What to do in a time of financial uncertainty


  • Photo 1 of 2

    A chart graphing the movement of the S&P 500 with investor anger from Jan. 2010 to July 2011. Investor anger is at an 18-month high due to the debt ceiling paralysis.

    - Courtesy of MarketPsych

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    A chart comparing investor sentiment and the S&P 500 from Jan. 2008 to June 2011.

    - Courtesy of MarketPsych

Tess Vigeland: Alright alright alright alright alright. People! PEOPLE! Can we please just calm down?

Montage of newscasters: The U.S. treasury can no longer legally borrow any money and it says that could sink the economic recovery. Congress either raises the debt ceiling by early August or we could all pay a devastating price. If you think this economy is bad now, wait till word gets around the world that Uncle Sam has become a deadbeat.

Enough already! Stop! Stop the madness! You are scaring my listeners! I won't have it!

And you know what else? This all sounds way, way too familiar to me. I remember the last time sure financial armageddon was just around the corner. And it wasn't that long ago.

We got the exactly same questions from you: What can we do?! Well my guess is that this time 'round, We have some of the same answers. And for those, we've brought back Jason Zweig of the Wall Street Journal and psychiatrist and investment advisor Dr. Richard Peterson of the firm MarketPsych. Welcome back gentlemen!

Jason Zweig and Richard Peterson: Good to be with you. Great to be with you.

Vigeland: Last time the three of us got together to talk about what was going on in the financial system was two and a half years ago. March of '09, we all remember what was happening then?

Zweig: Absolutely.

Peterson: Oh yes.

Vigeland: The Dow hitting 6,500 and everybody panicking and wanting to know if they should just get out of the markets altogether. And I have to tell you, we're starting to see that again in our listener mail. Carrie Hunt in Chicago wrote in, said, "I haven't heard or found a single story on how regular people like me can or should be preparing for financial apocalypse." Greg wrote in from Durham, N.C., "Sorry Marketplace. This time it's too weird to follow the standard advice of 'invest for the long term.' I have no idea what to expect but my 401(k) and I are going to be on the sideline until this shakes out." Richard?

Peterson: There is a lot of fear, because there's a lot of uncertainty. A lot of people haven't seen what it means and all they hear is "we have D-Day Aug. 2. If we don't have a solution by then, it's over."

Vigeland: Right.

Peterson: And the question is, how do you position yourself as an investor? Or knee-jerk reaction. It's something call the "familiarity bias." We go towards what we know and what we're comfortable with, which is cash in the bank.

Vigeland: Jason?

Zweig: There are people who talk a lot about going off the grid.

Vigeland: Yeah, buying seeds. I have friends who have talked about that.

Zweig: Yeah, but my general philosophy as an investor is I don't want a lot of things sitting around my property that somebody will murder me for, if worse comes to worst. So I'm not a big believer in burying gold in my backyard or filling my basement full of tuna fish. Because if the end of the world does come and the financial system completely falls apart...

Vigeland: We're going to be at your house.

Zweig: The looters are going to come after me, not you, if I have all that stuff. But you need to protect yourself against the risk that the U.S. will no longer dominate the global economy the way it has for our entire lifetimes. And it's also possible the dollar will recover in the future. We don't know that either.

Peterson: Very true.

Vigeland: But Richard, yes, of course, we're taking it to the extreme, but the cans of tuna, the gold -- all that stuff.

Peterson: Container in the mountains.

Vigeland: Is it just patently absurd that we're even going there, because of talk of the debt ceiling?

Peterson: But this is how we catastrophize.

Vigeland: Yes! We are catastrohpizing!

Peterson: We don't know how exactly it's going to impact us, so we go to the default option, which is "Ah! Panic!" But fundamentally the issue is, what does default mean? Obviously to many people, it has been exploded out as this idea that you're going to lose your money. At the same time, there's no way to prepare if you have sizable savings that need a very liquid place to put them.

Vigeland: OK, well, Richard, I'm going to ask you as a psychiatrist -- put me on the couch...

Peterson: There's no pillow.

Vigeland: I am the American consumer, I am the American investor. I'm freaking out. What are you going to tell me?

Peterson: There's a reason to be scared, because things are changing. The difference between most investor fear is that right now, investors feel like they have no control over what's happening. So, what you've gotta do is find something you can control, whether it's finding an investment advisor who will work with you and educate you about how to diversify your money right now, how to protect yourself from default. Do something that you can control. Or if the information bothers you, turn off the TV, if you're a long-term investor. Don't get caught up in the short-term.

Vigeland: Don't turn off the radio though.

Peterson: Don't turn off this show, but everything else. But it's really about finding whether you are afraid and what you are feeling out of control about. And all this information is confusing and it makes us feel uncertain, like there's nothing we can do. But you can take some steps with your own money, and I don't mean pull it all out of the market. But changing how you take in information.

Vigeland: Well then, Jason, let me follow that up by asking you whether people should even be taking action at a point like this? Again, to compare to March of '09, our advice back then -- the three of us sittin' around the table -- was look, "People, you're investing for the long-term. Keep it steady. Maybe make a few small moves, but don't do anything rash." Does that hold this time or should people actually be taking some sort of action?

Zweig: One thing you can do, I think, is you can take a deep breath and ask yourself if you can think of an example back to the history that you've lived through or that you've heard about, where people saw a disaster coming that actually came. I did a column recently and I called this the "neon swan," as opposed to the black swan from the book by Nassim Taleb. And the black swan is something that's unpredictable, unexpected, hugely important and understandable only in hindsight. And here we have a neon swan, it's perfectly predictable, we all see it coming, there's nothing surprising about it if it does happen, it's completely out of everyone's control and it's staring us all in the face. And the markets are stubbornly refusing to react to it, which tells you one of two things: Either the hundreds of millions of professional investors who move money around all day long are staring this thing in the face and don't understand it any better than we do. Or the market's have already decided that their just isn't very much you can do about it and it probably isn't going to happen, at least not the way people expect it to.

So my advice would be if you do anything, do something gradually and do it in moderation, rather than taking some large sudden step, like moving all your money into cash. Because after all, if treasuries default and you have all your money in cash...

Vigeland: That's not very helpful is it?

Zweig: ...Probably in the form of treasuries. So that might not be the best idea either. And people shouldn't be blase about it and they shouldn't say, "Oh, this could never happen" or "this won't happen." It probably won't and it probably won't happen in the most obvious form. But I think we need to come to terms with the fact that the credit of the United States is not what it once was and it's more important than ever for people to be globally diversified.

Vigeland: Alright. Dr. Richard Peterson, Jason Zweig, thank you both so much for coming in.

Peterson: Thanks Tess.

Zweig: Thanks Tess.

Vigeland: And while we're making comparisons, two surveys measuring consumer confidence this week said sentiment is back down to where it was in March of '09.

Alright well if that wasn't quite enough debt ceiling talk for you, we've got a guest economist writing about it on our Makin' Money blog.

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