The U.S. financial markets crisis reached a critical stage during September 2008 when the global credit markets experienced severe contracted liquidity after the bankruptcy of investment house Lehman Brothers and the $85 billion government bailout of insurer American International Group on September 16.
With the credit crisis taking out some of Wall Street’s biggest players, it had yet to really affect Main Street America until September 29 when the House of Representatives rejected the original $700 billion bank bailout package proposed by President Bush. This rejection triggered a 777 point drop in the Dow Jones Industrial Average, the largest decline in history. Over $1 trillion worth of stock market value was wiped off the books in a matter of minutes. And the stocks belonged to those on Main Street, who suddenly had a tangible stake in getting a bailout bill passed that would hopefully shore up the American financial system.
If you are one of the ordinary Americans who saw your stock funds and the value of your 401(k) plan evaporating before your eyes, you are probably wondering whether you should keep contributing to your 401(k) plan. Your best bet, even in these uncertain times, is to continue to contribute each pay period on a consistent basis. Keep in mind that when you are contributing during a down market you are buying everything at lower prices. If you are tempted to stop contributing during a bad market, think about continuing to contribute but allowing your new money to go into the money market account. More importantly, remain calm. You may be tempted to act rashly, but please remember, this too shall pass.
Like every other financial crisis our markets have faced, this situation is part of the cycle that has allowed so many investors to generate great wealth in the markets. Warren Buffett and his teacher, Benjamin Graham, are right: over time, the market is a weighing machine. Companies cannot make poor financial decisions without eventually having to deal with the consequences. During the next few weeks, the markets promise to be extremely volatile. The response from Wall Street and the financial press will range from euphoric to despondent, and much of the advice you hear will be emotional and short-term in focus.
We also recognize the very real risks in the market today. More companies are sure to struggle. But at the same time, we urge you not to panic or react in haste. If we retain our wits, we can’t help but make better decisions than the majority of investors.