Smart Actions Investors Should Consider During Market Drops (Other than Panic Selling)

Feeling uncertain about markets and your portfolio? Markets and investment portfolios are down this year - almost across the board. So how should investors react? What smart steps should 6-Figure Investors take when markets are volitile? In this episode we discuss:

1) Investor Emotions: The spectrum from panic selling to "doing nothing" during market drops

2) What to do if you feel nervous about your portfolios

3) Actions long-term investors should take, like rebalancing and tax-loss harvesting, which are better than "doing nothing" around market bottoms

Transcript:

Hello friends. Welcome to another episode of the six-figure investor today.

We are excited. Might be a strong word, but we're going to be talking about how to deal with market downturns as an investor, which. Very relevant for the day. We are, it's been a challenging year markets, both stock and bond indices are down so far year to date. A lot of portfolios are down maybe more than 10%.

And so I think that creates a lot of consternation for folks. Yikes. I think there's really two ends of the spectrum that I see our clients and friends kind of going through on a regular basis when I talked to them. One end is sort of fear and uncertainty and that can ultimately to panic.

And the other end of the spectrum though, is that I know I should be a good long-term investor. And so what I'm going to do is stick my head in the sand and I'm not going to do anything. And that response isn't really ideal either. And so what we want to do today is unpack both of those into the spectrum and sort of bring people to the middle and help them make smart decisions.

Well let's just dive right into this after the show intro, we'll see you back in that.

All right, friends. Welcome to the six-figure investor. We are excited that you're here today because you want to learn more about the market downturns and what to do as an investor. I have to admit Brian watching the news. I've been feeling a little ho-hum and a little nervous and a little uncertain about what is coming and feeling like it's not such a great.

Sure. Yeah. So I think there's really two ends of the spectrum that I see our clients and friends going through on a regular basis when I talked to them. And neither really into this spectrum is optimal for long-term results. So one end of that, and you alluded to this in the intro is sort of fear and uncertainty and that can ultimately to panic.

And the other end of the spectrum though, is that I know I should be a good long-term investor. And so what I'm going to do is stick my head in the sand and I'm not going to do anything. And that response isn't really ideal either. And so what we want to do today is kind of unpack both of those into the spectrum and bring people to the middle and help them make smart decisions.

When things are maybe not going as ideally as folks would like in the markets, that sounds great. Well, why don't we start with. A downturn is coming or I feel a downturn is coming. Let me do, like, let me sell everything off those people. What would you say? Yeah. So on the uncertainty end of the spectrum, I think there's two things that are really important.

The first thing is that you need to go back to your investment plan and objectives just because the market is down 13% this year doesn't mean that your retirement is necessarily off track. It doesn't mean that your long-term goals are necessarily off track that you have to save more, spend less all of those, those sort of things that we go to.

Naturally as as investors, if you have a well constructed long-term investment plan, it should have taken into account this kind of volatility. And so that should give you some comfort if you zoom out and sort of understand where we are on a longer-term investment horizon, we've seen two or three years of above average returns.

Now we've had six months of below average returns. And so it's, it's more likely than not over the long-term of your investment timeline. The market's going to produce the historical returns that are in a well-crafted financial and investment plan. And so your longterm plan probably remains intact and maybe that helps you breathe a little bit easier.

But I think, you know, if you have a lot of discomfort about where we are, then it's definitely time to talk to your advisor and professional about. You know, where you are, vis-a-vis your plan and and take a look at things that makes sense. Okay. For some folks, they feel the most uncertain. If they're coming towards maybe the end of their prime working years, they're looking at retirement or they're already retired. Do you have anything that you would add specifically for those folks? So I think as you get toward the later stages of your working years, it's important to remember that your investment timeline is still really long.

A lot of folks today in retirement are living 20 or 30 years. Right? So people are retiring at 65. They're living well into their eighties and into their nineties. And, and you don't need to have every dollar that you need for retirement the day that you leave, because your portfolio is going to continue to grow likely over time.

And so it's important to, again, zoom out, understand where you are. Remember that you're still a long-term investor. There's still a lot of time for your portfolio to continue to produce returns over the rest of your life. So what if like, no matter what my situation is, I'm, that's not giving me comfort.

Like I still feel really nervous and apprehensive. When I look at the plan that I had originally made, like, what should I do then?

So there's two things that could be happening. Your portfolio might be wrong or your expectations about the returns and the volatility of your portfolio could also be wrong.

So either way, if you're uncomfortable with where you are it's important to align the investments that you have and, and the different securities that are in your portfolio and your expectations, and whether it's the portfolio that's wrong, or your expectations are wrong. Getting those two things in line.

Is really important moving forward. We also find that a lot of times investors aren't as diversified as they think they are. You know, a lot of. Have promo primarily owned stocks and bonds over the last 30 years. And that's done well because interest rates have generally fallen into bond prices have generally gone up and equity prices have appreciated as well.

And so it's really important that you think about what true portfolio diversification looks. What's your risk tolerance looks like and what your expectations are around your portfolio and make sure that all of those things are in line. Again, something that is worth talking to a professional about if if you're not comfortable just now when you were talking, you know what my brain said, vibrant said, wait, you can invest in things that are not stocks and bonds.

Yeah. One of the things that we've been working with clients on since the beginning of the year is, is that modern portfolios have a lot of things in them that are not stocks and bonds and institutes. Have been investing this way for years, it's not new. You can own different types of real estate and that's not just houses that people rent from you.

You can own commercial real estate, you can own industrial real estate. You can own senior living facilities. There's all kinds of real estate that you can buy raw land, farm land, right? You can own infrastructure. And the best way to think about infrastructures, it's things like cell towers or data centers or other types of.

Utility functions that we have to have to operate, you can invest in commodities, right? Oil has been sort of the top commodity in the, in the new cycle lately, because prices are rising. Rising both because of inflation also because of the situation that's going on in Europe.

And there's other commodities that are out there, and then there's also metals, copper and palladium rare earths, right.

That are used in car batteries. All the metals all the way from, like I said, from copper and nickel and things that are used in industrial capacities and through gold and precious metals that are long-term sources of value. So when you think about building a true long-term portfolio or a longterm modern diversified portfolio, you should have components of all of those things.

And if you don't then that is going to increase the volatility or the, the potential for your portfolio to go down when there are concerns about what's happening in the economy. And that ended up itself not being properly diversified is going to make these downturns feel worse than they might otherwise feel.

If you were, if you were diversified more brown, Cool. That was a little bit of a left turn. I think you were mostly talking about the, that we think about the spectrum of responses to what's happening in the economy. You've got the folks who are really feeling uncertain and nervous. If there's anything else that you want to say to those folks before, maybe we go to the other side of the spectrum and talk about those, you know, let me just stick my head in the sand investors.

Yes, I think there's one more piece of advice for folks that are on the uncertain end of the spectrum. And I think this actually applies broadly for everybody. But I think it's particularly powerful for people that are, that are really feeling uncertain, maybe even sort of starting to panic about what's going on in their investment portfolio.

And, and that piece of advice is you really need to think about. What you're listening to and watching and consuming even credible financial news is in the business of making you watch and listen day after day after day. And so that means tomorrow has to be better than today and so on. And in, so in the financial news, every small piece of data that comes in either the sky is going to be falling and we're on the road to a dark one.

Or conversely, something will be positive and we will have reached the end of all trouble and markets bullying rise from here. And either of those outcomes are never true. But but the news has to make us believe that you know, things are going to be really bad or really good going forward in order to get us to watch.

And so if you're consuming a lot of of news, you just have to keep in the back of your mind, why are they telling me the things that they're telling me is it because they want to give me really good advice and help me make smart decisions? Or is it because they want me to wow. Get ratings and run more commercials.

And I mean, that sounds like crash, right, but it's, but that's true. They're in the business of viewership. They're not in the business of portfolio management. I've never met a news anchor. That's also professionally managed portfolios, maybe ones out there, but I haven't met them. If there is one, you can reach out to them.

So who you listened to and what you do with what you hear is really important. If you feel your brain. With any kind of, any kind of news day in and day out, everything that we know about psychology suggests that it will eventually lead to bad decisions. So I tell clients all the time, just turn off the noise.

It's probably counterproductive be thoughtful about what you're consuming and what you're listened to and then how that's even subtly impacting the decisions that you're making. Good. I think that's wise advice for all of us. So let's turn the tide a little bit and go and. Talk about the folks on the other end of the spectrum.

These, I mean, these are the people that I am. The, the folks that know that their investments is a long-term play that the economy rises over time, that if they play the long game, they'll win. And so they just kind of want to stick their head in the sand and pretend like, you know, what's happening is not happening.

And eventually we will overcome, what do you say to a yeah. So I think that's a good mentality to have but I also think that doing nothing can be counterproductive as well. And so even if you, if you are a believer in long-term markets and you say I'm going to stay invested no matter what, because I know this is the right thing to do.

There's still two actions that you need to be thinking about during market downturns,. The first thing is, to rebalance your portfolio. And what that means is. Making buying and selling decisions to return your portfolio close to your target.

Long-term asset allocation and asset allocation is just a big finance word for the percentage of stocks that we own, the percentage of bonds that we own. The percentage of all of those other assets that we talked about, that you should own. Making sure that, that our portfolio today has the right percentage of stocks, the right percentage of bonds, the right percentages of gold real estate, commodities, all those different things.

Because what's likely happened over the last few months is stock prices have fallen. Bond prices have fallen. Other types of assets have risen commodities in particular until you may have too much of some assets and not enough of the other assets and the discipline of rebalancing provides the best chance of buying low and selling high over the longterm as we manage portfolios for years and years and years.

And so we want to be thinking about rebalancing as we're going through the rest of the summer. I know the first time you and I talked about this concept of rebalancing, I found it really confused. So can you break it down a little bit more for our listeners that are not familiar with that term and what it means? So going into the beginning of the year, you were 50% invested in stocks and 50% invested in other types of assets. And if you had a thousand dollars in your portfolio and you had $500 of that invested in stocks, that $500 has declined by 10%. So now you have only $450 invested in stocks and $550 invested in other assets. And so what you want to be doing is selling those assets that have appreciated that are in that $550 bucket and buying the things that have depreciated or decline that are in that $450 bucket. And so you get those two things back in line at $500.

Of stock exposure of equity exposure, and $500 of, you know, whether it's fixed income or real estate or commodities or whatever the rest of your portfolio is that those things are back in line.

Decades of investment research is really clear that market exposure and asset allocation. The majority of our long-term investment returns. And so that's one of the reasons why rebalancing is really important if your entire plan that we talked about earlier, your investment plan and your financial plan is designed around an asset allocation, right?

Or a mix of stocks and bonds, which it should be. Then it's important that we stay at close to that mix over the longterm. And if we get too far away from that, We're either not going to achieve the long-term returns that we expect to achieve, or we're going to be taking more risk or particularly less risk than we expect to be taking.

And we're going to feel not great about our portfolio prospects. And so that's the reason that we rebalance is to get our asset allocation back in line, because that's what gives us the best chance at achieving our target rates of return over the. So maybe the first thing that a stick my head in the sand investor should do is look at now the balance of their portfolio and make sure that that reflects the mix that they want to have. Yeah, that's right. And the second thing is something we call tax loss, harvesting farming. There's no farming involved in this.

Can you share because I am happy to pull up my I'm purely a suburban farmer. I can grow grass in my front yard somewhat, but that's the only, that's about the extent of my farming capabilities. So for individual investors, tax loss, harvesting is really important. Tax loss harvesting is the process of selling one security that has declined in value.

So think about those stocks in your portfolio that are bound perhaps the first part of the year, recognizing the loss for tax purposes. And then at the same time, buying a similar security to maintain your exposure to. Can you give us an example? I needed a translation. Yeah. So I think the easiest way to think about that is if you own a Coca-Cola stock at the beginning of the year, and the price dropped, you sell your Coca-Cola shares and you realize those losses for tax purposes and you buy Pepsi shares at the same.

Those two stocks, they're not identical assets, right? And there may be differences, and this is not a a recommendation to buy Coke or Pepsi or sell one or the other is just an example. But the two stocks are not identical assets, but they are likely to move in similar ways. And the same is true for mutual funds and ETFs.

You can sell one fund and buy another fund. That's not exactly the same, but that is similar. And you realize the benefits of the losses in your portfolio, and then you use those losses to offset your income for this year. You use it to offset other. In your portfolio,

I'm down with this kind of harvesting. I mean, you're basically telling me that the loss that I've taken on my stocks, for example, this year, I can't. Right up on my taxes. Yeah. You can use it to offset other income. You can use it to offset other gains in your portfolio. The rules around what you can and can't use to replace assets.

And then obviously the tax implications can be complex. So it's worth talking to a professional. If you're not familiar with the specific rules around tax loss harvesting, or, you know, obviously when you do your taxes right. Work with the folks that you use to help you make really smart tax decisions. Also it's important to note, we didn't say to sell the assets and stay uninvested.

Sometimes it may be tempting to do that. The best practice here is to sell assets, harvest the losses. Then at the same time, Bye in your portfolio, that was similar assets so that your market exposure remains the same. All we're trying to do is capture those losses for that versus we're not actually trying to change out that we're invested.

Got it. I'm down. I'm going to get out my overalls . Awesome. Brian, this episode is. Well of little like golden nuggets. I have learned quite a few things. Just talking about how we should think about our investments in a downturn or a season of downturn. Anything else you want to share with our audience?

Or, you know, kind of give us a recap of what we discussed today. Yeah. So I think a couple of things are really important and this is actually true, no matter where you are on that spectrum that we talked about earlier. Uncertainty and nervousness all the way over to I'm going to stick my head in the sand and do nothing.

The first thing is if you're feeling nervous or feeling uncomfortable, revisit your investment plan talk to your financial professional. You probably not as off track as you think you are when you really look out and zoom in that out in the context of time. And also

just think about what you're listening to and make sure that the things you're listening to and taking in every day aren't leading you to bad decisions. And secondly everyone should be thinking about rebalancing that that means buying and selling to get their portfolio back to their long-term target mix of stocks, bonds, and other assets that they own, and then tax loss, harvesting.

So selling assets that are down realizing those losses for tax purposes and staying invested for them. Awesome. Well, thanks so much to our audience for listening in today. I think we've graduated from having seven listeners to having 39. So maybe we'll target having 60 people as inclusive. W we are, we are moving up in the, in the world.

We hope that you learned something really helpful in managing your portfolio. If you find yourself in a place thing, woe is me, or really uncertain about your portfolio and wanting to talk to somebody, not necessarily having somebody in your Rolodex to do that, how can they get into particular brand?

You still have a role Rolodex. Ah, yeah, it's called the contacts in my cell phone. Yeah, so you can, you can check us out online. The capital stewards.com, the capital stewards.com backslash about us. There's also a place there for you to reach out and contact us if you'd like to know more about us or sign up and get emails and more content from us.

And we'll also put links that are helpful for this conversation in the. That's below in the show notes. Yes. And if you learned something really valuable on today's lesson, we would love for you to stop by and just drop us a quick review. Let us know what you're learning, what you like, and we'll add more of that content to the upcoming lineup or tell us what you don't like.

All right. Thanks friends. Good to see you.