A financial panic is often defined as a psychological phenomenon. It includes collapsing asset prices, extreme volatility in all markets, removal of large quantities of money from banks, and a lack of confidence in the economic system. If your portfolio is not properly diversified, it can mean tremendous losses. On the other hand, for savvy investors, financial panic can be the road to making significant sums as soon as the panic is over. Although it's often difficult to see a panic coming before it's too late, there are some things you can do to prepare for one.
1. Consider buying gold. Historically, gold has been a haven during times of extreme stress and panic in financial markets. Gold does not lose its value in the way other assets do. The big issue is to buy it fast, before the price begins to skyrocket even further, as many investors flock to gold during times of panic.
2. Set money aside to buy stock. It's always a good idea to have funds ready for potential buying opportunities. Panics mean that stock prices crumble, making stocks relatively cheap, and in many cases undervalued. If you have properly hedged your investments, then you may want to use some of this cash to buy blue-chip stocks. During a panic, stock prices are more of a reflection of investors' fear, than of the quality of the stock. Assuming you have confidence the economy will eventually improve, this can be a good time to buy.
3. Look at possibly investing in educational or technological stocks. In periods of economic uncertainty, people often seek to increase their education to make themselves more desirable on the job market. High technology is also sought after because firms are trying to squeeze as much productive capacity out of the few remaining workers as possible. You may want to consider stocks that stress productive improvements, such as nano-technology or biotech. Technology is a way to boost production while laying off workers. In general, these are the stocks that do well during times of economic uncertainty. However, keep in mind that even during times of relative calm, tech stocks can be volatile so tread carefully when there's a panic.
4. Consider buying government-controlled currencies. Few currencies are controlled by governments, but as the financial panic in Asia of 1997 proved, state-controlled currencies fared better than the rest of the currencies. This was because in China and Taiwan the state kept the currency artificially high while the privately controlled currencies of Japan, Thailand and Korea plummeted. This permitted China to buy up assets throughout Asia.
5. Unload some of your assets. Consider selling off currencies such as the dollar or euros, which are controlled by private banks. You may also want to part with stocks in small and unstable firms. The idea is to streamline your portfolio and purge it of less stable investments.
- The Financial Dictionary: "Financial Panic"
- Framing Finance: The Boundaries of Markets and Modern Capitalism; Alex Preda; 2009
- 6 Reasons to Embrace Stock Market Panics; Setu Mazumdar, M.D.; 2011
- Congressional Research Service; The 1997-1998 Asian Financial Crisis; Dick K. Nanto; 1998
- CNBC; Newmont Mining CEO Sees Gold at $1,750 in 2012; Margo D. Beller; July 29 2011
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