Episode 22 – Investing when the stock market is down
Episode transcript:
[musical intro]
Jenny
Welcome back to Fund Your Future with DRS. And we wanted to take some time on our podcast, to…. Sometimes it’s a bit of a touchy subject, but investing in the stock market, more specifically investing when the stock market is down. And while we can’t give specific advice, we think it’s a worthy topic of conversation. And before we get started, we wanted to remind our listeners that if you do have a pension, your money is safe and being taken care of.
But, you know, if you do have stocks, personal stocks, it’s been kind of frustrating to check in on it and see that’s been going down for the last couple of months.
Seth
Yeah, I feel like when I’m in meetings with colleagues, it’s a topic of conversation more often that I feel like it should be like “What’d the market do today? What’d the market do last week?” Looking at it like, “Oh, I’ve put in this amount of money and there’s actually less than what I put in.” And I think one of the reasons – one of the things I was excited about for this episode was just oftentimes when those conversations come up, I am reminded of a quote from Warren Buffett, the world-famous investor, a person worth billions and billions of dollars, has made a living investing.
But his quote is: “I’ve always felt that investing is like a bar of soap. The more you handle it, the smaller it gets.” It just reminds me always that it’s superhuman nature to feel like you need to do something. You need to take action. Like, “I feel uncomfortable. I don’t like the way this is going. I need to do something.”
And I think when people are looking at their investments and they get that uncomfortable feeling because they see it going down, they’re like, “I need to take some action.” And, you know, there’s been lots and lots of studies that show people who are more frequently trading within their accounts have worse performance.
People don’t like to hear that. It’s really important to think about, like, “Am I making these decisions out of fear? What’s my long-term plan? Am I sticking to my long-term plan? Even in times of distress?” And that’s hard. It’s super hard. In some ways, what I always want to say to people just don’t look, or don’t look so frequently. Like, what are you really gaining out of checking your account every day?
Jenny
Yeah, it might depend on if you’re trading a specific stock that you’re tracking. But if you’re investing in something like index funds or ETFs, it’s probably better just to not look.
Seth
You know, there are lots of different ways to think about or kind of help reverse the psychology for folks when the market is down. You’re actually buying things on sale.
Jenny
Yes. I love this analogy. If your stock is normally at $100, then the market’s down. Now it’s at $90. You’re like, “Great, I’m going to buy more shares knowing that it’s going to go back up. I’m getting this on sale.” This seems, you know, like you said, it’s a psychology of like getting yourself into that mindset of you’re buying something on sale when it’s low.
Seth
Yeah, for sure. And I think for a lot of us who have regular deductions coming out of our check – where every two weeks, or twice a month, or once a month, however often we’re getting paid. We are purchasing investments. We’re having money go into our Deferred Comp account or our Plan 3 account or our Roth IRA or whatever accounts we have set up. Over time when the market is down…
Yeah, we’re buying more shares. It is one of the few scenarios where people kind of stress out about buying things that are on sale. So, I think it can be helpful to keep that in mind if I’m purchasing more shares.
Jenny
Yeah, “I’m buying this at a lower cost.” And you’re, you know, feeling confident that that’s going to work out in the long run, that the stock market is going to go up and that is the thing about the stock market is that it goes up and down.
Seth
It definitely makes people feel uncomfortable. And I think the other thing that can be really helpful to keep in mind to your point about the market going up and down is reminding yourself of: when do you actually need this money?
Jenny
Yes.
Seth
And I think it’s really easy when you’re in your twenties and thirties and forties, like we are, not to pay as much attention. It’s just like I’m just socking that money away. And in 20 or 30 or 40 years when I actually need the money, I’m going to assume that there’s going to be some growth in that.
I think it’s much more stressful for people who are in their sixties or seventies or eighties when they see that number go down. And it’s like, “Oh, I’m actually going to take some of that out.” But even if you’re in your sixties and seventies, you know, hopefully you live into your eighties or nineties or 100 and you might not need that money any time soon.
Jenny
Yeah. Or you could just take out like a really small percentage.
Seth
Yes, I think that’s exactly right. I think that’s the thing to keep in mind. Maybe I’m going to need $10,000 next year and so I’m going to set that money into an investment that’s very safe. And I’m going to feel comfortable knowing that that money is there and available when I need it. And it gives me the peace of mind that if the rest of the account is going up or down, I know I’ve got time with that money. That time becomes my friend and I can ignore it a little bit more or a little bit more easily.
Jenny
Yes, I think definitely long-term is the theme here. Not for money that you’re going to go use for a vacation for next year. It’s that long term strategy goals.
Seth
Yeah, I think that sometimes it’s hard to figure out “What do I need today, tomorrow or next week or next year?” Especially when you’re transitioning from active work to retirement. Like, I’m used to having this set paycheck every month or every two weeks. And now I don’t know exactly what my expenses are going to be. This goes back to previous episodes where we’ve talked about budgeting and kind of setting up income and expense tables, getting a better sense of, “yeah, I’m going to need $30,000 over the next 12 months or whatever, because I have these set expenses.
And so, I can set that money aside and feel like it’s safe.” I think you heard this a lot during the great recession in 2007, [2008, 2009] where people saw their life savings go down by 30% or 40% and 50% in some cases. And it felt really scary.
Jenny
Yeah.
Seth
For folks who are really close to retirement. But then if you look at those accounts, three or four or five years later, they’re back in similar kind of not maybe all the way to their highs, but a lot of it is recovered. And the folks who really ended up in bad shape were the folks who locked in their losses.
So, your account goes down 40% or 50%. You freak out and you say, “oh, I need to put all this money in something safe.” And then it doesn’t go back up when the market comes back. And I think that is really — to Warren Buffett’s quote — is really how people end up making their bar of soap smaller.
You know, you don’t allow your funds to rebound. As you said, the market has its fluctuations. And so, you don’t want to lock in those losses.
Jenny
Yeah, you don’t want to see it going down and panic. It’s that long term investment.
Seth
Yeah, and that’s what I think it’s really important to think about. What is your kind of long-term plan? And when you need the money. And then also: what is the investment strategy that you’re okay with or you’re comfortable with? And I think we see a lot of people who know that they are going to have their Social Security benefit and they’re going to have their pension benefit.
And so that’s kind of like the security blanket, like I’m always going to have that money. So, I’m comfortable having my investment account be more aggressive. So, if it goes down 50% because of some horrible change in the market, I’m okay with that because I know I’ve got this base amount of money available to me.
I think other folks who have less in their Social Security or less in their pension might feel a little bit more conservative about their own investments. Realizing that as I approach retirement, I’m going to need that money more quickly, or more of it. So, they might invest in things that are less volatile.
Jenny
So, what about compound interest? That’s obviously a big factor here in the stock market.
Seth
Yeah. Also, another famous quote, at least credited to Einstein. That compound interest is like the eighth wonder of the world.
Jenny
Yes.
Seth
It is a fascinating topic. And oftentimes the thing that kind of blows people’s mind when they start to think about investing in one of the ways you can think about it: How long is it going to take for my money to double? Think about this when the market is going down, you know, well, it’s going to come back at some point.
And if I wait long enough, time is really my friend. And so even if it’s down now, let’s say it’s going to double in eight to 10 years. And I was just going to go on the record.
Jenny
I’ve heard seven.
Seth
Yeah. Depending on how conservative or aggressive you are with your investments, that number can vary. And that’s why I usually choose 10 just for easy math, right? Like it’s just, okay, I know 10 years from now, if I go from $50,000, it’ll be $100,000. Then another ten years, it’s $200,000, then it’s $400 K and then $800 K. You start to think like farther out, especially if you’re in your twenties, thirties, forties, that if you live to be 100, you’re talking about, you know, six doublings or seven doublings.
That’s a lot of momentum that can be on your side to think about that time of compounding. Once again, folks who are still in their closer to retirement age, their sixties and seventies, if you’re not drawing on it immediately still might double one more time before you even need to take out the money if you’re in your fifties or sixties.
And I think that’s where stepping back from the immediate stress or anxiety of seeing the market go down and think about like, okay, where can I expect this to be or hope that it’ll be in 10 years from now?
Jenny
Again, it’s really just looking at that time element and saying, “Hey, I’m in this for the long haul.” Especially for that compound interest that it’s going to…probably won’t get that much compound interest over five years. But like we said, over 10, 20, 30 years, you’re really looking at a good, good amount.
Seth
Yeah. And I think maybe that’s where it can be helpful for people to step back. You know, if you’re feeling stressed about it, go run your portfolio through a compound interest calculator. Like, “what is this going to look like in 10 or 20 or 30 years?” And remind yourself why you are investing. And you’re setting this money aside now to give yourself more opportunities and options in the future.
Jenny
Absolutely.
Seth
Yeah. I think that’s really what it comes down to. I know people get frustrated like the last year we’ve had where there was people who were brand new to employment and they were putting money into their Deferred Comp or their Plan 3 account and they were seeing it go down month after month and accounts, whereas folks, they worked for a short period of time and they end up taking their money out of their account and they ended up with less money in their account than they had put in.
Jenny
Oh, no.
Seth
Right. And so that feels frustrating. But once again, they didn’t have the opportunity or the advantage of decades. And that can be I think it can feel like a loss. One of the things I try to also remind myself is like, “what else would I have used that money for?”
Jenny
Yeah, and I think that gets back to the budgeting part. So, I really just try to… if I am going to buy investments, it’s really that extra sort of like fun money. I’ve already set aside money for my bills and for my house to fix it up. And my Roth account. This is just sort of extra money.
Seth
Yeah, I think that’s a really good way to think about it in that: “What other things would I have planned for this money?” And this is like a very normal human bias: “I’ll get more joy out of it today than I’ll get out of it 10 years from now.” I think it’s something to kind of try to think about that bias of how can I do my future self a favor?
My future self will be very happy with me now. But also, “what am I planning on doing with that intent 10 or 20 years from now? Am I hoping to travel more or am I hoping to retire early? Am I hoping to be able to help out my grandkids?” Like whatever those future motivating factors are can be really helpful.
“Well, maybe I’m not going to put as much money in right now because I want to do some of those things now.” And try to figure out where that how to how to strike that appropriate balance.
Jenny
Exactly. Yeah. Just being able to say, “hey, I’m going to set this amount of money aside, I’m going to invest it for my future self and so that I have those options.”
Seth
And this has been a running theme through a lot of our podcast episodes is thinking about those options and making sure that you have more of that flexibility. You know, one of the things we talk about a lot with the Deferred Compensation Program is that ideally you’re saving that money for retirement, but in a lot of ways it can also function as a transition or a bridge or like, “I’ve stopped working, I get laid off, I have these funds available to me to give me additional options at that time as well.” So maybe it’s not just at retirement, maybe it’s in some life transition period as well.
Jenny
Yes, absolutely.
Seth
Another thing I’ve been talking with my colleagues about, there’s always good times coming ahead, but there’s also always bad times ahead. I always come back to I don’t know if you were a Game of Thrones fan, but you know, the winter is coming. Like you don’t know when it’s coming, but I think kind of similarly for the stock market, a recession is coming.
We don’t know when you will see these dips in the market, but they’re happening and trying to help yourself be mentally prepared for them is really helpful. So, if that means, you know, setting a rule for yourself that you’re not going to rebalance your account except for once a year on your birthday or, you know, whatever, whatever day you do, those sorts of things, helping kind of set up like, what’s that game plan when things are calm and you’re not feeling stressed can be really helpful.
Maybe I’m a little bit odd in that I set a lot of rules for myself just in general. Like life rules that help me try to live what my values are or make the best decisions in a future moment by setting those rules up when I have more clear thinking.
Jenny
Oh, that’s great.
Seth
Yeah. The one that popped into my head. Maybe not totally relevant, but I have a rule that I don’t take out money from an ATM in a casino.
Jenny
Oh, nice. Well, that’s probably a pretty good rule.
Seth
Yeah, I like to gamble occasionally. Like, that seems like a fun thing to do, but I go in with a plan, like, that’s a strategy. And I feel like it’s similar with investing. It’s like, what is my plan? “I’m going to invest in a target date fund that is appropriate for my age.” That’s my investment strategy. Or “I’m going to spread my money across these three funds.” And that’s my strategy now. And I’m going to continue and maybe only re-evaluate that once a year on a specific date. Not when I’m feeling stressed or when I see the market go down.
Jenny
That is great advice. I’ll tell you another rule that I use for myself not related to investing, but I never use my online banking apps when I’m out in public, like on a public Wi-Fi. I only access them when I’m at home on my own Wi-Fi.
Seth
A good security measure for sure. And also, probably a measure that helps you not make rash decisions or panic. Like, “oh, I need to buy this right now or I need to transfer money right now.” Oftentimes, any rule that helps you slow down and stop and reflect can be really beneficial.
Jenny
And so, you mentioned the compounding interest calculator. There’s millions of those available online. Are there any sort of other tools that you would recommend for folks in terms of stock market? Obviously, there’s a lot of them out there and it depends on where you’re investing.
Seth
Yeah, it’s a really good question. I think most folks, if you’re using any sort of brokerage account or if you’re investing through like the Deferred Compensation Program or your Plan 3 account, Voya, our third-party record keeper has a lot of calculators and tools that can kind of help assess what your risk tolerance is. Which I think can be really helpful as people are thinking about: “Is my portfolio in a state that that makes sense?”
Those calculators can also just be helpful in helping you think about what your own thinking is like, “how would I feel if my investments dropped by 20% tomorrow?” Going through some of those calculators will help you to stop and think about “when do I need this money, how much will I need, when will I need it?” Those questions might not always be obvious to us. And so, working through those calculators can be really helpful to think about different scenarios.
Jenny
Yeah, that’s great.
Seth
How often do you check your investment accounts Jenny?
Jenny
I would say probably once a month. I keep like a little spreadsheet, so I’ve got like my Roth that I have through a Betterment account and then my DCP account and just general savings. And you know, if it goes down, I’m like, “it’s okay, it’s okay, don’t worry about it.”
Seth
I think once a month, once a quarter, totally reasonable. When I visited my parents before they were retired, I felt like my dad was checking his account once a day. Yeah. And we had a colleague that used to work here. It was kind of a similar thing.
Jenny
That I don’t recommend to anyone.
Seth
No. And I just try to explain help those folks understand that it was causing more stress. When things go down, you feel worse. Worse the amount you feel better when things go up. And so, you’re actually causing yourself more stress, even in cases where like the market is going up or kind of staying flat.
Jenny
Right? Whereas if you’re only checking once a month or once a quarter, it’s going to go down and up and down and up and down and up. And then you look at it, you’re like, “Hey, yeah, it’s gone up since last quarter. This is great!” Or maybe you didn’t see all those little pitfalls in between.
Seth
Yes, I think that definitely an advantage to looking less frequently – reduce some of that stress in your own life.
Jenny
Yeah, and kind of remembering in your head like “okay this is for the long haul like at least 10 or 20 years minimum.” Yeah. Well, thank you very much for the conversation.
Seth
Yeah, thanks for chatting.
[music outro]
Disclaimer
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