If you have been watching the markets lately, like I have, it’s gotten a little dicey. It’s been a while since we’ve had volatile downmarkets. What should you do when your investments get shaky?
In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about what to do when your investments start tanking. Markets do go up and down. If you’ve been investing long enough, you realize that’s just the way it goes.
- Downturns: People make big mistakes and lose a lot of ground—and money
- What to do? There are some things you should do and some things to avoid
- What is shaky market territory? People get emotional when it gets more volatile
- What are natural reactions? These feelings are normal:
- This time it’s different, but is it, really?
- Are you tempted to find winners and get rid of losers?
- Historically, people work through it and recover nicely
- What’s not normal? Things get completely backward sometimes:
- Past: Inflation was high, cash paid nothing, and mortgage rates were low
- Present: Cash pays nothing, inflation is very high, mortgage rates are up
- What are action items?
- Remember to refer to your financial and investment plans
- Give yourself a little space between the feeling and the action
- Educate yourself on how markets work
- Recognize that the market is out of your control for the most part
- Create awareness around human investing behaviors/behavioral finance
- Rebalance investments and benefit from tax-loss harvesting
- Change your pre-tax IRA or 401(k) to a Roth conversion
- If you have extra dollars, put them to good use and start investing
- What are questions to ask yourself:
- What is the underlying concern?
- What is the money that I’m concerned about? What’s its purpose?
- When are you ultimately going to use it? What’s it going to be for?
Full Episode Transcript:
Hello, everyone. I hope you’re having a great day. I have been watching the markets lately. It’s gotten a little dicey. As of this recording, we’re in about the middle of May, and things have gotten a little dicey lately.
It’s been a while since we’ve had volatile downmarkets. I guess the last time was in 2020 when COVID started happening. Before then, it’s been a really long time. Even with 2020, that was really fast, and then it just shot right back up.
Markets do go up and down. If you’ve been investing long enough, you realize that that’s kind of the way it goes, but either way, even if you’ve done this a million times, it can get scary. There’s a lot of fear, temptation, and stuff to think about potential changes to make.
We’re going to talk about that today—what to do when investments get shaky like they are now—go through some of the things you should be thinking about, and give you some tools to arm you as we go through shaky markets like we’re dealing with now and inevitably in the future.
Like I mentioned in the introduction, if you’ve been investing long enough or you’ve researched investments, you know the vehicles when you invest. Things go up and down, but it’s different when you actually see your balance go down. It can get emotional when markets get shaky like this and fear is high.
The problem with shaky markets like we’re having now is this is when people are prone to mistakes. A lot of times, people think that when the markets are good, that’s when they’re excelling because it feels like they’re doing good, but when the market is really good, the majority of people are doing really good. What separates people typically is in these big downturns. It’s mainly when people make big, huge mistakes and where they lose a lot of ground.
The question that arises is what should you do about it? The market’s shaky. I know you’re feeling like I need to do something about it. There are some things you should do and there are some things you should avoid doing. We’re going to talk through that today. We’re going to talk about what it looks like.
When I say shaky market, I’m going to talk through a little bit of what I mean by that. We’re going to talk about some of the natural reactions people have, and then we’ll talk about some action items you can take to avoid some of these big mistakes I’m referring to.
Just a quick story, my first experience investing was one of those big mistakes I talked about. I was 16 and had saved up a bunch of money working over the summer. I’ve always been interested in investing and thought it would be a good idea to invest the money that I had earned.
I took my entire life savings, which was, I think, $4000 at that time. It still feels like a lot of money to me now, but then, it was all the money I had when I was 16. The year was about late 1999. I invested my life savings. I really didn’t have any plan at all other than I just wanted to make my money return something. There was really no purpose and no plan beyond just that.
I picked some stocks. Tech stocks happened to be really popular at that time. I started researching and that was what was out there. It was everywhere. Everybody was talking about tech stocks, so that’s where my research led me and that’s naturally what I settled on.
I did research on what the best ones were, and I picked some of those. I’m like, okay, great, we’ll have a few of these, I’ll invest in them, and then things will be great. I’m going to buy them and hold them for a long time because that’s what you do with investing.
If anybody was around investing then, you’ll know what I’m talking about. If you’ve researched it, that was the tech bubble. A lot of these tech stocks and dot-com companies got overinflated, and then they crashed around that time. Right around the time I was investing, I guess I caught a little bit of the upturn enough to be like, man, I’m awesome.
That’s how it felt at the time, but it quickly started to crash. Like any first-time investor, I felt the temptation to do something about it, so what my action was is as I started to trade, I’m like, I got to get rid of these losers. I’m going to find some winners.
I started trading and looking for the winners. Unfortunately, I never found the winner and basically, after a few years of trading, had lost pretty much everything that I had started with. That was my first big investing mistake. I really didn’t have the knowledge and experience at that time and basically made all the mistakes you could possibly make. Fortunately, it was an early phase in my life and I was able to learn when the stakes were lower.
That is a good example of some of the mistakes that happen. Hopefully, you’re not making all of them at once like I did, but people make mistakes. We’re all prone to those. I think it’s helpful to recognize those mistakes and ideally, you’re learning from the mistakes of others. Hopefully, you can learn from some of these mistakes we’ll talk about and some of the mistakes I made in my past.
When I talk about shaky markets and downmarkets, what does that look like? If you look at the short term, right now, the market has been starting to get volatile. If you go to Google and you google VTI, what you’re looking up there is the Vanguard Total Stock Market. That’s one of the good metrics of the market.
When I say the market, basically, it’s an ETF that owns basically every stock in the US. I look at it as a pretty good metric of the entire market. It’s a good way to look at the historical market. I guess the fund is not super old. It goes back to the early 2000s, but you can look at how the market is doing by just looking up this fund.
As of this recording, I’m looking at it. If I go to the year-to-date view of how it’s doing, the ups and downs are starting to get a little bigger, and as of this second, it’s down 16.31%.
That’s going to change every second because I’m looking at Google as of literally the second, but call it a little over 16% down year-to-date for this fund. I would define shaky market territory as in that 15% or greater territory. Twenty percent loss or greater is when people start to get alarm bells going on. Then, when you get into 30% territory, I think that’s when it really starts to get bad and people start to feel it.
By my unofficial definition—there are much more official definitions—I gauge it just by how our one-on-one clients feel, the feelings I’m seeing them having, and the number of them that are raising issues. I think at this point in time, it’s starting to get into the shaky market territory with this downturn. Not quite like it was in 2020 or in 2008, but it’s starting to get into that territory. The market is starting to get more volatile and starting to have more ups and downs, and people are starting to get a little emotional. That’s what I mean by shaky market territory.
In 2008, that’s a good example of an extended bad market. Once things settled out at the bottom like I was talking about the Vanguard Total Stock Market—like I said, that’s a good example of the overall stock market—from the top of the market in mid-2007 until when it got to the bottom in early 2009, it had dropped over 50%. That’s a pretty big hit. If you’re 100% in that fund with all your money, say you have $1 million, it’s now $500,000. You’re going to see that statement. Basically, it’s going to feel like you just lost $500,000. That’s shaky market territory.
I wanted to talk about the reaction that happens there because I think that’s important to observe. When people see the statement as things come up or they start to see the news go out, the feeling that either the news tells or we naturally tell ourselves is this is different. This time is different. I know it’s down and I know markets go down, but this time is different. And maybe even like, this is something we’re never going to recover from maybe because it’s different.
The interesting thing about that storyline is it usually is different. That’s why it happened typically in the first place, because we often as a society learn from our mistakes but not always.
These big downturns typically are caused because some new big issue came up or something flew under the radar and caused it. Oftentimes, the downturn is caused by something completely new and different, but also, historically, we’re able to work through it, come through, and recover nicely, so those feelings are normal.
Also, when we get in that shaky market territory, things just get completely backward sometimes. Right now, for example, inflation is high, cash is paying nothing, and for a while, mortgage rates were really low.
There was this time in March of 2022 when inflation had already crept up, but mortgage interest rates were super low and cash was paying basically nothing. Fast forward to today, cash is still paying nothing and inflation is really high, but mortgage rates have gone up quite a bit.
That’s not exactly normally how it is. Typically, as inflation goes up, your cash should pay a little more normally and interest rates on mortgages would typically go up. They’ve started to do that on mortgage interest rates, but things can get backward, especially when you look at the really, really short-term periods of time.
Sometimes, if you’ve ever heard people talking about their reverse yield curve, that’s an abnormal thing that happens, but typically, these backward sorts of scenarios happen in a really, really short-term timeframe. Also, in these scary markets, salespeople really leverage people’s fear, and so does the news. You have to realize that there are a lot of people incentivized by that fear and they can capitalize on it. That’s just another consideration.
The focus or the temptation is to really hone in on the day-to-day. People get this pull to start watching the market, especially the worse it gets. You can find yourself checking the daily market report or maybe even checking hourly, or watching it. There’s this pull to watch that short-term market movement. Not to say that the news is bad or whatever. I’m just saying this is just a tendency that happens.
Feelings will come out. That’s just a thing that happens. When things get bad, people will get nervous, scared, or fearful. I think it’s important to emphasize that that’s completely normal. That’s how this works. You’re going to want to search for solutions that are out there.
It’s natural to avoid the pain and try to stop the pain. What happens with all this is you’re prone to actually making changes. For example, selling low and buying high. You’re prone to making changes that are not exactly logical and very emotion-driven.
When it comes to investing, this is oftentimes the worst time to make the changes we are pushed towards in this situation, maybe get rid of my investments, or change the investments to a different type of investments. They’re just at the point where they’re at their lowest. That’s the reverse of what we know we should be doing.
I think it’s good to recognize that those things are happening. It’s normal. Ask yourself what is the underlying concern? Maybe think about what is the money that I’m concerned about for? What’s its purpose? Think about when am I ultimately going to use it? What’s it going to be for? You just think through those questions.
The last thing I wanted to talk about in relation to these shaky markets is what can you do about it? What can you do to avoid some of the mistakes that I’m talking about? You got to remember your financial plan and investment plan. They’re kind of integrated, your financial plan and investment plan. If you haven’t made one by now, this is the prime time as soon as possible to have one because this is going to be the timeframe when you’re going to really lean on it.
Your financial plan allows you to connect your investments with your goals. It helps you to put a good purpose or tie in a purpose for your dollars and helps you to match up long-term goals with long-term dollars and avoid matching up long-term dollars with short-term dollars.
For example, if you’re investing money that really should be for emergencies, that’s going to cause a lot more added fear and concern when you see them start to drop. You’re going to be like, uh-oh, what if something happens and I need that money? That’s my only reserve.
A good financial plan is going to say, well, no, you should have an emergency account which should not be invested because you need to pair up short-term needs with short-term dollars. If you need it in the short term, you can’t invest it because who knows what’s going to happen in the short term? You’re pairing up those dollars with those goals and putting a good purpose behind that money.
On the flip side, for example, maybe you have a long-term goal of retirement. It’s the most common one, retiring by age 50 or something. It helps you to think of dollars in terms of that goal and purpose and put it in a bucket.
If you’re 20 right now and all those dollars are tied to that purpose, that’s a long time from now. You got 30 years. It helps you to not focus so much on the day-to-day. It doesn’t really matter what’s happening this week, day, or hour. You’re not going to use those dollars for 30 years, so you shouldn’t really be focused on that short period of time if you’re not going to be using them.
The big thing is having that investment and financial plan and consulting it in times when it gets shaky or you start to feel those emotions. If you work with a financial planner—especially if you start to feel nervous about it—talk to them about it. That’s what we do or where we can help sometimes.
As you feel those feelings and emotions, I think it’s good to try to give yourself a little space between the emotion and the decisions or actions. The risk is you feel the fear, and then you make a move immediately or as fast as possible. It’s better, especially with investing, to give yourself a minute to take some time to wrap your head around it and get some logic. Give yourself a little space between the feeling and the action.
It’s also great to always educate yourself on this type of stuff. For investing specifically, I would suggest educating yourself on human investing behaviors and behavioral finance. There’s a ton of stuff out there on how people behave with investing, some of the falls or the biases we have, and that sort of thing.
We’ve actually recorded an episode on that. I’ll link to that in the show notes. It hasn’t come out yet, but we’ll have that linked up. You can check that out if you want to dig into that subject.
It’s helpful to understand how you’re going to tend to behave and some of the behavioral risks you would have and educate yourself on that so you can gain awareness of it and avoid being as prone to those.
Then, educating yourself just on how markets work too is a great step to take always as well. Same sort of thing, the more awareness you have of how these things work, the better you’re going to be able to navigate this experience, especially when you’re feeling the emotions.
We’re also going to do a podcast episode on that as well. I will have that linked in the show notes for you guys that want to dig in on that.
I think the key though is just sticking to the basics of what your plan is and what the resulting investment strategy is to allow you to reach your goals. With investing, ideally, you’re doing it as unemotionally as possible and sticking to pretty specific logical rules.
In summary, the first step is if you don’t have a financial plan or investment plan, I would suggest creating one as soon as possible. We’ve created a do-it-yourself guide. For those of you that lean toward that direction or are not sure which direction you want to take, I’ll link to a do-it-yourself guide that we’ve created to help you work through that process. If you want one-on-one help, our planning firm does initial consultations at no cost. We’re happy to do one of those.
Step number one is having that financial plan you can lean on. That’s going to be huge, especially the more emotional and scary it gets. Once you have the plan, you want to consult it, review it, lean on it when you start to feel that uncertainty and those emotions, and make sure that you’re following it. It’s going to be a reminder and a voice of reason for you, so you want to consult it.
If you’re working with a financial planner, you can consult the financial planner. The service they provide is going to be that voice of reason. But if you’re doing it yourself, you want to consult your financial plan so that you can remind yourself of what that needs to look like.
You don’t want to make changes based on things you can’t control like external market factors or emotions. Recognizing that the market is out of your control, for the most part, is really important. Separating some space between those emotions and the actions is helpful.
Some last items I’ll throw out if you’re still looking for some actions are some (what I would consider) productive actions to think about when the market is shaky. These are not always applicable, but there are some potential considerations for you to at least think about.
If you haven’t funded all your tax-sheltered saving vehicles, when the market is down, it can be a fantastic time to do it. Ideally, you would have done that already or you already have a plan to do that. That’s the ideal world because most of the time, the markets are good.
But if it happens to be that today, you didn’t really have a plan for dollars and it happens to be that you haven’t maxed out those tax shelters, well, that’s a good time to do that. Like I said, ideally, you have that plan, you can lean on it, you’re already facilitating that process, and you’re already on track to fund all those tax shelters. If you don’t have that, you now are seeing yourself with lots of extra cash, and you haven’t funded those tax shelters when the market is really, really down, it can be a great time to get caught up on all that.
The second thing would be to tax-loss harvest. Tax-loss harvesting is when you’re taking losses on investments intentionally to produce tax losses. It’s a tax benefit that will come through on your tax return.
We did an episode several shows back on tax-loss harvesting that I will link to if you want to dig into that.
Then, just rebalance your investments. That’s basically following your investment plan. Oftentimes, when the markets get shaky, it will pull you away from the target that you’ve established with your investment plan. What rebalancing is is rebalancing the categories of investments to stick with the plan you originally established. You’re not actually changing the plan. You’re just adjusting your investments because they’ve changed so much and they’ve gotten off track with your plan.
Rebalancing and tax-loss harvesting can be really good. The more it changes, the more these can be beneficial.
Another one that can sometimes be helpful is a Roth conversion. Roth conversion is when you’re changing your pre-tax IRA or 401(k). You’re changing your pre-tax account into a Roth account. You can always do this on your IRA, and then some 401(k)s allow you to convert from pre-tax to Roth.
This is basically saying that on pre-tax money like a traditional 401(k) or IRA, you’re not going to pay tax until you take it out. It’s like, tax me later. On a Roth, you get taxed now, but then you never pay tax again. It’s like, tax me now. With a Roth conversion, you’re basically saying, I’d rather take the tax hit now. You’re just like, let’s just go ahead, pay the tax now, and get it over with. You usually do that because you think the tax hit is going to be lower now than later. That’s usually why you do Roth.
The Roth conversion can work well when the market is really low mainly because the values are down. You can use history as an example. It’s not always easy to pinpoint this in real-time. It’s actually very difficult to, but in some cases, say we’re in 2008 at the bottom of a 50% drop, you are already considering this strategy of Roth conversion, and you just hadn’t pulled the trigger yet. That can be an excellent time to do it because say you had $100,000 in an account. If you converted it to Roth, it would be $100,000 that was taxed. That triggers a tax on, say, 30%, which is $30,000, but you hadn’t done it yet, so now, that account is dropped to $50,000. The same thing, you convert the $50,000 and it’s taxed at 30%, but that’s only $15,000 of tax. It’s basically converting it at a discounted price which triggers less tax.
Roth conversion looks slightly more appealing the more the market goes down. It’s not a reason in itself to do Roth conversions, but it can add to the argument for Roth conversion.
Then, the last thing is if you happen to have unaccounted-for dollars—this goes back to the financial plan—the most important thing is having the financial plan. But if you happen to have not had one, you have these unaccounted-for extra dollars that are just not being put to use good use, and let’s say that they should be or could be used for long-term monies, it can be an excellent time to start investing those the further down the mark the market goes.
Like I said, it’s best if you’re already putting those to good use, if it just happens to work out that you have, if you get a big bonus, or you have a good influx of cash, I’m going to lean slightly more towards getting that invested quickly, especially if I know we’re in the middle of a huge downturn.
As I mentioned, I think the biggest thing is having that plan and leaning on this as the market gets shaky. It’s really pretty much always going to get emotional and scary for people as we go through this especially the worse it gets. It’s hard to tell exactly how it’s going to affect you until you’re really in it, so I think it’s good to recognize that that is something that’s going to happen. It’s okay to have some fear and concern around this, but just make sure that you’re taking a minute, consulting your plan, and trying to put on that logical hat. I think it will save you some pain and regret later in life.
Hopefully, you don’t have to learn from your mistakes and hopefully, you can learn from this and some of my mistakes I made in the past.
As always, it’s been a pleasure. We’ll look forward to catching up again next time where we dig into a couple of these issues I mentioned. We’re going to dig into some of the behavioral tendencies we have when we invest. Then, in the next show after that, we’re going to talk about some of the examples of how markets have worked in the past.
We’ll look forward to catching up on those topics next time.