Financial Planning Opportunities Amid Market Downturns: Timing The Market
Episode 2: Financial Planning Opportunities Amid Market Downturns: Timing The Market
On this episode of Finance In A Flash, we discuss the negative effects of trying to time the market. Our first instinct when the market "tanks" is to sell and to "buy back into the market when things look better". However, having this mindset can be dangerous and cost you enormous returns over the long haul of investing.
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Transcript
Nick (00:00): Hey, everybody. Welcome to finance in a flash. In our previous episode, we discussed evaluating your risk tolerance, amid a market downturn. And on this episode, we're going to look at the effects of trying to time the market and the negative impacts of doing so as always. Thanks for listening to finance in a flash. Let's Go!
Nick (00:25): All right, let's get started. Chip, you and I fielded a lot of calls held webinars meetings on this topic. Um, you know, a lot of clients would ask or kind of pose this question. Should I? So now before the market goes lower, you know, we're recording this as of May 27th and the past couple months the market was at, you know, a 34% loss S&P 500 was, and we had a lot of questions saying should I sell now, before it gets even lower. And then, you know, once everything looks better, once I feel better about everything we can buy back. In other words, should we try and time the market? And I know your response to this because we've given it at least 200 times over the past couple of months. I feel like I can almost read your mind by now, but what would your, I guess, what was our response to this question? The clients, and a lot of people were asking during this time?
Chip (01:13): Well, I mean, I think it's a hard, it's a hard one to comprehend in a way, because it seems so obvious that, you know, the market's going to continue to decline at the time you're experiencing that. And the data's coming out in the news and you know what we had here recently, I mean, it was a significant decline in a very short period of time, and it's easy to feel like it's only going to get worse. I mean, the economic data and the fallout from the pandemic, we haven't even, we hadn't even seen that. And it's just a tremendous amount of uncertainty, but, you know, the bottom line is that, you know, it's, it's impossible to know exactly the direction the market is going to head in. And, and this is a perfect example of what happened because at the time that things felt the worst, the absolute worst, March 23rd was a terrible day.
Chip (02:14): I mean, I remember thinking, man, this is, this is rough. Yeah. And, but that was the very moment in time where that was at least in the temporarily, that was kind of the bottom. And so since then the markets have, have improved a bit. And so it's just a reminder that no one knows which direction the market's headed. I know that we talked about this, you and I, that, you know, you can look at equally smart pundits. You could see one guy saying, okay, this is just the beginning. The Dow could hit 10,000 again or worse. And then you have an equally smart guy, the sand, okay, this is an overreaction yes, the economy is going to take a hit, but, um, it's, it's been a tremendous decline, a short period of time, and that's just not, it's an overreaction. And so, you know, it's impossible to time the market, and that's kind of what we told people over and over again. And, um, uh, that, that has, uh, rang true with a lot of people. And I think that, you know, we did a good job of, of kind of explaining the bad scenarios that could happen if, if you do attempt to time the market.
Nick (03:25): Yeah. And to that point, you essentially have to be right twice, right? Like you have to time it at the bottom, which was March 23rd. And then we don't know when you have to time it again, going back into it. So you have to be right. Selling any, had to be right buying back gain, which like you said, is virtually impossible.
Chip (03:44): It really is. And you know, I've been through a bunch of these things. I remember the Asian flu back in the late nineties. I remember the tech bubble that happened in the early two thousands and the great recession. And then now again with the pandemic, but you know, it is, it is awful hard to, because what you really have to do is sell at a point in time where the outlook is really good and favorable and buy at a time where it's terrible and it's worse than you can even imagine. And so, and that just that's awful hard for anyone to pull off because of the human element of it. And it's just, it's just impossible.
Nick (04:31): Yeah. And I think that brings up a good point of why it is important to have a financial advisor and have someone to manage your investments for you. I know that, you know, you're watching, if, you know, say you manage your portfolio by herself. And we all experienced those emotions on March 23rd, when the market was falling and falling and falling and everything, everyone, every article, every new stage was saying, sell, it's going, you know, it's going to go down 50%. The Dow is going to go below what, 15,000. But then to have, you know, kind of a bouncing border, um, a partner that says, you know, look kind of talk you off the ledge. We're not going to go to zero. It's not going to go to zero. We've seen this before. It's going to go up. We don't know when it's going to go up. We don't know how it's going to go up, but we have a belief in that the market is efficient and it will continue to go. But I think it is super important to kind of have that sounding board of, you know, someone with, I guess, a level head to kinda keep you from making those bad decisions of selling.
Chip (05:32): It really is. And I think that's one of the, the hidden benefits of working with an advisor, but it's, it's a couple of things. One is to remind clients that their portfolio is not the market. You know, the market is, you know, 99% of our clients do not have a portfolio that is invested like the S&P to their down. Their portfolio is something totally different. Really it's customized to their own specific circumstances. We do an awful lot of work on the front end, just in looking through, you know, what is the, what are the cash-flow needs for clients? What is their risk profile? You know, in other words, how much risk do they, are they required to take in order to achieve their investment objectives? How much risk do they have the ability to withstand given their, risk capacity?
Chip (06:20): We spent a lot of time evaluating those things, talking those things through with clients, and they're so super important. And going through that process during times, like what we've seen, because, you know, I can say, Hey, look, we have a war, chest war of cash, just kind of sitting there, uh, own deck for, for, uh, your living expenses. So we're not going to have to sell, uh, for an awful long time. And so, you know, I think that's just a good reminder, uh, to have, and to reflect back on the plan and how your portfolio is absolutely based on your own specific personal circumstances. It's not a guessing game. We're not going in and saying, okay, well, let's shoot for the highest amount of returns we can get. That's quite the opposite because a lot of our clients are headed into retirement. And so we're focusing much more on controlling and managing the risk. And that's, I think something especially important to point out
Nick (07:17): The people. Yeah. I definitely agree with that in kind of building off of, you know, your portfolio is not the market. Um, you know, we've kind of seen this with different clients in the past. You, you know, maybe have a story or an example of obviously, you know, redacted names, but of, of where this is kind of happened before, you know, kind of a real life example to give, put people in that, in that shoe.
Chip (07:44): Yeah. I've got a great example and it was, it happened to me early on in my career, and I'm so thankful for this experience and really it's, it's a lot of these, um, learning moments that you get. But, uh, during the middle and I was a green horn, I mean, I'd only been in this industry for a couple of years and, you know, had never experienced a big market downturn, but in 1997 we had the Asian flu, certain portions of the market really took a hit. And I had a client that called into our office and, and she was just worried sick. I was thinking while she was explaining the situation, Oh my gosh, you know, the market's down. What's what am I going to find when I pulled open her portfolio and looked, and I found that she had about, she had invested in about eight or nine CDs.
Chip (08:34): So the CDs, you know, as, as you know, are totally have no, the market has no bearing on CDs. I mean, you're FDIC insured and it's a fixed income security. And so, you know, it was an eye opener to me to realize that, you know, oftentimes people don't really understand what their portfolio and how it's even invested and what it's in. And so I think that's an important element at firm, and it really has made an impact on how we approach advising clients going forward, just because we want to educate, we want people to understand, you know, this is how your portfolio is allocated, and here's why here are the investments that you own. These are the reasons why. And, um, and that was a big, moment for me to, to realize that that people may not understand exactly what their portfolio is.
Nick (09:23): Yeah. That is a great example. And I think that also feeds into media bias, right? I mean, I think that you've seen that the fear-mongering essentially have in granted, things were bad. Things were not good when the market was down in, it's still down. But, you know, as of, as of right now May 27th, the market's only down 8% year to date. And so I I've yet to seen Yahoo, finance, CNBC, Kramer, anyone just kind of say, you know, look at this route. I look at this, all the articles I still see are this is false hope. You know, everything's, you know, be cautious of investing this, this and this. And I feel like so many people, very, very few people, and you can correct me if I'm wrong, but I know very few of our client's portfolios, or even close to what people refer to as the market. And so when everyone sees all the market's down, this market sound that nine times out of 10, maybe 9.9 times out of 10, your portfolio is knocked down close to what the market's down.
Chip (10:24): And it is one of those elements, Nick, that's, it's frustrating for advisors to manage, you know, so many people have, um, are trying to get and promote information. I know that you and I receive it, we should receive emails that say, Hey, yeah, look at, you know, this is, this is the great depression and it's, you know, it's going to happen again. And the unemployment is going to be so high and all these things. And it's just realizing that, you know, we have to be a sounding board. We have to be in front of a, of a lot of the media to say that, okay, these people don't know your situation. We do, we have taken the time and you've hired us to understand that your situation and that's how we have positioned your portfolio. And, you know, we're not in the game fear-mongering or false hope or anything like that. We want to be realistic with people that you're going to experience market declines from time to time. It's just a natural part of the investment cycle, but, you know, we can expect that and plan around it and take advantage of it even when we can.
Nick (11:34): Yeah, yeah, no, exactly. I think managing those expectations on the front end is, is super important. And I was just pulling up, uh, you know, I, I like to take pictures of Yahoo finance or different, news outlets whenever they post articles, I think are a little suspect. And, I was just pulling up one and it says, is from MarketWatch, it was on Yahoo finance. And the title was wall street, star money manager says S&P 500 could plunge to 1500 in worst case. And that was April 8th. And I just hit 3000 again yesterday. So that doubled what he said. And I don't see any of those people are held accountable for, you know, the fear or, you know, saying releasing apologies, just kind of, you know, fear sells. And I think that's super important for clients or anyone listening to kinda, you know, take into account that we're not saying that the market's never going to go down.
Nick (12:29): We're not saying that a recession is never going to happen. We're just saying, if you let's have these reasonable expectations on the front end and then just kind of, let's try to tune out what the media is saying, because a lot of the times these are just talking heads are not in the industry. They don't know your goals and objectives. They don't know where your portfolio is. If we can tune that out, it makes everything so much more manageable and easier. And I think, you know, we read an article, I think it was just right after I started at the end of 2018, you know, maybe I've been on for around six months. And I received, we received a, you know, an article that said, analysts who predicted the 2008 and 2009 crash, predicts a second crash coming in 2019 when the market proceeded to go up 31% in 2019. So I just think it's important to kinda just tune that out, listen to your advisor and focus on the goals and your portfolio objectives.
Chip (13:23): Yeah. I think that that is super important and, and be realistic. I mean, you know, I think that if you can do that and tune it out, then your peace of mind, your happiness level and all of those intangible things are so much higher. And you know, the anxiety level is, is tends to be lower too. So it's a, it's a interesting phenomenon, but it's, it's impossible to time the market and no one knows the direction. And, you know, the only thing we do know is that companies are driven for profitability and for any of those companies, you know, that aren't profitable or aren't successful and managing their balance sheet and their revenue streams and that sort of thing, they kind of go out of business. And for those people who are, invest with a diversified approach, you know, that that's okay because one company going out of business is not going to derail your retirement.
Chip (14:23): In fact, it could be profit. It could be helpful because, you know, if, if one company goes out of business then another company buys the Goodwill of that company and kind of starts over, you know, if one drug company goes out of business, well, you know, another drug company could buy the research and, the drugs that they have on a patent and that sort of thing, and make a go of a new business line that's better. And so, you know, I think it's important to keep that big picture, thing in mind and, you know, just kind of feel at ease with the amount of risks that you take in your portfolio. But, understand that there, no one has the answer.
Nick (15:03): Yeah. I think that's a great point. And before we kind of close out here, I didn't want it to give a few stats at looking back and, you know, I don't think either one of us would say that history always replicates the future perfectly, but I think it is important to kind of learn from it. And, you know, from 2007, 2009, the great recession, the market was down around S&P when that's, when I say the market, I'm referring to the S&P 500, um, which was around, which was down around 51%. And it took 37 months to recover, which in one way, that seems like a long time, but another sentence, like it lost half its value. And it took, you know, right at three years to recover. I think that like essentially what everyone thought was the worst possible scenario, three years later, it was kinda like, okay, well, we're heading in the right direction again. Then if you will, so if you go back the last 30 years in, which was roughly around 11,000 days, and you just missed the best 25 trading days, you're missing out on around 5% annualized return. So you have 5% annualized over 30 years less if you miss out on 25 days, which I think is an incredible, incredible fact.
Chip (16:23): Yeah. That is incredible because all the good days are interspersed with the bad days. And, you know, and we saw this this time. I mean, you and I we're, we're, you know, we're trying to rebalance portfolios and, and that sort of thing, while the markets would swing by 10%, it would be down 5% in the beginning of the day and end the day up 5%. And that's just an amazing period of volatility. And, you know, it's no wonder that people are scared and worried. I mean, that's a natural human emotion, but at the end of the day, you kind of have to accept that as, you know, being a part of a successful investor, that's what you need to be able to tolerate that. And, the way you do that is by creating an allocation, that's more, that's not the market and this is more suitable to you.
Nick (17:11): Yeah. I definitely agree. And as we close out here, I guess, do you have any, I guess closing, closing thoughts, or I guess reassurances that, you know, we're not convinced that is going to go from here on out. I may drop again. That's fine, but I guess, are there any reassurances we can, you know, kind of, you know, tell the audience just kind of going forward to manage their expectations.
Chip (17:35): Yeah, I do think that it's time that you, you should, if you don't have a plan, then you should focus on the plan, focus on the elements of, that we have control over focus on your, of your portfolio, the stock bond mix, focus on the internal costs of the investments that you use focus on, any planning, opportunities that may exist. Things like Roth conversions and mortgage refinance and tax loss harvesting, and some of those other planning, things that you can control and manage. That's kind of the advice I have. Don't worry too much about the market and what's going on there. Just kind of focus on those elements that we have control over. Yep.
Nick (18:18): I think that's a great point. And so that kind of wraps up this episode of, you know, trying to time the market in answering those questions that a lot of people had or clients have, during a downturn in the market. And I think that is really important to cover. So, alright, everyone, thanks for listening. We will be back next episode to talk about rebalancing your portfolio of amid market downturns.