When the stock market took a hit in October 2018, we saw the usual knee-jerk headlines:
Out of sheer curiosity, I decided (stupidly) to check how it impacted me. And … well, It didn’t look pretty.
Damn. That’s more than $113,000 lost because of a single bad day in the market! If anyone should be worried about this, it should be me … right?
Not at all.
I decided to reach out to a few publications to give my thoughts on the matter. One of those turned into a Q&A that didn’t get used. It had a lot of great information outlining my feelings on the issue though. That’s why I wanted to show you the Q&A in its entirety today.
Why I didn’t worry when I lost more than $113,000 in one day
Money is a very emotional thing, so what does it feel like to lose $100k in two weeks?
It feels like nothing. This was money that I had invested for the long term. If the market goes up or down, it makes no difference to me.
On a side note, notice most of the “hot” emotions we use to describe money: “guilt,” “worry,” “concern,” and “embarrassed.” Once you have a plan and you stay disciplined about it, those change into “cool” emotions like “confidence,” “empowerment,” “freedom,” and “security.”
Many experts say “don’t look at your statements,” but you looked … why is that?
Because I was stupid. I was reading Twitter (mistake #1) and saw a bunch of charts and words like “crash,” so, of course, out of morbid curiosity, I logged in to see how it affected my money.
The real lesson here is that no matter how much you think you “know” yourself, when the markets go down and the media starts blaring red alarms, you can’t predict how you’ll act. That’s why it’s so important to have a long-term plan that you trust.
Do you have specific numbers on what funds/sectors dropped the most, and did it make you rethink any allocations?
I didn’t touch a thing because we know that the market returns on average 7% to 8%. That means some years (or months) the market goes up, some years (or months) it goes down.
Typical human instinct in times of crisis is to do something. What is your strategy?
Basically I just close the window on my Vanguard account and go find the next episode of Better Call Saul on Netflix.
Sometimes the best thing you can do is nothing. In fact, in investing, that’s almost always true. Research by Dalbar showed that investors get below-average returns because they try to time the market.
Pick a solid asset allocation for your age, automate your money, and just keep investing, month in and month out. Investing should be boring. That’s when it’s profitable.
What behavioral tricks do you adopt to keep yourself from panicking?
I don’t log in to check, except once a month, or in some cases, once every six months.
I’ve spent the time up front to get my asset allocation nailed down. I’m in my mid-30s, so my portfolio is more aggressive than that of someone in their 60s.
I’ve built my savings up — automatically — every month for years. This is the power of having a strong set of financial habits and automating my finances.
I remember to live life outside of the spreadsheet. If you sit at your computer all day, agonizing over you portfolios and investment calculators, of course you’re going to easily become obsessed over the highs and lows of the stock market and react irrationally.
Many media headlines are designed to play to our emotions, so how can people avoid feeling scared?
We’ve seen headlines like:
“Let Me Count the Ways Stock Markets Are Tanking”
“Stock market drops again, wiping out 2018 gains for the Dow and S&P 500”
“Yesterday’s Stock Market Plunge Points to More Trouble Ahead”
You know what’s funny? These articles love talking about the “tanking” week — but if they zoomed out and showed you the last 10 years, one week’s drop hardly registers at all. Those articles sell clicks, not good information.
I suggest being careful about where you get your news. It’s like that saying that you’re the average of the five people you hang out with the most. Well, your knowledge about the world around you is the average of the five sources of news that you’re reading. That’s why you should choose carefully when it comes to your news diet.
We have enjoyed one of the longest bull markets in history … are people dealing with “recency bias,” i.e. expecting that the market will always go up and up?
When your dimwit uncle is telling you about a “sure thing” you need to invest in (cough, crypto), that’s a very good red flag.
By the way, I hear a lot of people saying, “The market is too high right now, so I’m going to wait it out.”
Index Fund Advisors did a study where they found that over a 20-year period, investors would have earned a 7.2% return. However — and this is amazing — if they missed the 5 best-performing days, that return would have dropped to 5.02%. If they missed the 20 best days, that dropped to 1.15%.
This means that successful investing is not about timing the market, it’s about time in the market.
You have a big online community, so what mistakes have you seen others make in times of big market drops?
They get scared and sell.
They stop investing. Many people did this in 2009 and missed some of the best returns of their lifetimes.
How can investors reframe these moments in their heads as potential buying opportunities?
Think about it this way:
When the price of toothpaste drops, that’s good. When the price of milk drops, that’s good. When the price of stocks drops, if you’re a long-term investor, that’s also good.
But be careful. I’m not saying you should take all your money and go in all the way. The key is to automatically invest every single month — regardless of what the market does. By having a system in place that does it for you, you don’t have to worry about the day-to-day happenings with the market.
You are newly married, so what advice do you have on sharing bad money news with your spouse and staying on the same page?
I’ve been married for three months so now I feel qualified to give everyone in America marriage advice.
My advice is to make money a regular topic of discussion. For example, I’ll send my wife an article I read about millennial investors and we’ll talk about it over dinner. We do a monthly review of our finances. We’re building the habit of talking about money regularly so it’s not a taboo topic.
What’s the best advice you ever got about coping with this kind of market turmoil?
It’s easy to get swung by the whims of the market — left, right, whatever is trending. That’s the recipe for an unhappy life and poor returns.
The key to living the Rich Life you want and not worrying about your gains and losses in the day to day is to live life outside of your spreadsheet.
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