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Learn How To Cope With Economic Winter

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The Tampa Tribune

Published: November 23, 2008

This country's economic crisis has us all wondering what the future holds. Will the new president be able to reinvigorate the economy? When will the housing market rebound? How is the holiday season going to play out in terms of retail sales?

For months, economists have been debating these issues. After all, that's a big part of their job. But for the average investor, it might be better to focus on the past.

I'm not talking about the last couple of years; rather, I'm talking about the past couple hundred years. We can learn a lot from the historical ups and downs of the stock market.

"If you look at over two centuries of American history, bull and bear markets are a fact. The market does fluctuate, usually over decades. So roughly, you're talking about a decade up and a decade down," says Richard Sylla, a professor of economics at NYU's Stern School of Business who focuses on the history of the markets.

I think we all know what sort of decade we're experiencing now, which means that in a few years, things should start looking a bit brighter. In fact, economists are largely in agreement on this. But how do you cope in the meantime?

Knowledge is power. What I just wrote about the market's history is just the tip of the iceberg. I'm not saying you should devote a lot of time to research, but knowing where the economy has been can go a long way in making you feel more at ease during this recent low point. "Fear is going to control you unless you educate yourself on what's happening. It's having no understanding that makes people completely freaked out," says motivational speaker Tony Robbins.

According to Sylla, if you go back 200 years and average the market's returns, there have been about 10 movements like the one we're experiencing now, meaning the full cycle of up and down takes roughly 20 years. Makes sense, right? The 1990s were extremely strong, and this decade has been anything but.

Put it in perspective. "In every 80 to 100 year period of time, we have cycles, or seasons. They come like clockwork, but we forget them," explains Robbins. His example? 1929 began the Great Depression, a dark and dreary time - in other words, a winter. When people finally came out of that, they entered spring. The market started blossoming again, there were opportunities to make money and people were generally optimistic. Right now, Robbins says, we're once again experiencing a winter, but we don't have to be dark and dreary about it. "Winter can be one of the best times of your life, financially, if you don't panic."

Take the advantage. By "don't panic," Robbins, in part, means don't pull your long-term money out of the stock market. Let's get something straight: If you have money that you're going to need in the next five years or so for short-term goals - sending your kids to college, buying a house, going on a vacation - it should not be in the market. There is too much risk involved and it might not be there when you need it. But if you're saving for a long-term goal, such as retirement, your dwindling 401(k) balance is not a reason to pull out. In fact, it could even be a reason to invest because you have an opportunity to buy low.

Invest wisely. Now, more than ever, you need to make sure you have an emergency fund that can cover six months worth of expenses. People are getting laid off every day and if you're next, you'll at least be prepared. Credit cards - not that they were ever the ideal way to float through an emergency - are no longer reliable because people are seeing their limits cut all the time.

Arielle McGowen contributed to this column. Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL's Money Coach. She is the personal finance editor for NBC's "Today" show.

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