How to Cope When the Markets Panic

Time can speed up radically in the markets. It accelerated to supersonic speed over the past week, and you could have gotten whiplash if you tried to keep up with it all.

Global stock and bond markets rose and fell and rose again in cascading waves, moving across oceans and time zones. Fears of a recession in the United States mounted, and the Federal Reserve came under pressure to cut interest rates and spur growth.

Panic can happen easily in market declines — and it can vanish just as quickly. Late in the week, it was almost as if the seemingly calamitous market whirlwind had never happened.

The episode provided a reminder of why, when your own money is at stake, it’s so important to pause, take a deep breath and think calmly. What we just experienced wasn’t all that severe, on a historical basis, at least not in the United States — but it could well presage deeper losses down the road. Big downturns are part of investing, much as recessions are part of economic life.

Don’t act hastily when the markets are turbulent. But when things are reasonably calm, and you can think and act deliberately, remember that most of the time, broad diversification helps reduce risk. As I pointed out last week — in a column written shortly before stock markets fell and bonds rose in value — it’s worthwhile to rebalance your portfolio periodically, making sure you still have a mixture of stocks and bonds that isn’t riskier than you can handle.

It Started in Japan

Tokyo was the epicenter of the market action. The benchmark Nikkei 225 stock index fell 12.4 percent on Monday, its biggest one-day decline since 1987. But this debacle was followed the next day with a boisterous rebound of more than 10 percent. Behind the stock market volatility were big shifts in the value of the yen, and small ones in interest rates, as my colleague River Akira Davis reported from Tokyo.