. Also some market players, such as banks and hedge funds, have sold certain assets just to maintain their liquidity. These sales may have little to do with the intrinsic value of their holdings.

What it means for us

Action plan

3. Get a pay rise, or start making cash on the side

At times of financial crisis, cash means security and opportunity

The US is probably already in recession. The rest of the world may follow. Nobody knows how hard or deep the economic hardship will be. For people losing their sub-prime homes, things are already very tough indeed.

The outlook could improve from here, or it could easily get a lot worse, fast. We can kid ourselves that we know better than the millions of other people out there, or else we can concentrate on being prepared for any eventuality.

What it means for us

Action plan

Note to the skeptical: I’m writing this in April 2008. If the wider economy doesn’t turn sour and deep recession threat is averted, by all means buy yourself a treat with the cash you saved. Then try and find something bad to say about me suggesting you prepared just in case. Toast my bad advice with champagne!

4. Revisit your long-term goals

At times of financial crisis, we’re reminded things change

Most people reading this post will hopefully enjoy a long and happy life, in which you’ll encounter every kind of economic climate.

My oldest living relation is 94. She walked geese to market as a young girl, lived through two World Wars, used ration books for years, thought TV dinners were marvelous, never owned a car, and gives sweets to children who get more pocket money than she gets in a week’s state pension.

In just the past 15 years we’ve seen inflation plunge, migrants flock to jobs in the West [12], the dotcom boom and bust, gold quadruple in price, China become the world’s factory and US property price falls for the first time in living memory.

What it means for us

Action plan

Thanks very much for reading this far – I hope you’ve found it useful. To keep your finances up-to-date, subscribe to Monevator [18] via email or RSS. It’s free!