Stocks Are Plummeting: Find Out Why, and What to Do Now

Stocks Are Plummeting: Find Out Why, and What to Do Now

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Soon, we’ll start an article with, “Good news!”

But, hey, as that proverb often attributed to Confucius goes, at least we're living in interesting times: That is certainly true if you've been watching Wall Street—which took yet another plummet yesterday.

Starting on Wednesday and continuing through yesterday, U.S. stocks were hit hard. Although the Fed announced a plan dubbed Operation Twist to strengthen the economy, investors were more spooked by the central bank’s forecast for the economy, which noted “significant downside risks” globally, especially in worldwide financial markets. Which most people assume is a reference to the crisis going on in Europe right now.

One of the biggest reasons the market is down right now is the European debt crisis, according to sources in an article from The Wall Street Journal. And weak manufacturing numbers from China haven't helped either.

What’s Happening in Europe

Credit rating agency Standard & Poor’s cut Italy’s debt rating by a notch early this week, and adding insult to injury, also cut the ratings of seven Italian banks on Wednesday. This is a big deal, because even more countries are exposed to Italian debt than they are to Greek debt. One of the biggest reasons everyone has been so worried about Greece is that the crisis there could spread to other countries like Italy and Spain … and this is one indication that that might be happening.

What’s Going On in the U.S.

Adding fuel to the fire are two new speed bumps in America’s own debt worries:

  1. This week, credit rating agency Moody’s downgraded Bank of America’s long-term credit rating two notches—Wells Fargo and Citigroup got hit, too, but Bank of America’s downgrade was the most serious. This downgrade is in large part because the credit rating agencies are doubting that the government would step in to help banks that are “too big to fail” the way that it did at the beginning of the financial crisis.
  2. The House unexpectedly vetoed a bill intended to fund the U.S. government through the next fiscal year, so we're again at risk of a government shutdown after September 30th. (Here’s more on what’s happening.) This is a little too much déjà-vu for investors, given the crazy market swings this summer, when Congress couldn’t make up its mind on the debt ceiling. Remember that?

What’s Gone Down in the Past Couple Days

  • European stocks are way down, with the Stoxx Europe 600 index reaching its lowest level in intraday trading in more than two years
  • Investors are worried about the stock market, so they’ve been fleeing stocks and buying up U.S. dollars instead—so now the Euro and the British pound are at nine-month and one-year lows, respectively, against the dollar
  • Obviously freaked out, investors are also buying up Treasury bonds, which are known as a historically safe investment
  • Interestingly, gold is also usually considered a “safe haven,” but it slumped to a four-week low, differentiating this market dip from other recent ones; all sorts of markets were down enough yesterday that people were just liquidating as much as they could and storing their money as plain old cash

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Well, What Are We Supposed to Do?

Advising everyone to hold tight is easier said than done, we know. If you’re an experienced investor, you should do what you think is best, but we just want to remind you that investing is a long-term proposition. Things might be bad now, and there’s a good chance they’ll still be bad in a few months. But that’s okay. If you’re investing, you shouldn’t be planning to retrieve your money in mere months, anyway, or even in just a year or two.

We recommend the Five Year Rule, which says you shouldn’t put any money in the market that you’ll need back within five years or fewer. Time itself is one of the best ways to even out risk, so if you do have more than five years to spare before retrieving your money, then our best tip is for you to keep your eye on the prize … and not on the day-to-day.

After all, the markets might be turbulent, but selling your investments when everyone else is selling as well isn’t exactly a recipe for the age-old mantra of buying low and selling high.


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