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News & Insights
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If you have been investing for over a week, you have experienced a large market sell off. A sell off is just investor speak for a sharp and sudden decline. What most people see is just a red number when they login to view their investment portfolios which causes angst and worry. We see drops of at least 5% at least once annually and drops of over 10% every other year on average. So, while these moves may be relatively common, that does not make them easy to stomach when they inevitably occur.
Here is a guide to getting through a scary market:
- It is ok to feel scared.
“Fear keeps us focused on the past or worried about the future. If we can acknowledge our fear, we can realize that right now we are okay. Right now, today, we are still alive, and our bodies are working marvelously. Our eyes can still see the beautiful sky. Our ears can still hear the voices of our loved ones.”– Thich Nhat Hanh a Vietnamese Monk and Activist
We are all human and loss affects us more dramatically than gain ever will. You do not need to act like you are not bothered by a 3% plus drop in a day. If you feel anxious and uncomfortable, acknowledge it! Naming a fear will helps us to then put it in perspective.
- If you find yourself turning to the news with your worry and fear, stop immediately.
“Media cannot tell the great truths. It is all headlines and no history…Media goes crazier and crazier and crazier trying to capture eyeballs, no thought… the American household is inundated with noise.” – Nick Murray
Your favorite outlet for news media, however well intended they may be, is not a resource in a time like this. Information and editorial panels will offer hundreds of facts and opinions while likely giving you little to no truth and context. Throw the newspaper away, turn off the cable news, turn off your phone notifications for a day or two. Good places to turn to are your friends and family- the here and now. Yes, the market and the economy are working out some kinks, but your kids still love you, your spouse still would love to go on a walk with you, your parents may appreciate a phone call. The more we can immerse ourselves in our values through this, the smaller the market problem becomes. Another great resource is your trusted advisor.
- If you have made a financial plan, your portfolio is built for this.
Market declines happen every year, and a correction of 20% or more should be expected every four years or so on average. If you are spending down your portfolio, you should have the safe money set aside to weather this. If you are building and accumulating, keep going. Make your monthly contributions, keep your 401(k) and brokerage contributions going, do not stop. You get to invest at lower valuations, meaning better potential for long term growth. Proper financial planning will lead you to a portfolio designed for these types of market conditions.
- Inaction could be a great action.
Gandalf wisely said, “A wizard is never late, Frodo Baggins. Nor is he early. He arrives precisely when he means to.” You can take this as a lighthearted quote, or a truth that the wise never rush to action. The wise will act when it is appropriate.
We’ll see the headlines “what to do with this market selloff” and we’ll even start thinking, “I have to do something!” False, we do not have to do anything. Too much activity can be very counterproductive in a choppy market. Whether you are thinking to should add more to the market or sell it all, pause and consider the overall plan. Do you have emergency funds? Do you have large upcoming expenses? Are you reacting or is this action in line with a disciplined long term financial plan? Maybe doing nothing is the best thing to do.
- If you need to talk through the current situation, hire a financial planner.
Sometimes talking through what we are feeling in reference to our portfolio and financial plan is all we need to put the noise of the news and our minds at ease. If you do not have a financial planner, but feel this is as good as time as any to find one, make a connection or ask a friend for a referral. A good financial planner will not sell you a product. A good financial planner will listen and advise in an honest and caring manner. A short list of planner requirements would be:
1) They are a CFP® professional,
2) They work at an independent firm,
3) they are fee only meaning they do not sell products for a commission, and
4) they come highly recommended by a friend, family member, or trusted colleague.
We all must know and understand, that we cannot begin to predict when market drops will occur and how long they will last. Our premonitions are limited to our hindsight. Our omniscience only extends to what we have experienced. It is for that reason that we must invest according to a plan. A plan that aligns our capital with our values and gives us a north pointing arrow when we can’t seem to see past our current circumstance.
Investor Peter Lynch said, “A stock market decline is as routine as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.” Prepare and gain the confidence of looking beyond the circumstances of today. Perhaps everything will be alright.
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Written by Geoffrey Schaefer, CFP®
Often I hear from clients and potential clients,
“I’m worried the stock market will go down.”
“Don’t stocks have a lot of risks?”
“Can’t we lose all of our money in stocks?”
Most of this is gleaned from the news media which actually contains much information while holding little truth. News is sensational. It is filled with data points and polarizing facts, often without context. Truth is steady, truth can be repetitive, truth will not garner clocks and thus impossible to find in the news media.
When we listen to the news rather than truth, we get scared of what we hear and then project that fear onto every part of our life.
Let’s talk investments for a bit. You’ve heard from the news that the president is going to tariff this, or this company’s sales are dropping, or the economy is tanking… yada yada yada. There is always something for the news to broadcast here. So, we hear that and we say, wow, this is too risky! We have to do something! Right?!?
No.
Let’s define risk.
In the financial context it is the possibly of complete loss. You have a home and it burns down. You have a car and it is totaled. You have a stock and that company goes out of business. The loss is complete and irreparable.
In the case of a home or car, we all have insurance policies to help cover this risk. In the case of an investment, what do we do?
I’d like to now introduce another term, often thrown around negatively, but actually it is more likely to be seen in a positive context: volatility.
Volatility is the chance of sudden and unpredictable movement. Nick Murray defines volatility as the price movement, both up and down, along a long-term trend line.
When it comes to investing, we often mistake risk for volatility. You have a portfolio of diversified stocks worth $500,000. Over three months, the value drops to $400,000. You’ve lost $100,000, right? Wrong!!
You’ve only lost that value if you sold the investment after the drop in value (which by the way, that is exactly what human nature will lead you do and you shouldn’t.)
That drop was likely not a result of risk, rather than volatility. The same volatility that pushed it upward every month prior to that, but only noticed when it moved in the opposite (negative) direction.
Here is some negative volatility that the largest 500 stocks in the U.S. have experienced in my lifetime:
- The dotcom bubble of 2000. The market dropped nearly 40% over three years.
- The great financial crisis of 2008. The market dropped 37% in one year.
- Covid 19 in 2020. The market dropped over 30% in less than three months (but finished the year up 18%).
- The 2022 market. It doesn’t have a cool nickname, but the market dropped by over 18%.
All of that negative volatility. Seems like a terrible deal, right?
The S&P 500 measured at 326 in September of 1990. It now sits at over 13,224. A total return of over 3,640% which is over 11% per year.
$10,000 put into the stock market in 1990 would be worth $374,290 today. The real risk is not investing at all. The real risk is selling in a Covid-19 market or tech bubble moment rather than staying the course.
When we are not invested, we usually are not doing so because it is “too risky.” We’re doing so because we do not have a financial plan that acts as a roadmap and guidepost when the news gets louder than the truth- and it will.
Are there some examples of investment risks? Yes, here are a few:
- Having 100% of your investments in one company stock. This carries the possibility for massive and even complete loss.
- Following fads like the meme stock mania, cryptocurrencies, foreign currency exchange, aggressive options strategies. None of these are investments, they are speculation at best and deserve little to no room in your overall financial plan.
- Timing the market. By the time a drop occurs, it is too late to get out without incurring losses. Human nature leaves us paralyzed by fear so pulling the trigger on getting back in will be nearly impossible.
- We sell low and buy high. Something goes down and we get out and we put that money into the fund that is doing well. Humans are tragically prone to recency bias. Because something is true of the past 6 months does not indicate it has always been true, or will continue to be true in the future.
- Inflation. Not investing will absolutely subject you to the risk of inflation. In 30 years, your purchasing power will be cut in half and then some. Not investing leaves you subject to a certain and inevitable fate.
Studies show that average investors underperform the market by almost 6% because of the reasons above. Those are real risks that are costing us, as investors, money and peace of mind. Our behavior is sabotaging our portfolios.
Here are more common mistakes investors
How do we get peace of mind with our investments?
Make a financial plan! A financial plan aligns your values with your capital. It clearly defines your goals and will tell you what must be done to get there. As part of a financial plan, you will develop a diversified and sustainable investment portfolio that will ultimately fund your goals and keep you away from the risk of trend following, market timing and hasty decision making.
Invest based on that and then tune out the noise that distracts you. CNN does not care about you, nor does Fox. Your coworkers RobinHood account or a hunch from your uncle will not aid you in achieving your financial goals. Make a plan or find a planner who will help you make one and hold you accountable.
Understand that when investing, risk is different than volatility. Make a plan, identify the risk, and invest! I can’t tell you how many times I hear, “I wish I would have started sooner.”
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Written by Geoffrey Schaefer, CFP®
Receiving a windfall changes your financial situation overnight. There is a lot of opportunity that exists in these events, but many challenges as well. Many recipients of a financial windfall act too quickly or become paralyzed and fail to take any action at all. What is the proper way to respond to receiving a windfall?
What exactly is a windfall? A windfall is a sudden receipt of assets (often a large amount), sometimes expected and sometimes not.
Common sources of financial windfalls are:
- Inheritance or Gifts
- Legal Settlements
- Business Sale
- Gambling Winnings
- Stock Liquidation
In all these cases, assets become liquid and available to the recipient quickly and usually change their net worth and ability to give, spend, invest, etc.
So, you get a phone call that you’re receiving millions of dollars, what could go wrong from that? You would think it would be simple, but many financial planners have seen clients spend down or squander windfalls at alarming and surprising rates. Lavish spending habits, large unreasonable purchases, unrealistic expectations of what that level of wealth affords, and lack of a foundation in values all can lead to pitfalls and missteps with found wealth.
How can we navigate receiving a large sum of money in the most prudent way possible? Here are a few ideas:
- Don’t change anything right away. Many windfalls involve life changing money, but a dramatic lifestyle change, or large expenditures may jeopardize the sustainability of those funds in a long-term plan. In general, money received from a windfall, especially inheritances, gambling winnings, or settlements, is spent more easily than money that is earned, saved and invested over decades. You see this in the fact that one third of lottery winners go bankrupt within five years. 78% of NFL players face financial hardship and nearly 16% go bankrupt after leaving the league. In the case of inheritance, only 10% of wealth passes to a third generation. The best thing you can do when you receive a windfall is pause until you make a thoughtful, values driven plan.
- Understand your emotions. This one may seem irrelevant, and you may be asking, “isn’t this a financial post?” The human element is incredibly important to navigate. In the case of a legal settlement, you may feel relief. In the event of an inheritance, you may feel guilt, anxiety, confusion and sadness. If you win the lottery, it may be ecstasy followed by disbelief. None of these would be abnormal, but your feelings are unique to you and those feelings could be pointing to values that direct decisions yet to come. Listen to how you feel.
- Anchor to values. A value is a standard or judgment that you use to determine what is important in your life. While some values like life and freedom are universal, most are relative and vary from person to person. If you value something, it likely won’t change if you are worth $500,000 or $50,000,000. How you address those values could change dramatically. Perhaps championing the homeless or protecting the environment were causes that mattered greatly to you. They will likely still matter to you after the windfall, but how you address them and support them within your financial plan can change. The money changes your plan, it shouldn’t change your values.
- Understand what you received and the taxation of that asset. Taxes are a huge expense throughout your lifetime. A business sale could be a huge taxable event, while an inheritance from parents may result in next to no taxes. The taxation of your newfound money varies greatly depending on the source and the vehicle. Understanding what you have after taxes is key. In some cases, like installment sales of a business or the receipt of an IRA, you can spread out some of the tax liability and benefit from ongoing planning. Don’t charge ahead planning on a pretax amount as that will only lead to disappointment when the after-tax amount arrives.
- The only timing is your own. Should your portfolio be allocated differently at $20 million versus $200,000? Maybe. If you receive a large sum, can you buy that new car? Probably. Can you spend more monthly with your annuity payout? Most likely. When should you do this? After you take a few weeks to a few months to pause, recenter on your values and build a plan, there is no timeline. Your plan may require a portfolio overhaul. Your ability to retire may move up by a decade. You may be able to gift a large sum to a charity. If your plan is built on the alignment of your newfound capital to your values, the only timing that matters is when you are confident and ready. Important parts of the financial plan would include:
- Tax planning
- Asset allocation
- Cash Flow Management
With every source of windfall this is different as they all involve different emotions. In a business sale or settlement, maybe it’s weeks. With the loss of a loved one, maybe it is months or even years. Make a plan with a trusted advisor that allows you to take the time you need to make these decisions, most of which are brand new to you.
Financial windfalls are life changing. Do not let the stress of decision making overwhelm you to the point of inaction. On the opposite side of the coin, do not let the newfound purchasing power let you slip into outspending what you truly value. A financial plan is important for every family and in this case, it is invaluable. If you encounter a windfall, make a plan before you make financial moves.
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Written by Geoffrey Schaefer, CFP®
If you have been investing for over a week, you have experienced a large market sell off. A sell off is just investor speak for a sharp and sudden decline. What most people see is just a red number when they login to view their investment portfolios which causes angst and worry. We see drops of at least 5% at least once annually and drops of over 10% every other year on average. So, while these moves may be relatively common, that does not make them easy to stomach when they inevitably occur.
Here is a guide to getting through a scary market:
- It is ok to feel scared.
“Fear keeps us focused on the past or worried about the future. If we can acknowledge our fear, we can realize that right now we are okay. Right now, today, we are still alive, and our bodies are working marvelously. Our eyes can still see the beautiful sky. Our ears can still hear the voices of our loved ones.”– Thich Nhat Hanh a Vietnamese Monk and Activist
We are all human and loss affects us more dramatically than gain ever will. You do not need to act like you are not bothered by a 3% plus drop in a day. If you feel anxious and uncomfortable, acknowledge it! Naming a fear will helps us to then put it in perspective.
- If you find yourself turning to the news with your worry and fear, stop immediately.
“Media cannot tell the great truths. It is all headlines and no history…Media goes crazier and crazier and crazier trying to capture eyeballs, no thought… the American household is inundated with noise.” – Nick Murray
Your favorite outlet for news media, however well intended they may be, is not a resource in a time like this. Information and editorial panels will offer hundreds of facts and opinions while likely giving you little to no truth and context. Throw the newspaper away, turn off the cable news, turn off your phone notifications for a day or two. Good places to turn to are your friends and family- the here and now. Yes, the market and the economy are working out some kinks, but your kids still love you, your spouse still would love to go on a walk with you, your parents may appreciate a phone call. The more we can immerse ourselves in our values through this, the smaller the market problem becomes. Another great resource is your trusted advisor.
- If you have made a financial plan, your portfolio is built for this.
Market declines happen every year, and a correction of 20% or more should be expected every four years or so on average. If you are spending down your portfolio, you should have the safe money set aside to weather this. If you are building and accumulating, keep going. Make your monthly contributions, keep your 401(k) and brokerage contributions going, do not stop. You get to invest at lower valuations, meaning better potential for long term growth. Proper financial planning will lead you to a portfolio designed for these types of market conditions.
- Inaction could be a great action.
Gandalf wisely said, “A wizard is never late, Frodo Baggins. Nor is he early. He arrives precisely when he means to.” You can take this as a lighthearted quote, or a truth that the wise never rush to action. The wise will act when it is appropriate.
We’ll see the headlines “what to do with this market selloff” and we’ll even start thinking, “I have to do something!” False, we do not have to do anything. Too much activity can be very counterproductive in a choppy market. Whether you are thinking to should add more to the market or sell it all, pause and consider the overall plan. Do you have emergency funds? Do you have large upcoming expenses? Are you reacting or is this action in line with a disciplined long term financial plan? Maybe doing nothing is the best thing to do.
- If you need to talk through the current situation, hire a financial planner.
Sometimes talking through what we are feeling in reference to our portfolio and financial plan is all we need to put the noise of the news and our minds at ease. If you do not have a financial planner, but feel this is as good as time as any to find one, make a connection or ask a friend for a referral. A good financial planner will not sell you a product. A good financial planner will listen and advise in an honest and caring manner. A short list of planner requirements would be:
1) They are a CFP® professional,
2) They work at an independent firm,
3) they are fee only meaning they do not sell products for a commission, and
4) they come highly recommended by a friend, family member, or trusted colleague.
We all must know and understand, that we cannot begin to predict when market drops will occur and how long they will last. Our premonitions are limited to our hindsight. Our omniscience only extends to what we have experienced. It is for that reason that we must invest according to a plan. A plan that aligns our capital with our values and gives us a north pointing arrow when we can’t seem to see past our current circumstance.
Investor Peter Lynch said, “A stock market decline is as routine as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.” Prepare and gain the confidence of looking beyond the circumstances of today. Perhaps everything will be alright.
Follow us on social media below: