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Ben Stein How Not to Ruin Your Life

Ben Stein, How Not to Ruin Your Life

Keeping Your Cool in a Shaky Market

by Ben Stein

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Excellent (1419 Ratings)
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Posted on Friday, March 2, 2007, 12:00AM

Now for a few lessons from the recent stock market zaniness:

1. Don't panic. Panicky behavior, especially panicky buying and selling, accomplishes absolutely nothing. Smart investors never buy in a rush or sell in a rush. It's always worthwhile to think, to consider, and to do research. Only madmen and stock traders and speculators panic. Don't do it.

2. Keep plenty of cash on hand at all times. It's very hard to think rationally about stocks if every dime you have is in stocks and if the market is falling fast. The risks of annihilation are so great at that point that panicked selling seems like a smart option.

If you keep a good chunk of your assets in cash, bonds, and money market funds, however, so that you know you'll be safe, sane, and secure for a long time to come no matter how the market is gyrating, you can make a patient, sensible evaluation of the situation.

Cash In, Cash Out

How much cash is enough? It depends on how fast you spend it. But to keep a year's worth of living expenses in cash or near-cash (bonds, money market funds, and so on) is not foolish. At a minimum, you should have six months' worth of cash or near-cash in hand.

Cash is a terrible long-term investment, and treasury bonds aren't much better. But in terms of keeping calm so that you can make sensible decisions, there's no substitute for cash.

Personally, I get crazy when my cash reserves run low, which they can when employers are slow in paying me or I have sudden large expenses. For instance, I just had to have one of my embarrassingly many houses virtually demolished, re-piped, and re-floored because of a burst pipe -- not once, not twice, but three times in a short span.

You would be amazed at how much cash this can burn. And waiting for the insurance to pay is a recipe for heartache. As I write this, I realize I probably should've had even more cash reserves. I easily have 18 months' worth of cash, and it's the cash I think of when I'm worried, not my endless printouts of stock.

A Contagion of Panic

Here's another lesson:

3. Stocks don't always fall for a good reason.

Yes, there was cause for the Shanghai market to fall last week. It was up over 100 percent in approximately a year, and speculation was wild. But there was absolutely no reason at all for the cream of American stocks on the Dow and the S&P 500 to fall. It was just a contagion of panic.

If you read the newspapers, keep yourself well informed, and have your eyes open, you need to ask yourself if the economy looks as if it's in real trouble. If it doesn't look that way, don't sell unless you desperately need the money.

In fact, don't even sell then. Suppose there's a recession. I don't expect it, but it could happen. But suppose there is: Recessions in the past 20 years tend to be extremely short-lived. The lower stock prices that accompany a recession, and the lead-up to a recession, tend to be superb times to buy. If you can be patient, hang in there and buy when the market is low, over long periods of time, and you will be well ahead.

It's always better to buy when the market is low and the outlook is dour. If you have the smarts and the courage to do it, you'll be glad you did. People rarely make a lot of money buying at peaks; they always do well buying in valleys.

No Crystal Ball

4. Put not your trust in princes.

Alan Greenspan is a wonderful guy. He's been a friend of my little family forever, and he spoke glowingly at my father's memorial service. But he's not the Lord God. He can't see the future, and he has no data that other economists don't have.

Greenspan has a poor record indeed as a forecaster. He didn't see the collapse of 2000-2002 coming, and a few years ago he was warning that the great danger was deflation. He's a great man and was a magnificent Fed chair. But he doesn't have magical powers of foresight.

In fact, neither does anyone else, including me. The conclusion: Just keep buying at a measured pace, and if the market sinks a lot, buy more. I guarantee you that's how the big boys do it. The little guys sell out at the first sign of trouble -- the ones with the private jets hang on.

Two Last Lessons

And, finally:

5. DIVERSIFY.

I capitalize this on purpose. An investor's two best friends are time and diversification. Get the broadest possible market indexes. Spread yourself out over large and small caps. Have a large dollop of the developed foreign and a goodly chunk of the developing market. Yes, it'll be a rocky ride in China and Brazil, but over long periods you'll do great.

6. The long-term direction of the market is up.

It will fluctuate, as J.P. Morgan said, but the long-term trend is up. If you can patiently stay invested and take advantage of this long-term trend, you'll come out ahead. It may take some time, but short of nuclear war -- and in that case, there won't be a thing to worry about -- you'll make money if you stay in on a broadly diversified basis. You'll be wiped out if you sell on a panic basis.

So:

Have plenty of cash.

Be patient.

Never panic.

Buy when others are selling.

Diversify.

And, one last time, be patient. Do you think Warren Buffett was selling last week?

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186 Comments

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  • Yahoo! Finance User - Wednesday, March 21, 2007, 4:15PM ET  Report Abuse

    • Overall: 5/5

    Cogent and well-written: All anyone needs to invest wisely. Of course, those who don't have cash should of save until they have enough to put aside, and then start investing.

  • Yahoo! Finance User - Tuesday, March 20, 2007, 9:57AM ET  Report Abuse

    • Overall: 2/5

    I guess those of us who dont have plenty of cash should panic but isnt that always the way it is, give me a break.

  • Patriot - Tuesday, March 20, 2007, 3:24AM ET  Report Abuse

    • Overall: 5/5

    Excellent advice expertly written.

  • Yahoo! Finance User - Friday, March 16, 2007, 5:04PM ET  Report Abuse

    • Overall: 5/5

    Ben Stein is the example of the "principe of reality".Every article helps me to stay focus on my goals and to see the real world.Thanks M.Stein

  • Yahoo! Finance User - Tuesday, March 13, 2007, 2:03PM ET  Report Abuse

    • Overall: 2/5

    I think the advice given is very good. You should never panic in any situation. As for the cash issue, I live from paycheck to paycheck and still manage to save some. I have been doing this for several years and have a pretty good safety net saved up, IN CASH.

  • Yahoo! Finance User - Tuesday, March 13, 2007, 8:32AM ET  Report Abuse

    • Overall: 4/5

    He speaks of cash as if it grows on the ground

  • Yahoo! Finance User - Saturday, March 10, 2007, 6:04PM ET  Report Abuse

    • Overall: 1/5

    Buy the valleys? Great advice if you have a time machine.

  • JUDY - Saturday, March 10, 2007, 3:36PM ET  Report Abuse

    • Overall: 5/5

    Ben always has something good to say. I also enjoy him for his commentay on CNBC and columns in the new York Times and on Fox Sat. Morns

  • Al - Saturday, March 10, 2007, 1:16PM ET  Report Abuse

    • Overall: 4/5

    Ben Stein has a feel for the small investor, and gives comfort in saying"not to panic" during a jittery stock market.(something we all know, however do not always put into practise ) Thanks Ben....Al in Seattle

  • Yahoo! Finance User - Thursday, March 8, 2007, 10:29AM ET  Report Abuse

    • Overall: 1/5

    Isn't it interesting that those who rated this 1 star (those that sell at he beginning of market downturns) have annual gains of 20, 30, 40%. Those who rated it 4 stars (the lazy buy and hold zombies) dont say what their returns were. Perhaps they are embarassed with their average annual gains of only 10% and that they have had to suffer massive drawdowns of 40-80% along the way to get even that.

  • Yahoo! Finance User - Wednesday, March 7, 2007, 11:12PM ET  Report Abuse

    • Overall: 1/5

    lame. he writes, Only madmen and stock traders and speculators panic. Don't do it. Everyone in the market is a trader. furthermore, many speculators dont panic. the good ones make money off the people who do. going long may be the best advice for the lazy, dumb, and indifferent but necessarily for everyone. i hope he didnt get paid for this piece. not that he needs it with his embarrasingly many houses and his being tight with his highness greenspan.

  • SteveC - Wednesday, March 7, 2007, 10:55PM ET  Report Abuse

    • Overall: 5/5

    Ben's advice is a formula for success. I'd planned to exactly what he advised anyway, but it's good to hear it from him as reinforcement. One other piece of advice I'd recommend to others is: don't listen to the "gurus" on CNBC or other financial shows. That adds too much hysteria and unclear thinking during the "buying period" for stocks or funds. At least it works for me to completely ignore these folks. Although, by all means read all economic and financial news you can.. and you are the one making the decisions; not the guru of the month.

  • followlane - Wednesday, March 7, 2007, 10:12PM ET  Report Abuse

    • Overall: 5/5

    Following two says it all - "Excellent advice"

  • Yahoo! Finance User - Wednesday, March 7, 2007, 9:19PM ET  Report Abuse

    • Overall: 4/5

    Is it wrong to skip the Yahoo Finance columns, and go right to the comments? I especially enjoy the one-star rated comments, saying that the 'emperor has no clothes'.:-)

  • Yahoo! Finance User - Wednesday, March 7, 2007, 8:58PM ET  Report Abuse

    • Overall: 1/5

    Now days, common sense and 2 cents will give you two cents to rub together. Bailing out of an insane market drop to save capital worth will make you a far wealthier man/woman than Ben will ever be. I've been through plenty of "corrections" and recessions and pullbacks in the past 30 years and to stick it out and watch your life's savings and 401s and IRAs dissolve away by 20-30% and have to start the steep climb back out of that hole, which may take years, is not worth the ulcers. The biggest oversight many of these financial geniuses fail to acknowledge in their dialog is 70% of the people reading their article are within 5-10 years or less (I turn 59 tomorrow) of hopefully retiring or at least tapping some of those investments on a limited basis. The majority of today's readers don't have the luxury of a game plan leaving significant amounts of critical capital in cash at 4% and miss major opportunities. For me, I pay CLOSE attention to the headlines every day that I am "at risk" in my selected mutual funds and when the global news makes sense as to why a severe downturn is occurring....I'm outta there. I bailed on May 12th last year, re-entered my chosen funds on 11/29 and closed out the year with a 41% gain for the 5 1/2 months I was exposed. (Oh about Buffet...in 2005 he made 6% on his money....I made 28.7% on my net worth. I'll take my program any day!)

  • derek - Wednesday, March 7, 2007, 8:24PM ET  Report Abuse

    • Overall: 5/5

    Nail on the head. I took way too many transfer orders last week. Compliance at my firm prohibits me from advising people not to sell/transfer all their equity investments. I can explain different scenarios/portfolio models but can't directly tell a client what to do. Too bad for so many that missed the rebound and sold last week. Also, many people are risk-averse when they have no reason to be other than their lack of understanding on how the market works over time. I assume that Ben is focused more on long-term growth assets (his main topic) rather than day-traders or speculative investors. Granted, Ben's column touches on well known strategies within the industry, its a shame that so many investors don't know or adhere to them. But if everyone did I guess there wouldn't be as many investors taking losses to allow others to make gains.

  • Christopher - Wednesday, March 7, 2007, 7:14PM ET  Report Abuse

    • Overall: 5/5

    Ben's advice is very much based in common sense, which is what makes his words so valuable. Many of the readers are seem unimpressed by his prophetic statements. Investing is not a get rich quick scheme. Ben is not going to vomit technical data to show why you should invest in a particular product. He is simply telling you to stay calm an think and that is exactly how Warren Buffett got so wealthy. Get in the game, stay in the game, diversify and insulate yourself from emotional trading and investing decisions by keeping plenty of cash on hand. Yes, not all of us have a lot of money. But start saving today and do everything you can to increase your income and decrease your expenses. Thank you, Ben and God bless you.

  • DAVID - Wednesday, March 7, 2007, 6:53PM ET  Report Abuse

    • Overall: 1/5

    More laughable, out-of-touch, nonsensical non sequiturs from the Abby Joseph Cohen School of Permabullishness.

  • Darryl V - Wednesday, March 7, 2007, 6:27PM ET  Report Abuse

    • Overall: 3/5

    This was a good arcticle- Not anything mindblowing, but smart, sound advice. It seems to me that we all need a refresher in the fundamentals periodically. The part about having cash reserves on hand is most definitely not crap; quite the contrary. True, many Americans are living paycheck to paycheck, but its not impossible to put cash away every single payday. If more people did it, even in minute amounts, the average Americans debt to savings ratio wouldnt be nearly as bleak as it is. Thanks again Mr. Stein for some good, sound, advice. :)

  • kajlig - Wednesday, March 7, 2007, 3:52PM ET  Report Abuse

    • Overall: 2/5

    What a crap idea. CASH, a lot of American are under stress of mortgage, living pay check to pay check then who has the CASH. When you read some experts you expect something new and informative. Everybody knows have patience, think long term and have cash. But cash will come from where unless or until you don’t have positive cash flow and extra savings. If you are investing on regular basis, I am sure you don’t have any CASH left. Tell us something which we don’t know.

  • Yahoo! Finance User - Wednesday, March 7, 2007, 1:54PM ET  Report Abuse

    • Overall: 2/5

    Everybody misses the best parts of the article - just before and just after item No. 4: 1) It's always better to buy when the market is low and the outlook is dour. People rarely make a lot of money buying at peaks; they always do well buying in valleys. 2) Alan Greenspan has a poor record indeed as a forecaster. So, what do we have now. Ask yourself if the small decline that we just had make the market low or is it still high? Are we closer to a peak or to a valley? Is the outlook dour or is the outlook still rosy with all the clowns coming out and telling us buy-buy-buy and think for the long term? As for Greenspan, he now says that the bottom of housing has been reached and that the probability of recession in 2007 is only 1/3. Given his poor track record, assume the opposite: the bottom is yet to fall out from housing and the probability of recession in 2007 is 2/3. Now, I have to quickly buy me some stocks (gg).

  • Dr.Frank Loo - Wednesday, March 7, 2007, 1:20PM ET  Report Abuse

    • Overall: 3/5

    I am not sure whether Warren Buffelt sold anything last week but I didn't. By the way, Shanghai is not the cause of it all. Amongst other things, the carry trade scenario was one of the reasons. The US sub-prime mortage problem is another.

  • Yahoo! Finance User - Wednesday, March 7, 2007, 1:17PM ET  Report Abuse

    • Overall: 5/5

    This advice is all right on target. A couple other ideas: 1. Most stocks go in the direction of big market moves. So its best for we individual investors to buy after the market seems to have bottomed and started improving rather than while its still falling. You can't ever exactly buy at the bottom anyway, and the most risky time for a stock is right after you buy it, before you have any gains. 2. If you have stocks you want to keep through the correction that are above your purchase price, consider setting a stop or stop limit just above the purchase price, just in case. You didn't buy the stock to lose money. And this can prevent a big loss should the correction turn worse than you anticipate.

  • Food_fan - Wednesday, March 7, 2007, 10:26AM ET  Report Abuse

    • Overall: 5/5

    Just one more point. Someone with modest amount to invest should buy mostly securities which pay stable dividends. "Stable" is a key word here. And never buy anything without earnings, this gamble is for people with deep pockets only.

  • IMRaj - Wednesday, March 7, 2007, 10:03AM ET  Report Abuse

    • Overall: 1/5

    Useless article from a man who doesn't seem to have a clue as to how stock market wroks.

  • Doc Rog - Wednesday, March 7, 2007, 9:50AM ET  Report Abuse

    • Overall: 4/5

    Thanx again for re-reminding us of two very important ingredients in the investing mix; to keep a bit of "what if" cash and that unless you are going to sell for something such as retirement, the obvious thing to do when the market takes a short bath like happened last week is to add a few extra dollars to your weekly buy!

  • BobT - Wednesday, March 7, 2007, 9:17AM ET  Report Abuse

    • Overall: 5/5

    Solid advice: somewhat difficult to adhere to when one has experienced : Kennedy vs:Steel in 1962, the early 1970's, October 1987, and lesser "adjustments"

  • Yahoo! Finance User - Wednesday, March 7, 2007, 7:54AM ET  Report Abuse

    • Overall: 5/5

    Excellent advice. Because he writes as he speaks (or vice versa) I can hear his voice when I read his words. A wonderfully calming influence during turbulent times in the market and "right on", too!

  • Yahoo! Finance User - Wednesday, March 7, 2007, 7:47AM ET  Report Abuse

    • Overall: 5/5

    Yes indeed. Being 'fearful when others are greedy and greedy when others are fearful' is about the best way to be as a prudent investor.

  • dee - Wednesday, March 7, 2007, 5:42AM ET  Report Abuse

    • Overall: 5/5

    as always we can count on ben to take a deep breath and say something intelligent. go ben !

Showing comments 6-35 of 186<< PreviousNext >>
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