Show Notes for this Episode:
Bear markets and volatility are part of the normal investing process. It doesn’t mean they are any fun to endure. But the important thing is keeping your emotions in check and not making emotional decisions with your investment portfolio.
We’ve experienced numerous major bear markets over the years. The key to surviving major market volatility and bear markets is pushing through them without making decisions that may harm your ability to grow your personal wealth. It’s placing logic over emotion, which is easier said than done.
2020 has been a rollercoaster of a year on many levels and the markets haven’t been spared. A global pandemic, recession, high unemployment, protests over race and equality, and not to mention it’s also a presidential election year. In prior presidential election years, markets have been mostly positive. But that doesn’t mean this year will end that way, and it’s dangerous to try and predict.
The U.S. market also lost a third of its value in a little over a month and recovered all of its losses within the following few months to reach all-time highs. This kind of volatility makes it difficult for many investors to stay the course.
A financial advisor can help you from acting on your emotions during times of volatility of course, but that still doesn’t prevent you from actually feeling the fear. In fact, research shows that a good financial advisor can add 2-3% per year in returns to your portfolio through behavioral coaching!
In this podcast episode, I share 3 tips for mastering scary markets.
What you will learn in this episode:
- What to focus on instead of the daily market ups and downs
- Why it’s important to remember THIS evidence regarding market behavior
- The difference between being an investor and a gambler
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Welcome to episode 61!
I'm Stephanie Sammons, the retirement money gal and certified financial planner. You know, the markets have been quite scary this year. I know, and let's face it. 2020 has really been a roller coaster of a year with the global pandemic that we're still fighting. The recession that has come about as a result of shedding the country down temporarily record high unemployment protests that are continuing across the U S regarding race and equality. And it's also a presidential election year, and we have a very uncertain political environment this year in particular, the U S market lost one third of its value in about a month's time back in March. And it has come roaring back this spring and summer to reach new all time highs. But the truth of the matter is that volatility in the markets and in the economy remains high, and it probably will continue at least through the end of the year, because of all of the uncertainty.
It's hard for the markets, which are forward looking to predict what's coming accurately. Now, when I say the word volatility, that simply means the magnitude of the ups and downs in the markets and the frequency of those ups and downs. And it can really feel like you're being whipsawed around when it comes to having your personal wealth invested in the markets, the stock markets, the bond markets globally. So I want to help you navigate this volatility and keep your emotions in check and keeping your emotions in check when you are an investor means that you're somewhere between the, the emotions of greed and fear. You're somewhere in between those two, where you can remain pretty stable and pretty resilient when it comes to having confidence that you're doing the right things with your money and with your wealth that you have invested. So I'm going to share three tips for mastering scary markets with you.
Now, some of you know, I've been doing this for a very long time, almost 25 years, and I have lots of ups and downs along the way in the markets. And I have seen definitely some scary markets in the past. And perhaps you have experienced those as well. Things like the internet bubble bursting and nine 11, and the great recession of 2008, 2009, and also of course, Corona virus, this global pandemic that we are now experiencing. So it is difficult because you are emotionally attached to your money, to your wealth. And sometimes it's really hard to separate your emotions from that. And you have to learn to build somewhat of an immunity to the day and weekly and even annual changes and fluctuations in the markets. But in particular, the real short term, the day to day, that's where you have to be the most resilient because that's what really plays on your emotions.
And the news media doesn't help at all. The headlines are scary and the media is built to entertain and frankly, to frighten us. So they want you to tune in. They want to increase your anxiety. They want to impact your emotions. Why? Because hopefully you will stay glued to whatever show or whatever publication you are engaged with. And that helps media companies earn more of your ad dollars as well. So it's kind of a crazy thing, but there's a lot of information out there and there's a lot of misinformation out there. And so I feel like if you have three solid concepts in your mind about growing your personal wealth over time, that you will be able to make it through these difficult times, without getting emotionally attached and making bad decisions with your money. So I'm going to share just three tips for outlasting these scary markets and having emotional endurance, if you will.
That's the goal. Being able to push through these scary times that are temporary and really keep your eye on the prize, which is your financial future and your real life goals. The first thing I want to do though, is I want to validate your emotions because they are real and it can feel scary and make you feel anxiety and fear. And it's no fun to feel that way, but it's okay. And it's okay to acknowledge that you are scared and then do your best to push through or let those emotions play out and not react and not make decisions based on those emotions. That's what I mean by push through. I don't mean ignore your emotions. I mean, acknowledge them, validate them, but don't act on them. Okay? I don't want you to confuse your potential to grow your personal wealth over time with these temporary paper gains and losses because of changes in the markets.
And that's what they are on paper. They are temporary gains and losses. They are not real gains and losses. Okay. Let's start with number one, three tips for mastering scary markets. Number one is keep the focus on your life goals, not on the daily value of your portfolio. Have your life goals changed. Have your life circumstances changed, maybe they have, it's been a crazy year. Maybe some things have really changed for you. Maybe you've lost your job. Maybe you're going through a divorce. Maybe you've been diagnosed with an illness. Maybe things have changed. And if things have changed in your life, then that's a time to reassess your life goals and to review how your portfolio, how your wealth is positioned based on those life goals. But if you hadn't, haven't really had any major life changes or your circumstances haven't changed that much or at all, you really shouldn't be making any changes in your investment portfolio.
In most cases, unless that's the case, you've had changes in your life. Your life goals have what I call longevity. You know, these aren't goals for a day or a week or even a year. The goal of retirement is a long term goal. You can be retired for 20, 30, 40 years. So you have to think about your time horizon here with your, your wealth and your investments as much, much longer than this one scene out of a long movie, because that's what it is what's going on right now. This year is just a scene, a short scene in a very long movie. And hopefully that puts it into perspective for you. Now, if you're finding that you're very uncomfortable with the magnitude of the fluctuations in the markets and how that is impacting your, your nest egg, then maybe you do need to adjust your risk level a little bit.
Maybe you do need to adjust your asset allocation, how you are positioned amongst stocks, bonds, and cash in your portfolio. Or maybe you just need to diversify a little bit more. Maybe you're too concentrated in some areas. So it's worthwhile to do a portfolio review during times like these, but most likely making big changes are not going to really help you. And they're more likely to hurt you if you're acting on emotion. So major changes probably aren't warranted. If your life goals or your life circumstance stances, haven't changed now, what can you do here? When you keep the focus on your life goals, what can you control? Because you might feel like I need to do something I need to act, but sometimes doing nothing is the best thing to do as well, but you could boost your savings right now if you're in a position to do that.
So that's one way that you can continue to work toward your life goals without getting too caught up in the day to day fluctuations in the markets. So number one, keep the focus on your life goals. Number two, remember the evidence I talk about the evidence on this show quite a bit. And the evidence comes from years and years and years of history and history does not exactly repeat itself, but it does rhyme as you know, so scary markets are a normal part of the investing process. They happen, they are all different, but they are all the same. And you hear lots of folks saying this time is different this time. Oh, it's so much worse. This time is, is so different. We've never seen this before and they are all different, but they're very, very similar. The truth is we most likely will get back to some level of normalcy in the near future.
Things will not change drastically forever, but they will change some, if you remember the changes that happened after nine 11, we had more safety precautions at airports, these types of things, we're going to see some changes like that. But for the most part, I do think we will get back to some level of normalcy, not too far away from now. The markets on average, this is back to the evidence are up three out of four years. On average over time. That's what history tells us the returns in the markets happen very quickly. So let me give you an analogy for this. Let's say, let's go to the movies again. You're at the movies or you're watching a movie at home. Obviously you're probably doing that and not going to the theater currently. And it's a great movie and you need to use the bathroom or you need to get a drink or something like that.
And so you don't hit pause. You leave for three minutes to go do what you need to do and you come back and you've missed the best part of the movie, or you've missed a really important part of the movie. That's what I mean by returns happen very quickly. Another example is you're, you're on the sidelines watching your kid's soccer game or football game or basketball game, and you forgot something. You need to run out to your car. You left your phone in your car. And so you run out to your car and you run back in and lo and behold, you mr. Kid making a three point shot or scoring a goal. So you don't want to miss the returns on the upside that happened in the markets. And they happen so fast that if you're sitting out on the sidelines and you're trying to play the game of, should I get in or should I get out?
You're going to miss the very best days in the market. So being on the sidelines can be not only costly, but it's also very stressful, maybe even more stressful than riding out the roller coaster of the ups and the downs and the markets. So I don't know if you remember me talking about fidelity did a study recently after the March decline of 34% in the U S market and almost a third of fidelity investors sold out, which means that most of them probably missed the rebound, which happened very, very quickly. All of this has happened within a period of about six months. So it's something to think about. It's much more stressful if you're trying to sit on the sidelines and figure out when should I get in, when should I get out? And we'll talk about that more in a minute, a little bit more evidence to share with you.
I did an episode a couple of weeks ago about presidential elections and your retirement plan. It was episode 59. You can go to retirement money, gal.com forward slash 59. The number five nine, there've been 23 presidential election years, 19 out of those 23 years, the market's ended up being positive for the year 19 out of 23. That means there were four years for presidential election years where the markets were down in an each of those four years, there was something else at play, something else going on. For example, one of those years, we were getting ready to go to war and it was the beginning of world war two. So you really can't predict with any accuracy how this presidential election year might end up. There's no clear pattern for that in history. And there's also no clear pattern for how the markets perform under a democratic president or a Republican precedent.
So you're going to waste your time and energy, trying to figure that out. You get the most reward by staying invested and writing out these temporary downturns, as well as participating in the upturns. And remember on average markets have been a three out of every four years. That is the evidence. Number three, it pays to be an investor and not a gambler. You might be familiar with the bar of soap analogy. I can't remember if I've talked about this in the past or not, but think about a bar soap in the shower. And the more that you handle that bar of soap or washing your hands, the smaller that bar of soap gets, and the same can be said about your nest egg, your, your investment portfolio, the more you tinker with it, the more you buy, sell, buy, sell, buy, sell the smaller it gets.
We are just no good at doing that. Even the experts have a very difficult time predicting what's going to happen because you have to predict two things accurately. And consistently one is when do you get in? And when do you get out? And when do you get back in and another is you have to predict how the markets are going to react to the events that are happening. None of us could have accurately predicted that after the global pandemic became what it is now, and it was revealed to us. And we started to really understand the magnitude of this thing. Most of us probably would have predicted the markets would have completely crashed and not come back for a very long time. And that's what many people acted upon. They, that was their belief that they really had this figured out. And they got out of the markets and they got on the sidelines sitting in cash.
And what happened? We had a V shaped recovery. The markets rebounded very quickly and made up for all of that lost ground. So you don't want to be a gambler. A gambler tries to make a quick buck and tries to avoid losing a dollar. If you're a gambler, remember the house always wins. And the way that you win is by being an investor and investing for your life goals that matter for decades, not days. So number three, it pays to be an investor and not a gambler. Alright, so those are the three tips, focus on your life goals, the reasons you're invested in growing your personal wealth, not your daily portfolio value. Remember the evidence and being an investor, not a gambler. These are the real keys to mastering scary markets and ultimately achieving your life goals. I hope you find this helpful, and I hope it helps you to build some resilience as we continue to face challenging and volatile times with our economy and our political environment. And of course the financial markets, this show is for informational and educational purposes. Please do not consider any
Of the content as personalized financial investment tax or legal advice.
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