Doing Nothing Can Be a Strategic Response to a Market Crash

In my post of earlier this week, I described the tactical money moves I made in response to the failure of Lehman brothers.  This included a strategic decision to stand pat in our retirement portfolio asset allocations. 

Since then, the news has remained negative, with the U.S. stock market dropping another 4% on Wednesday and Asian markets continuing to fall as I am writing this.  These developments have caused Mr. ToughMoneyLove to question the wisdom of his decision to stay the course.  Indeed, am I insanely confident in our so-called “all weather” portfolio? 

Rather than ignore my wavering confidence level, I decided to dig deeper into the facts to determine if there were other tactical or strategic options that would be better for our retirement portfolio.  Maybe Mr. ToughMoneyLove had to learn some hard truth himself. 

What I learned has persuaded me that doing nothing is a legitimate strategy in response to this market crisis. 

Even Professional Financial Planners Can’t Agree on What to Do 

My first tactical move was to research whether a consensus had been reached among financial planners about advice they were giving their investor-clients.  The online edition of Investment News reported the results of a survey it conducted over the past thirty-six hours of financial advisers.  Of the 730 advisers who responded, 69% said that they were not making any changes to their clients’ stock allocations.  16% of the advisers said they were decreasing equity allocations while 14% were increasing them. 

These are the professionals.  A substantial majority of advisers say do nothing.  OK, maybe they are overly optimistic so let’s go with what the minority contrarian group is recommending.  Except that the contrarians are almost evenly split between increasing and decreasing equity allocations in response to the market crisis. 

This tells me that maybe doing nothing is actually doing something – a legitimate strategy.  Perhaps I should just close the books on my decision and worry about college football for the rest of the week. 

But wait there’s more!  (I think Ron Popeil of infomercial fame owns that phrase but I can’t help myself.) 

If History Repeats, Doing Nothing Will be a Winning Strategy 

I decided to take a look at what happened during and after other famous market crises, three of which I remember.  I found historical stock market data for these crises compiled by Ned Davis Research.  I then assembled this data into the chart below.  From left to right you will see:  the market crash of 1929; the “Black Monday” market panic of October 1987; the “Asian Flu” market crash of October 1997; and the post 9/11 market decline of 2001.  The market returns are shown during the peak crash periods and at 63 days and 126 days after the crash.  As you can see, in each case, the market returned with a vengeance in a few months.


Now Mr. ToughMoneyLove is a logical person and therefore will readily concede that past performance is not necessarily an indicator of future results.  (Gosh – where I have seen that language before?)  Still, the charted history is compelling.  And with a strong majority of professional financial advisers either staying the course or increasing equity holdings, why should I deny history?  

So my “do nothing” decision is not founded on mere inertia but on real evidence.  I think that makes it a legitimate strategic money move.   Don’t you?

What are your money strategies in response to this market crisis?

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4 Responses to “Doing Nothing Can Be a Strategic Response to a Market Crash”
  1. Four Pillars says:

    I’m doing nothing right now!

    I think that trying to figure out what to do in a time of panic (or uneasiness as it were) is not necessarily the best strategy.

    Ideally an investor should have a strategy in place for different common events ie a passive investor will sit tight regardless, a more active investor might have some moves planned if certain stocks go below certain points etc.

    No matter what kind of investor you are it helps to think of what moves you should make BEFORE the market crashes…rather than during.


  2. Mike: You’ve made an excellent point. If you are a more active investor then have one or more contingency plans in place is the way to go. Stop loss sell orders would be one such plan.

  3. yeah, totally agree here. I’m all for doing nothing 😉 but mainly because i can’t even fathom switching everything around right now, and then doing it again in the near future. aka, i’m pretty lazy. So at least it’ll help me for once! haha…

  4. Budgets are Sexy – Thanks for the visit. Being lazy works OK as long as you are not invested in an at risk company, e.g. WAMU, AIG, etc. Definitely want to stay vigilant there.

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