Stay Cool During a Market Shutdown

Last October, Superstorm Sandy plowed a path of destruction for hundreds of miles. Nearly 200 people lost their lives, almost 8 million people lost power, and billions of dollars in damage occurred. In addition, the stock market was closed for two days. You might think that I would be concerned about the market going dark for two workdays–I wasn’t. Mind you, the event was certainly unusual. The last two times the New York Stock Exchange shut down due to weather was when Hurricane Gloria hit in 1985 and because of a 1969 snowstorm. The last time it closed for two consecutive days due to weather was in 1888. Indeed, after the terrorist attacks on September 11, 2001, the market shut down for four days. But just because the stock market closes, it does not mean there will be a serious problem for equities.

A stock represents an ownership stake in a company. You can buy and sell stock five days a week in most cases, but being temporarily unable to trade does not alter a company’s value. My investing hero, Warren Buffett, said of this subject: “I don’t want to buy any stock where if they close the NYSE tomorrow for five years, I won’t be happy owning it.”
With that in mind, here is a list of do’s and don’ts in the event the market closes on a regularly scheduled trading day.

Sell in a panic when the market reopens.
If the market shuts down, chances are something bad happened. That, compounded with short-termers’ panic over the closing, is likely to cause the market to fall a bit when it reopens. It is important not to sell due to fear that the market is down.

Be concerned the record of your stock ownership may get lost or damaged. The companies that keep these records closely guard this data. In the  unlikely event the New York Stock Exchange takes a direct hit from a tornado, you have no need to worry that your ownership in a company will vanish.

Think about what caused the market to close.
For instance, due to Hurricane Sandy, property and casualty insurers will send out big checks. In the short term, some might assume selling those companies is smart. Over long periods of time, insurers balance claims and premiums with precision–it’s how they stay in business. They may raise premiums, possibly boosting profitability in the long run. Another example: many rushed to Home Depot or Lowe’s in the wake of the storm. Yet what seems like a massive windfall to those stores is likely to be a blip over the next five to 10 years. At the end of this exercise, you’ll likely conclude you lack full information or should not take action.

Draft a stock shopping list.
While stocks are not trading, list companies you would love to own–at the right price. If the market drops early, great companies with little exposure to the troubles at hand may go on sale. For the opportunistic investor, the day the market reopens could be a good time to dive in.

Monitor risk tolerance.
One tool for determining asset allocation is a questionnaire to gauge your
reaction to market swings.  The trouble with such questionnaires is they are inherently hypothetical. Use such an event not to react but to measure your impulses. If the market falls a few hundred points at the open and you get cold sweats, you might want to tweak your allocation. However, if you feel calm, that’s good news.