Breakout

The Purple Crayon Guide to the Financial Crisis

Jeff Macke
Breakout

Everyone is discussing recent market volatility and the looming global financial crisis. Unfortunately, most of the conversations are misinformed.

Not to worry, I'm here to help. Here's your quick and dirty guide to what's actually driving the crazy market gyrations and what to do before it's too late.

The Problems:

* Banking Contagion. Remember the financial meltdown of 2008? That's pretty much what's happening to the EU and, by extension, everywhere else.

* Recession. The U.S. is in a recession. It won't be officially defined as such until about January of next year, at which we will be told that the recession began in the third quarter of 2011. I see no point in waiting that long.

* Global Leadership Void. (see: "debt-ceiling debate")

* Growing Panic. The Dow was down 5.6% on Wednesday and up 4% on Thursday. That's panic buying and panic selling.

How to save yourself from the fallout:

* Be aware, not afraid. I'm not trying to scare you. I'm telling you what is and I'm being as blunt as I can. Trust me, you'd rather hear this from me than your broker a year from now.

* Take Baby Steps. If you sold your whole portfolio on Wednesday and bought it back Thursday, you've got it wrong. Going "all-in" on an attempt to call a bottom in stocks is akin to betting your life savings on the green slot in roulette. Las Vegas and George Soros' fortune were both built on people who make such decisions. Buy and sell a little bit at a time.

* Sell until you can sleep. If you're waking up in a cold sweat thinking about your portfolio, your body is panicking. Eventually your sleep-deprived mind will start panicking as well, leading to horrible financial decisions.

* Have an exit plan. You can try anything you want if you know exactly how you're going to get out unscathed or only minimally damaged. If you try to "buy the dip" you have to know in advance when you're going to "sell your losing position." There's no shame in being wrong; staying wrong is unforgivable.

Let's continue the conversation below. Leave a comment or write to us at Breakoutcrew@yahoo.com.

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