AAR14 - Stock Downturns w/ Passive Investing - How You Are Affected

25:21Andrew Sather:Pick up something that not only is something to put your energy into, but it's also something to grow into. And it's also to something to back you up financially. So that like you said, if you lose your job, and you don't have much of an emergency fund, or it's not enough of an emergency fund, and you have to or want to dip into your investments, having an additional income stream, even if it's small, is going to keep you going. You know, I mean, to a lot of people earning an extra few hundred a month or something isn't very much for the amount of time you might be putting into it, but that could cover your groceries for a month.

25:53Andrew Sather:And now, you know, your food is covered, and that's a need that's completely covered for you. And obviously this is all hypothetical, but that could be a great way to go about it. And like you said, living through something, seeing all this news, seeing the news about Apple coming out with a horrible iPhone or something is very different from just looking at Apple stock and seeing a dip and being like, well, I could have held through that dip. Who really cares? It's just dip. But you're also seeing everything that happened afterwards and you can't wipe that from your memory. you can't wipe from your memory that that you know a stock went up 200 percent in the next couple years after this you just you just can't you're human and so you see that downturn you're like but i know it went up in the long run but at the time it might not feel that way and the news might not be speaking about it that way but but a lot of this you know covers it covers what more active investors should maybe do day traders swing traders and how they should react to those decisions and everything let's say somebody is just you know the way that i invest in the way that i tend to advocate to invest if you're just passively investing in the overall market or an index or something like that what kind of what kind of effects will that downturn have on somebody even if they are continuing to hold continuing to invest they went and picked up tennis what kind of an effect are they still seeing on their life i would this one just kind of pops to mind

27:20Evan Raidt:because i remember dave and i talking about it too around the time of early 2020 the the whole like wanting to tinker and take advantage you have to you have to keep those emotions aside um i know some people are big into like robo advisors and things like that and if if that's how you feel more power to you. But things like target date funds where you have some stocks and some bonds and there are algorithms trading and rebalancing. I think rebalancing is another key phrase that can get thrown around a lot at that time because bonds might do better than stocks and then you want to capture that and blah, blah, blah.

28:04Evan Raidt:We had talked about a story where there was one of those kind of target robo things and it basically did the exact opposite of what you wanted it to do at the time because of the way prices were moving. And if you were an investor in that over the long term, that really crippled you. And so yeah, even though you're holding this target fund that historically had done whatever, another aspect of, and I realize I'm not really answering your question, so I apologize, just a tangent again, another aspect of these downturns and corrections and bear markets is that entire markets can freeze up. Bond market, money market.

28:44Evan Raidt:And so it can do really wacky things with some of the more exotic financial instruments, some of the more exotic investments like a robo-advisor or a target date fund. And so it kind of speaks to another benefit of just holding a basic market index where they're not trying to do anything fancy like rebalance to take advantage of market swings. You're literally just holding these stocks and they're holding a basket of them for you. And so their whole function is just to sit. And maybe one way you can profit from these things is to take preventative measures beforehand and get yourself out of exotic instruments and put yourself in basic, what you might even call vanilla, boring, just great ETFs that hold baskets of stocks and get that in place before things go crazy so that you don't have these weird market things.

29:52Evan Raidt:And every downturn is different. Every market's different. There was tech in the 2000s and there was housing in 2009. so you never know what market what weird exotic financial instruments going to crash but what you can do is just understand i'm going to be a business owner i'm going to hold lots of businesses i'm going to be a participant in the economy and the way you do that in the most simplest and easiest and most easiest not to screw up way is to buy these index funds that Evan talks about every week. And doing that proactively will do what you're wanting to do. Because trying to do that, trying to sell a target day fund while things have gone crazy, it's just going to magnify the problem even worse.

30:41And so the time to simplify is not during a crisis.

30:45Evan Raidt:The time to simplify is before crisis. And if you want to be not affected, and that's hard to say, if you're listening to this in the future and you're going through a crisis, nothing you can do. It's spilled milk. It's a great lesson. You move on. But if you want to make good actions during a crisis, you got to set yourself up before the crisis. And I would really try to hammer that home. And trying to do too much during a crisis over spilled milk might just make your problems worse. Yeah, for me, that's the 100 % worst thing you could possibly do, in my opinion,

31:21Andrew Sather:especially as somebody who's trading something like an index it it has so many so many factors that go into it i mean one company has has thousands tens of thousands of factors that go into it now you have 500 companies i mean you've got a nearly infinite number of factors going into it and so trying to predict anything trying to make you know split second decisions about this especially if you're not you know a seasoned investor like last week you know i spoke to brian montes and he's a swing trader and so he has a ton of research he's poured years and years and years into being able to to read trends and as just a normal investor who's kind of passively investing in things if you think to yourself oh you know what i bet i bet i know what to do i bet i'll do this i trust me it people algorithms computers blah blah blah have have been thinking that exact thing months and months beforehand years beforehand they have been prepped for what exactly they could possibly do now they've got the list of things they could do and if things are being crossed off the the number of possibilities that they're going through is far beyond you having something pop in your head and we've all had i've had things pop in my head and said oh you know what i bet that would be a good idea to do with investing and i bet that would you know let me make it big but the reality is that's just not how it works you're not going to predict something like that at the perfect time and so from my point of view the worst thing you could do is trying to think that you know better than anybody else and trying to pull out of the market at the exact at the exact right time because like andrew mentioned a bit before all of these downturns aren't quote-unquote real money they're not realized losses or realized gains so if you put in 100 bucks now that 100 bucks is in the market and it drops to 80 you don't you don't have 80 bucks you don't even have that original 100 you have you know sort of not given your money away but you put your money elsewhere and it's fluctuating in value it's only until you pull out that money that it becomes quote-unquote realized and it becomes a real amount of money back to you so if all you get back is 80 then yeah you lost 20 bucks but if you look at your portfolio and see it at 80 but you don't sell and you wait till maybe it goes to 100 or 120 that becomes your realized gain or loss or whatever and so when you when you see something like a downturn just don't realize it don't don't turn it into a real amount of money that actually turns downwards or loses you anything and i think another thing that people don't don't think about because you know we see something like the the 2008 housing crisis as okay well that that's related to housing.

34:02Andrew Sather:So whatever's happening in the stocks doesn't matter. But they're pretty intertwined. They're not directly related or anything like that. But if you see your portfolio go down by 20%, are you going to feel like you have the financial security to go buy a house or to go sell a house or whatever, or take a financial leap in something? You're absolutely not. And that's how most people feel. And so if most people feel like the market's taking a downturn, I don't know what's happening with my finances. If they have all of these incorrect mindsets that we've been discussing where they feel like I've lost money, my money's gone, it's over, world ending, blah, blah, blah.

34:37Andrew Sather:They're not going to be like, oh, but that farmhouse is absolutely gorgeous. Let's go buy that. And so the housing market is going to struggle as well. And so if there's a market downturn happening, even if you're making all the right decisions to continue to be passive, to focus on other things while it's occurring, if you're having to take part in the housing market whatsoever, you're going to be affected as well. Then another area is also high yield savings accounts. So if you have money set aside, those rates that you earn on those high yield savings accounts are directly related to the federal funds rate, which is essentially the interest rate placed on banks by the federal government.

35:17Andrew Sather:and of course a bank isn't going to give you five percent if they're only earning four percent they're not going to lose money on it and so if the interest rate goes down because they're trying to hold back inflation or something like that then the the rate that you earn on your high savings account is going to go down as well so there's there's a ton of ways that that your finances i don't want to say will struggle but will the situation will change and you will have to adapt as you go outside of the market even if you just let it sit and then the last one is your age and how close you are to retirement.

35:49Andrew Sather:If you're five years from retirement, you see a downturn happening and you're thinking, that's my retirement, I'm supposed to be pulling out 600 a month from that to live going forwards. Right now it's taking a downturn. That has a massive effect on you. I'm in a fortunately young position that as a 26-year-old, if the market goes down 50%, within reason, I don't care. It's not going to have any effect on me anytime soon. But I know that if I was looking to retire with that money in five years, now I'm in a very scary position. And I think that's something that a lot of people don't maybe take into account, or they often take it too far into account where they think, I'm getting close to retirement, a downturn's happening, I need to turn my whole life around.

36:31Andrew Sather:I think the best thing to do would just be to assume that you might have to delay it a little bit, play it safe, build up some savings outside of the market, build up some focuses outside of the market, but continue to let the market do whatever it's going to do. And I wanted to quickly cover a few downturns that have occurred in the past just to kind of get an idea of what we're really talking about. So there was a dot-com bubble. And during this, a ton of tech companies went entirely bankrupt. Like Andrew was mentioning before, during a downturn, there's going to be some companies that just don't survive.

37:05Andrew Sather:That's a fact. And that's also just to kind of not toot my own horn or anything, but always back up that index fund investing idea for me it's a great thing because even if even if apple went bankrupt tomorrow that is not having a very large effect on my portfolio at all even if one of the largest companies is just gone but yeah many companies many tech companies went bankrupt many other companies even dropped by 50 plus percent and it took around seven years for an overall recovery so we're talking peak to peak reaching exactly back up as high as it was before so you can imagine seven years is a very long time.

37:38Andrew Sather:If you were close to retirement or something, then this could, and you were having to pull from that, this could delay your retirement for a while. And always more reason to have some money outside of the market. The market is a fantastic tool. In my opinion, it's the best tool to grow your wealth over the long term, but it is not where you should just be banking up all your savings and assuming that you're going to be able to access that whenever you want. You have to have some savings elsewhere to be able to readily access it regardless of what's happening. And we've touched on it before, the 2008 housing bubble as well.

38:12Andrew Sather:Again, this is a housing bubble, but it still had a massive effect on the stock market. So the market dropped by about 50%, and that took about four years to recover. So a short amount of time, but four years is still a long time for you to be sitting there looking at your portfolio and everything's down. Like you had said, three years later holding a stock, and you've lost money on it. That's the kind of situation this is. And that can have a huge effect on morale and how you feel about your finances, even as a passive investor. And then the last one, most recent one, COVID, of course, everything tanked like crazy, dropped by 30 % practically overnight, except that one, even though it was a worldwide pandemic, only took five months to recover back to where it was before.

38:52Andrew Sather:So you never know exactly what's going to happen. It could be short, it could be long term. and I know you've lived through many of these and you've had to weather them. Do you have any kind of last tips for how people could weather these kinds of downturns if they were to live through these?

39:08Evan Raidt:This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales. Using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks.

39:53Evan Raidt:Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required. Compatibility and availability varies 18+. Yeah, can I plug myself? 100%. Okay, give me a sec. Okay, I found it. So I had written this. It's on our blog, einvestingforbeginners.com. Go to the search bar. You can look up leather to my future self, investing in the next bear market. I'm sure if you put a few of those words in, it'll probably pop up. This is something I wrote in 2021, kind of in hindsight after all of the negativity that went down. So I told myself, dear forgetful Andrew, because I know that I have terrible memory.

40:39Evan Raidt:At least you know yourself. Well, I'm trying to learn myself more, right? We all are. I tried to look at it with hindsight and reflect on my biggest lessons. and then I showed a screenshot of my newsletter portfolio, April 1st, 2020. And then I compared it to one year later, April 1st, 2021. And you can just visually see if you didn't have a portfolio at the time, you can see my public portfolio and what that looked like. Just one year difference. And obviously the COVID pandemic was a much faster recovery. but still, I put in just kind of my different reflections and viewpoints. And it's a lengthier blog, so I'm sure whatever I wrote in there is a lot more insightful than anything else I could be on our show today.

41:33Evan Raidt:But yeah, I would check that out if it's something you're struggling with and just try to learn from. Let me go back to the bottom of it. I said, just do what you can and stick to the basics of investing. So number one, buy and hold for the long term. Number two, stay diversified. Three, continue dollar cost averaging. Four, don't try to time the market. Five, be patient. Six, let compound interest do its magic. And seven, our tagline, invest with a margin of safety, emphasis on the safety. Those were my big takeaways. And I would just say you can do it. You can do it. And if you can prepare before crisis, do that too, because you'll thank yourself later.

42:15Andrew Sather:Yeah, that is absolutely legendary bulleted list right there. But that is actually, it brings up one topic that I don't think we've really discussed yet, which is dollar cost averaging. Just to kind of cover it real quick for people who are entirely familiar with the market. When the market goes, trends downwards, and the stocks that you held before that you're continuing to buy are cheaper than they were before. Let's say you're investing in VOO and VOO drops by 10%. When you now buy that stock, you're averaging down your costs. So you think about it, you know, if you went to buy apples every single week, and then this week, the price of apples went down, the average price that you've paid for apples over that period has gone down.

42:53Andrew Sather:And what that means in the market is that if you average down the cost that you're paying, then when it recovers in the future, or even gets back to where it was before, you're now going to increase your gains significantly because the average cost that you've paid for all of those shares that you hold are lesser that is that's a huge factor as well during these downturns is if you just continue to buy and hold not only hold what you had before but continue to rebuy what you already own or new stocks of course but if you continue to buy into the market then the cost that you're paying is going to be much lower because everybody else is panicked everybody else has said the world is ending i need to take all my money out screw this I want to be out of the market and you said I I'm pretty much trust that this will recover I'll take that you know discount on everything then now when it recovers back towards before or even higher you're going to have far elevated returns and I think that's a that's a great way to turn these downturns into a positive and I definitely don't want to downplay the effect that downturns can have on people's lives on people's businesses and companies and jobs and such but as much as we can we need to focus on what we can do to turn negative, horrible situations into some kind of a positive or at least a net zero of everything.

44:10Andrew Sather:And so what kind of tips do you have for somebody who is going through a downturn and maybe wants to kind of neutralize it or even turn that downturn into a positive for themselves?

44:22Evan Raidt:Yeah, that's a great question. I mean, I don't know how much you can neutralize it to what I was saying before. Dollar cost averaging would probably be a really great way to do that. If you can, you don't have to feel like... All right, here's one. So I think Dave has talked about this multiple times on the show, so shout out to our buddy Dave. But Warren Buffett, arguably the best investor of the past five generations. This guy has been doing it forever during the 2020 COVID downturn. He was criticized for not deploying. He had billions of dollars in cash in his company that he could have bought a ton of stocks on sale.

45:09Evan Raidt:He was criticized very heavily in the financial media for not loading up the truck and buying all these great stocks at a discount. You fast forward three, four years later, he's being celebrated because his returns are again trouncing the market. So if Warren Buffett couldn't time it in a way to take advantage, you're going to try to do it. And if he still was successful, even though he didn't time it, that means we can be successful too. So to go back to your point on dollar cost averaging, the problem I have with what you said is I'm not buying apples, bro. I'll buy bags of Doritos. Let's be real.

45:49Evan Raidt:but just let's be realistic to keep the dollar cost averaging whatever you're doing now if you can maintain that treat it like a bill and even when you got to tighten up your wallet still keep the dollar cost averaging that is a major accomplishment you should be proud of that that's a good goal to set and it will do to your point having that cost basis lower will magnify your returns over the long term so if you can just do that you're going to be you're going to

46:17Andrew Sather:be solid yeah i absolutely agree with that and the one of the last things i want to say is that the panic is never going to equal returns so if you're panicking because things are changing drastically in a good way or a bad way and you think well now i need to make a snap second decision like we like i talked about before you're never going to be able to make the snap decision before everybody else does or or the snap decision that was the perfect decision for you to make. And then, you know, you might get lucky, you know, congratulations if it happens, but I guarantee you it was not because you had some, you know, grand insight to everything.

46:52Andrew Sather:So to just get through these downturns, you had to continue to buy into the market. Like you said, even if Warren Buffett isn't going to throw a ton of cash or things at a discount and think that that's the best way to go about it, then you're absolutely not either. And so just continue to continue to put money in the market, continue to maybe get some of those discounts. And even if you don't, that's okay. But just continue to ride it out and continue to build it up and let compounding do its thing and drastically elevate your returns more and more over the long run. And last couple of things, make sure to have an emergency fund and savings for short-term spending outside of the market.

47:26Andrew Sather:We've talked about emergency funds multiple times and they're invaluable for an infinite number of reasons. But during a downturn, that can be the money that you need to live off of. That it can become an emergency where you were planning to pull out of the market for one reason or another, and you no longer can without losing a ton of money. And anything you can do to prevent yourself from pulling out of the market and realizing those losses is the best thing for you. Very last thing, automate your investments for true passive investing. I talk about it a ton. I freaking love automating investments, but 100 % have it set so that when that financial news is blaring and saying horrible things about what's happening with the market you can shut it off and know that you don't have to actively make any decisions you don't even have to open up your i mean i remember when i was first starting investing and i hadn't yet automated things and there was not that drastic of a downturn but you know the market dipped a little bit and i remember opening my my robin hood app and you know it opens to your portfolio screen and i saw that my portfolio had dropped by i don't remember what percent it was it was a noticeable percent like five percent or something like that i i did not want to go over to the other screen and buy a stock right seeing the things that drop you know i mean that was before i necessarily understood you know dollar cost averaging and everything but i it doesn't make you want to buy when you see it having taken a downturn and you see that red and you see you've quote unquote lost some money but if i have it automated like i do now i never have to open that app unless i unless i want to or i need to check on something or alter something blah blah blah it just does it for me and i never have to see that and lose that morale or question something or put it off because of it or blah blah blah i'm just doing my own thing i'm just struggling to paint a room and i don't care about what you know what's happening with with the downturns and everything i i would love to see the room you're struggling to paint let's see the after i won't judge the color is not different enough for you to even be able to tell on camera that's the problem that's it's one of the problems but anyways this was a brilliant chat as always andrew i really appreciate it thank you so much for for all the valuable insight and i really appreciate all the the life experience that you've had through these downturns because that's like like like we talked about before me looking back at a chart is not going to give me a quarter of the info that you can get from actually living through it and seeing all that

49:47Evan Raidt:news and everything oh you're welcome so you're thanking me for being older yeah i'll take that That one benefit, I'll take it.

49:56Andrew Sather:That's always a plus. You got to roll with the punches. Anyways, everybody, please comment below. Email me at evan at einvestingforbeginners.com. Let me know, how have you weathered downturns before? I'm sure all or a lot of you have. Of course, you've lived through COVID. Maybe you were invested through COVID or something. How did you handle it? How did you live through it? And always, as always, check out our free budgeting spreadsheet we have available at einvestingforbeginners.com slash budget. great way to get started and finance and start balancing your budget and as always remember financial freedom is built one smart move at a time keep it simple keep it steady and at any rate i'll see you next time peace