We don’t know when the stock market will crash, but we do know that eventually it will go down. It may stay down for two to three years. How do you prepare?
In this video John Scherer CFP(R) and NAPFA member and I talk about John’s lifeboat drill. When you go on a cruise, one of the first activities is to talk and think through what do if you need a lifeboat. Then, if there’s an emergency, you know how to act and don’t panic.
The stock market is going to go down. We just don’t know when. We talk about how to prepare. Think in advance how you might feel and what you’re going to so that you feel comfortable making the best decisions. Recognize that your reptile brain may influence your reaction but doesn’t need to rule your actions.
John Scherer: Have you thought about how to prepare yourself for the next market downturn? We’re going to talk about that on today’s episode of Friends Talk Financial Planning. Hi, I’m John Scherer, I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget Sullivan Mermel: And I’m Bridget Sullivan Mermel, and I’ve got a fee-only financial planning practice in Chicago, Illinois. John, I really enjoy listening to you talk about how you talk to clients about what you call the lifeboat drill. You are actively talking with people about, “Okay, what do we do if we need the lifeboats?” So why don’t you talk that through?
John: Yes, sure. I relate it to being, like you’re going on a cruise ship, and as at the beginning of any journey they have a lifeboat drill where everybody goes out, you say, “Okay, get in your positions, and here’s the boat you get in if we get into trouble.” Probably nothing’s going to happen, but then we’ve got a plan in case it does.
And so I relate that to investing, just as you said, Bridget, although in investing it’s not if the market’s going to go down, it’s when it’s going to. It’s going to go down, we just don’t know when. What are we going to do when that happens? Think about it, I think the really important thing is to think about it today. Right now the market’s doing well. By the time the market goes down, it’s like trying to figure out your parachute after you’ve jumped out of the plane. Like this, you’ve got to think about that beforehand so we know what to do when we get there.
So rather than waiting until we have bad times in the market, this is the time to be thinking about, how do I feel about this? What things would I do? One of the things today I think is a great example for people is, that a year ago right, COVID came, everything shut down and the market, if you look at some of those charts, in six weeks it was down 30% or something crazy.
John: But then it bounced back again, and now we’re back at or above those levels.
It was sort of a weird thing because it was so quick. It was like a roller, really scary, and it came back up, and now we’re on even ground. And so I encourage clients, I encourage viewers to think about today, what would you be feeling like today, if the market had gone down last year 20%, 30%, and it was still down? Your portfolio was down a third from where it was at the beginning of 2020.
That’s what we had in 2007, 2008, and 2009. It was 18 months, pushing two years, maybe two and a half years, where the market went down, and it stayed down.
John: Think about how we are today. Okay, you’re feeling maybe it’s fine, maybe it’s going to come down. Who knows? But what we have today, I just read the other day that they’re still, we have eight and a half million less jobs in America today than we did a year ago.
Of course, there’s more money been spent on COVID relief bills than was spent in the whole of World War II, right, a lot of money going out the door. Maybe taxes are going to go up, we’ll see, maybe interest rates. We’ve got a lot of variability with what’s going on, and the market’s doing okay, so maybe we don’t feel quite so bad, but what if your investments were down a third?
Take a look at what that number is. Take a look at your statements, and say take a third off of that. Cut it in half, and then go a little bit higher, and say, “Okay, if all of our investments were way down from where they were a year ago, and we’ve got those other things,” boy, maybe you might have a different feel. What we sign up for as investors is not “oh my portfolio’s going to go down 25% and come right back up.” Yeah, it goes down 25%, and it might last a year, or two years, or three years, and how do you feel next time it goes down and it stays down for two years, and you still have unemployment that’s high also to think about.
Are you okay with that? Because that’s what we’re signing up for, and it helps at a minimum to think of, “Oh yeah, that’s right, that’s what we’re signing up for.” And I’m asking folks now to say, if that feels uncomfortable to you, today is the time to make a change. Not based on what we think is going to happen in the future, not based on predictions, but the idea that it is going to go down at some point. If it stays down, and that doesn’t work for me, now is the time to take action before something happens. That’s how I explain it to people.
Bridget: Right, and I think that getting emotionally prepared for it. Like, that this is what’s normal. When you get married, people don’t say it’s easy the whole time. Okay, there’s going to be some bad times. But you were talking about a particular client of yours that I thought was a very good example of thinking this through ahead of time. Why don’t you tell us what happened with that?
John: Yeah, sure. It was back in 2008 sometime, I think it was, and that was when the market had gone down, and it went down some more, and it stayed down, and it went down some more, and it was kind of a dicey time. I remember she had called in October or so and said, “Jeez, we need to talk. My portfolio is way down.” And I knew this client pretty well, they’d been around for a long time. So I said to her, I said, “Well, jeez, I didn’t realize that, is it?” She kind of stuttered and went, “Aren’t you watching this?” And I said “well, since when?” She says, “Well, at the beginning of the year my statement says this, and now it’s saying it’s down 25%.” I said, “Oh, jeez, I’m sorry. I thought we were talking about your long-term money because I looked at five years ago, you were here, and now you’re here, even after that downturn.”
She said, “Well, jeez, John, that’s not what I meant.” The reality is, listen, we think like, at the end of the year, we see our statement, and whether it’s a 401k, or other things, we feel like it works like a bank account; now I’ve got this much money, now I’ve got this much. The reality is, you know, hey, there’s fluctuations. If you look at a five-year time horizon and where was your money today versus five years ago?
Even last year, when it was down so bad, compared to five years earlier, you go, “Oh, it’s a better view on things.”
John: I just said, Bridget, it’s like I think about it, it’s like being prepared. It’s not oh, my gosh, the market goes down. What do we do now? What’s this cause?” It’s what happens in the press and the publications, but it’s like “listen, the market went down as expected. It’s going to go down about once every five years.” This is not a surprise. This is like “oh yeah, that’s what we kind of planned for.”
We know what we’re going to do when this happens, and now it’s, it’s still scary but it’s not unexpected. And that really helps us to make better decisions.
Bridget: Right, and realize that it’s a phenomenon. It’s called loss aversion. People don’t like losing money. But that can make them make poor investment decisions, just because they don’t like losing money. That’s why people buy high and sell low, which is exactly the opposite of what you’re supposed to do.
It’s because they don’t like losing money, they like losing money, you have to make twice as much to make up for losing, so you have to make $2 to make up for losing $1. You just have to realize; okay, this is my reptile brain…
John: That’s right.
Bridget: In action, it doesn’t want me to lose my food store that I’m going to be using for my reptileness, and start thinking more long-term and that the brain that is telling you to do that is not your long-term thinking brain and so you’ve got to change.
John: That’s a super way to maybe wrap up this conversation, it’s that reptilian- this is baked into our DNA, right?
John: A hundred years ago it was; there’s a danger, we need to do something or we’re going to get eaten, right? And this practice, talking about the– I call it the lifeboat drill, as you said, right? It’s what happens when this bad thing happens so that we can train our logical brain to override our instincts, our “do things”. And the reality is, no, the best thing to do is have the plan in advance and do nothing; that’s completely against human nature.
John: That’s the best way for success in the long run.
Bridget: Great. Now’s a great time to wrap it up. We always like to talk about two different things. First, please subscribe. It helps us with credibility with YouTube. And second, we both are members of ACP, or the Alliance of Comprehensive Planners at acplanners.org. It’s a group of fee-only financial planners. It’s a not-for-profit group. We all share a lot of the same values.
If you like the approach that John and I are taking, and you want to find a planner near you that takes the same approach, you can check out that website. With that, I’ll wrap it up. Thanks, John.
John: All right. Thanks, Bridget.