PSA on Market Crashes Like This Week

market_crashFirst things first: Do. Nothing.

Because, as you might have heard, the US stock market plummeted yesterday.

The Dow Jones Industrial Average (DJIA) index, made up of the stocks of 30 major US companies, dropped by a record-setting 1,500 points before closing down 1,175 points on the day.

Another popularly-followed index comprising 80 percent of the US stock market, the S&P 500 index, saw its worst one-day performance since August 2011, dropping 4.1% on the day. UK, German, and Japanese stock markets indices all plunged yesterday between 1.5 and 2.5 percent, as global stock markets tend to correlate in the short run.

You may be asking questions like what caused this? What will happen next? And finally, what should I do about it, personally?

Let’s acknowledge the upsetting part of this before moving on to a more calm, appropriate reaction to yesterday’s fall, which itself followed on the heels of Friday’s devilish drop of 666 points in the DJIA.

The point-drop plunge in the DJIA yesterday dwarfed earlier record-setting one-day losses at the height of the 2008 financial crisis on September 29, 2008 (777 points), as well as the drop on the first day the market opened following the 9-11 attacks, September 17, 2001 (685 points).

Incidentally, the focus on a “points” change in a stock market index is a mistake, as hopefully the 2001 and 2008 examples show. I’m making a math point, but an important one too-often ignored. We should only ever care about percent changes in indices. A 1,000 point plunge on the DJIA starting at around 10,000, such as we saw in 2001 and 2008, means the market was down 10 percent. A 1,000 drop in the DJIA starting at around 25,000 is just a 4 percent drop. Unpleasant, sure, but a more normal-sized occurrence. Yesterday and Friday were not 2008 and 2001-level drops in percentage terms, even if they involved more points on the DJIA.

Also, incidentally, the focus on one-day moves is almost always a mistake. Even after the last two trading sessions the US market indices like the DJIA and S&P 500 are up over 21 percent and 15 percent respectively just in the past year, not counting dividends. My own rule is that if you invest in the stock market your shortest measurement for returns should be about 5 years. Focusing on the daily results will lead you astray.

Interestingly, nothing even close to notable happened yesterday in market-moving news. The new US Federal Reserve Chairman Jerome Powell started his job on Monday, the poor guy. “Thanks for the welcome, markets!” he probably muttered to himself grimly at the end of his first day.

So what happens next? I have no idea.

More importantly, all of the talking heads about to tell you what happens next also have no idea. They will use sophisticated-seeming and contradictory words like “overdue-correction,” “necessary pull-back,” “buying-opportunity,” “beginning of a bear-market,” “popping of the bubble,” or “signs of impending recession.” My own hot take is that talking heads are notably poor at predicting the future with their hot takes. They should be aggressively ignored.

Does that mean I don’t think the market could drop 20 percent from its 52-week high, the definition of a bear market? Does that mean I think the economy is, or is not, going to see two consecutive quarterly drops in gross national product, the definition of a recession?

Like I said, I have no idea. Stock markets could very well drop 20 percent or even 30 percent, which they seem to do with regularity, every decade or so. It doesn’t mean the market is broken or anything even notable has necessarily happened. It’s just what stock markets do. As a stock market investor myself, I know for sure the market will drop 30 percent at some point, I just don’t know when. It could be this week. It could 8 years from now. I’m not holding my breath.

Speaking of which, what should you do about this market drop, personally? This is the most important part, so I put the answer in the first line of this post.

Do Nothing. Or at least, do nothing different from the usual. If you can’t do nothing with your money this week, you probably shouldn’t have it invested in the stock market.

If you regularly make contributions to your investment accounts, keep doing that. Remember, everything’s a bit cheaper than it was last week!

If you regularly withdraw funds from the market to fund your retirement, keep doing that as well. Remember, it’s up a lot from last year!

If you follow the minute-by-minute and day-by-day ups-and-downs of this market and hope to nimbly trade in-and-out, I can’t help you, because you’re doing it wrong.

You can’t control what the market does and what it is going to do. You can only control your behavior. So, buckle up, and remember to do nothing.

A version of this post ran in the San Antonio Express News.

 

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What To Do If The Market Crashes – Your Emergency Instructions

emergency_instructions
Go ahead and extract the instructions in the envelope

I think the Dow being down 1,000 points at the market open this morning (however temporarily) puts everyone in the frame of mind. Is this THE BIG ONE? Should I break the glass and read the instructions in the envelope labelled ‘IN CASE OF EMERGENCY?’

Sure, go ahead, you have my permission. Break the glass. Easy now. Watch your knuckles and wrists don’t get slashed. That stuff’s sharp. Ok, now, gently, carefully, extract the envelope. Very good.

It is labelled ‘IN CASE OF EMERGENCY,’ so go ahead and open up that bad boy. I wrote it just for you.

For just this situation: I mean, Greece is a kick-the-can-down-the-road catastrophe. Is any financial number out of China even real? Chinese investors obviously don’t think so, with limit-down market days a regular occurrence. Oil’s in a race-to-the-bottom as a result of the Saudi’s aggressive dumping, which would have been great if the US hadn’t just become the world’s biggest oil play in the past 4 years. US Presidential candidate choices cover the entire range from Family Oligarchy to Buffoonery. Stocks have moved one way toward ‘priced for perfection’ nosebleed valuations since 2011. For that matter, so are bonds. And the Fed’s still planning (as far we know, and, as of today, at least) to take away the punch bowl of cheap money in September. I mean, panic, right?

Let’s see what the instructions say….

PANIC! SELL! SELL! SELL! 1

(just kidding. That’s not the real instructions)

Ok, what are the real instructions? Here they are:

“1. Do Nothing

2. If you’re having trouble following directions, go back to Step 1.

Thank you for reading these emergency instructions. Good luck.”

That’s what the envelope that I left behind the glass says.

—-

Ok, but, if you absolutely MUST do something, and  you can’t sit on your hands – because you’re panicked and you managed to invest some money for your kid’s college fund or you actually have money socked away in a retirement plan and a 1,000 point DOW drop would keep you working eight more years on the job or whatever – if you have to take action, then I recommend the following, which I learned (I think) from a newspaper column by Jonathan Clements, author of the excellent 25 Myths You’ve Got To Avoid If You Want To Manage Your Money Right. Or maybe it was Jason Zweig, or James Stewart. I’m not sure. Anyway, it doesn’t matter.

The point is, take some symbolic but affordable amount of money ($100, $500, $2,000, $500,000? Everyone’s different) and transfer it to your brokerage account today, and buy some broad stock market mutual fund. It doesn’t really matter the amount, and it doesn’t really matter what fund.2 Just something symbolic. And write down your amount invested, and the level of the broad index (like the S&P500 for example). Then you can revisit it at a later date.

Like I’m doing right now. Because, during the 2008 Crisis, I did this three times and it made me feel better.3

October 8 2008, I sent $250 extra to my daughter’s 529 account. Pow! S&P 500 at 900! Down 38% Year to Date!

October 23, 2008, I sent another $250 extra to my daughter’s 529 account. Biff! S&P500 at 875! Down 41% Year to Date!

March 3, 2009, I sent another $725 extra to her 529 account. Smack! S&P500 at 725! Down 50% since the beginning of 2008!

It shows you are fearless. It shows you are a long-term investor. It shows you know how to buy low and sell high (or better yet, sell never.)

Of course, I had no idea whether, when, or if the market would begin to recover in 2 weeks (it did), 2 years, or 10 years. I mean, things looked grim. But psychologically, I think my little purchases were helpful in making me feel less panicked.

So that’s my real advice on a day or month like this.

 

Please see related post:

How To Invest

Volatility In The Stock Market: That’s A Good Thing

Book Review: 25 Myths You’ve Got To Avoid If You Want To Manage Your Money Right by Jonathan Clements

 

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  1. When we were about 13 years old, a childhood friend as a lark used to walk past phonebooths on the street and just pick up the receiver a suddenly start shouting “Sell! Sell! Sell! I said Sell Godammit!” We always thought this was hilarious. It still kind of is. But I know what you’re thinking: What are phonebooths?
  2. I wouldn’t recommend an individual stock because, man, you could really get cut on a falling knife this week
  3. Granted, not a lot better since my business sunk during this time, but at least I felt better about my kid’s college fund.

Do You Need An Investment Advisor? And Why?

nest_egg

A version of this post previously appeared in the San Antonio Express News.

Some friends of mine recently opened up investment accounts with a guy who is a salesman at a national insurance company. My friends also hired a “fiduciary” to review their investment plans. Finally, they consulted me, for free, on what to do with their investments because I’m a friend.

They seek answers to something nobody ever bothers to teach. They need financial advice. Who doesn’t?
Among the three sources they recently contacted, they will certainly hear quite a bit of possibly contradictory advice. In the long run, I got to thinking, do they also need to hire an investment advisor?
“Do you need an investment advisor?” is one of those evergreen questions for people who have managed to accumulate some investments.

The short, albeit possibly contradictory answer — given that I do not have an investment advisor myself — is: “Yes, probably.”
Following on the heels of that question, if the answer to the first question is yes, is: “What do I need an investment advisor for?”

I’m so glad you asked. And you’re not going to believe this, but I have very strong opinions on this question.
A good investment advisor should do two — and only two — things, and then stop.

Number one thing: Set up an investment plan for the client that has a reasonable chance for success at meeting the client’s goals, taking into account the client’s ability to save and invest. The plan should be so simple that all parts can be understood clearly by the client. The plan should run on auto-pilot (probably involving automatic paycheck or bank account deductions), and should rebalance on a low-frequency cycle (probably through new purchases, rather than sales).
All of this should be accomplished within two visits with the investment advisor.

Number two thing: When the market crashes — by the way, the only 100-percent guaranty in an investing life is that the market will crash, probably more than once, in a client’s 30-year investment cycle — the investment advisor is there to prevent the client from selling after the crash. Because when things get cheap you’re supposed to buy more, not sell.
Psychologically speaking, few of us can stomach the nausea of actually buying after the crash.

Ahem. Now, would all those reading this who made stock purchases in March 2009 please raise your hand?
Oh, really? All of you with your hands up are liars.
While we rarely have the sense to buy at the lowest point in the market, realistically a good investment advisor reminds us at least not to sell after the crash happens. The good advisor reminds us that we knew a crash would happen a couple of times in our 30-year investment cycle.
After the crash comes you don’t sell — you just keep on doing what you’re doing. If the advisor can prevent the panicked sale after the crash, the advisor is worth all the money paid to her over the years.

And that’s it. Anything else that an investment advisor does is probably too much, and the client may suffer as a result.

“But, but, but…..” I can already hear all of the investment advisors out there protesting.

But what about tax planning? And estate planning?
What about insurance products? Have you considered whole life versus term life insurance. Or can I interest you in a variable annuity?
But shouldn’t an advisor pre-screen some hedge funds and venture capital funds?
Want to hear about oil & gas leases? Master limited partnerships?
I’m pretty sure there’s real estate and mortgage refinancing to be done, no?
What about picking great stocks for a client?

financial_advisor
If your financial advisor was a stock-photo robot, he should look like this

But what should I know about precious metals, agricultural commodity futures, and that new project finance deal in Ghana?
I also once read something about sector rotation? And then there’s value vs. growth? And biotech, and countercyclical consumer products!
What about anticipating the Fed, trading ahead of new data releases, getting in early on the next hot trend, or black-box trading and currency hedging?
Look, I agree — finance can be endlessly fun and interesting, and these are all great areas for a broker or investment advisor to get into because they produce wonderful opportunities for additional fees, commissions, portfolio churn and opacity. In most cases, however, they just don’t happen to produce wonderful results for clients.
If you need insurance or tax planning, by all means hire an expert. But a good investment advisor does not necessarily serve her client by brokering all these products.

To sum up:
Do you know how to set up what I describe above as “the number one thing” all on your own? If not, you probably need an investment advisor.
Second, do you know — beyond a shadow of a doubt — what you will do when the market crashes? Are you sure? If not, you probably need an investment advisor to hold your hand — that itchy-to-sell trigger-finger hand — to prevent you from selling.

 

 

 

Please see related posts: Book Review of Simple Wealth Inevitable Wealth by Nick Murray
financial_advice

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