I don’t know if you have looked at your investment and retirement plan statements lately, but a lot of people are losing money. Over the past several weeks I have had various people tell me they have lost money, performance has been terrible, the stock market sucks, and their Tesla stock has gotten hammered. The first sentence in an article I read this morning, Friday May 6th reads, stocks continued falling Friday after the April jobs report revealed that the U.S. economy added more jobs than expected.
Everywhere you turn there are articles and headlines talking about inflation and possible recession. Interest rate hikes, the war in Ukraine, Covid, and stories about people quitting their jobs are all the rage. The current president is crazy and the previous one is a crook. The Supreme Court is leaking, you can’t afford a house, we’re being invaded from the Southern border and soon it will be impossible to vote in most states. Basically, the entire world is one gigantic mess!
What is Loss?
Okay, enough with the doom and gloom. Let’s talk about this for a bit. You just looked at your 401k account statement and it shows your YTD return is -10%. Or you got your IRA statement in the mail and the value at the end of 2021 was $500,000 and now it shows a value of $450,000. Have you lost money? I guess so. If you had liquidated your account at the end of 2021, you would have received $500,000 before taxes and penalties and if you liquidated it today, you would only receive $450,000 before taxes and penalties. But were you going to liquidate it at the end of 2021? Probably not! If you haven’t liquidated your account, have you really lost anything? I say No!
Warren Buffett once said the reason peoples’ houses were the biggest part of their net worth was, they don’t publish the price of your house in the newspaper every day. Now it’s even worse. You can watch the price of your stocks change every minute on your phone. They have apps that have gamified investing.
I have a chart on my desk that shows the median annualized return of the S&P 500 from 1984 – 2020. That number is 14.4%. It also shows the median intra-year price decline at -9.9%. Every year the market was negative at some point. In the best year during this time frame, the market was up 38% for the year but at one point it was down -3%. In 2008, the market ended the year at -37% but at one point it had fallen 49%!
There is a term for this called the risk premium. The equity risk premium refers to the excess return that investing in the stock market provides over a risk-free rate. The price of this return is the volatility that you must deal with. People refer to this as risk tolerance, but I don’t think that term makes sense. To me, investment risk is the chance that you might lose all of your money. If you only own a single stock, there is a chance that you could lose all of your money. If you own the market, I probably can’t say there is no chance you could lose all your money, but it is very unlikely. It is very likely, however, that you will have to put up with years like 2001, 2008 and now, 2022 where the value of your account is down, and the media is screaming at you that things are bad and are only going to get worse.
What Should You Do?
First, I am going to say that everyone is different, and they need to do things based on their own set of circumstances. The following suggestions are general in nature. I would be happy to talk to you about your situation and we could go from there.
- Have a Plan
A goal without a plan is a wish. When you have a financial plan, I find that most people are more comfortable with the ups and downs. They know how much they have to save to reach their goals. On our financial plans we run Monte Carlo testing that shows a range of outcomes, and we show the probability of success. We can also illustrate some options that are available besides freaking out. Maybe you work one more year. Maybe you only plan one trip to Europe per year instead of two. You might have to increase your savings rate a little bit each year. The point is, you are able to make adjustments because you have a plan, and you know where you’re going.
- Understand Your Own Behavior
This has to do with understanding your personal behavior. A lot of people underperform their own investments because they can’t handle the ups and downs. You need to be honest with yourself and figure out how much volatility you can handle before you bail. What is your puke factor? If you couldn’t handle the possibility of a 50% decline in your portfolio, you probably don’t want to have 100% of your money in the stock market.
- Don’t Compare
I always read articles that talk about outperforming the market. Who cares? When you have a financial plan, you know what you want, when you want it and what you need to do in order to achieve your goals. Why take on more volatility than you can handle? Comparison is the thief of joy. On the other hand, if you know you can handle your portfolio being down 49% in a year and your goal is to have as much money as you possible can, then it makes sense for you to invest more aggressively. But doing it so you can beat some index of 500 large companies doesn’t make any sense.
- Keep Some Cash
Savings accounts or cash or other short-term investments aren’t paying too much interest these days. But they also don’t drop in value and if you ever need any money, it’s much better to take money out of the savings account versus realizing a loss by selling your investment portfolio when the value has dropped. This also helps with number 2. If you know you won’t have to touch your long-term investment account, you are more likely to leave it alone in volatile times like these.
It's hard when you’re “losing” money. I don’t think our brains are wired for investment success. Our natural instinct is to run when we perceive danger, but this is exactly the opposite thing to do when it comes to investing. You’re supposed to add to your portfolio! We like patterns. When people are investing and their accounts are going up, there is the belief that they will always go up. When their account is going down, they are afraid it will continue going down and they’ll be left with nothing. Neither one of these is true.
This is one of the reasons I think it’s smart to have help. I realize some people can do this by themselves and it costs money to get someone to help you, but in the long run, having someone by your side to assist is great. They can help you figure out what you want and create a plan to get there. They can design a portfolio that matches your personality, your tolerance for volatility and help you keep to your plan. If you get scared, you have a person you can talk to. Plus, they have the benefit of having gone through these situations multiple times with lots of different people. Information and knowledge are two different things.
I hope this helps. Things have been crazy lately, but this too shall pass. If you want to talk about your personal situation, you can reach out to me HERE. As always, thanks for reading. KB