354. What Would I Do if the Stock Market Fell 30% Tomorrow?

A 30% stock market decline gets attention quickly. Account balances fall, headlines become more alarming, and investors may feel pressure to make an immediate change. But a market downturn does not automatically mean your long-term financial strategy needs to change. In many cases, the more important question is whether anything about your personal financial situation has changed.

In this episode of A Wiser Retirement® Podcast, we discuss how instead of reacting to the market itself, investors can focus on the elements they can control: liquidity, diversification, portfolio allocation, taxes, contributions, and their long-term financial plan.

Related Podcast Episodes: 

284. Fear, Greed, and the Markets: Mastering Emotional Investing (Part 1)

285. Fear, Greed, and the Markets: Mastering Emotional Investing (Part 2)

Related Financial Education Videos:

What is the difference between stocks, bonds, and mutual funds?

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Transcript

Investor Mistakes In Market Crashes

SPEAKER_06 0:00

The average investor doesn't lose because they picked the wrong investments. They lose because they abandoned the right investments at the wrong time. Today we're going to talk about what we would do if the stock market declined by 30%. Stay tuned.

SPEAKER_01 0:13

Welcome to a Wiser Retirement Podcast, where we cut through the noise and bring you real, honest conversations about investing, retirement, and building lasting wealth. No sales pitches, no gimmicks. Just insights to help you stop guessing and start planning your financial future.

SPEAKER_06 0:31

Welcome to a wiser retirement podcast. I'm Casey Smith. Today I'm joined by senior financial advisor Shauna Theriault. Good morning, Shauna.

SPEAKER_03 0:38

Morning.

SPEAKER_06 0:39

The stock market is up over 260% over the last 10 years, or just about 13% per year. No reputable source is calling for a market decline. But today we're going to talk about what we would do if the market was down 30%.

SPEAKER_03 0:56

Do nothing.

The 30% Drop Rule: Do Nothing

SPEAKER_03 0:57

That's it. This is the show.

SPEAKER_06 0:59

Yeah, do nothing.

SPEAKER_03 1:01

Don't panic. Don't sell. Do nothing.

SPEAKER_06 1:03

I know. You know what? When we say that, uh clients get infuriated sometimes. I'm paying you 1%. To do nothing.

SPEAKER_03 1:10

No, those are the times, but they don't know. Those are the times we work the hardest. You know, it's like because everyone's worried and we call you to tell you it's okay. Here's the plan.

SPEAKER_06 1:20

Here's the opposite of doing nothing, which is why people get in so much trouble. Um, Morningstar says that individual investors typically reduce their rate of return by one to one and a half percent. Panic selling. Yeah, they they they panic sell. So they don't have a financial advisor to call, they just make decisions on their own. Yeah. And typically they hurt themselves. They compounded that over your lifetime. That is that is millions of dollars. That would pay for an advisor, right? It would more than pay for an advisor, exactly. But based on decades of research uh from various sources, many individuals are going to do this.

The Panic Loop: News And Checking

SPEAKER_06 2:01

Have we got some bullet points here that I collected from all the research, right? Uh and we'll we'll dive into that a little bit more. But they're gonna check their accounts repeatedly. Yeah. Right? We know those people. Yes. They're gonna watch financial news more than usual.

SPEAKER_03 2:14

Yes. Just to see what's going on.

SPEAKER_06 2:16

Which a lot of it, CNBC, half of that stuff's entertainment. Maybe more is entertainment, honestly.

SPEAKER_03 2:21

Well, it's just like the news, right?

SPEAKER_06 2:23

Like that's yeah, but then it has all these people who who go on the news and they tell you what they're gonna do with their money and they're selling and they're gonna do this, and they're gonna invest their money over here and tell it's safer and blah, blah, blah. But you know what's funny is that that I've been doing this for 26 years. There was about a six-year period of my life where I was on the speaking circuit, right? And I actually got to know some of these people that are on CNBC at that time. They've moved to other networks since then. And you know what's funny is you go to a dinner with you do it, you do a show with these people. I wasn't on the CNBC, I don't, I don't think. Maybe at a conference that was recorded or something. But you but they're at this conference and you're on the panel with them, and then you go out to dinner afterwards and you start talking to them. They all were buying index funds, every single one of them, and they never traded a darn thing. Exactly. A lot of it is for entertainment or they were trading their family, their uh charitable trust or something or something, but they weren't their law, their retirement money was on the SP 500, which was Yeah.

SPEAKER_03 3:22

I used to work at a firm that had someone who was on there all the time and they were not doing what they said they were doing actually in their portfolio.

SPEAKER_06 3:30

Right. Because it because that they would never get that job or that opportunity to do that. Right. Because that doesn't sell ads and doesn't get viewership.

SPEAKER_03 3:38

So exactly.

SPEAKER_06 3:39

Um, they believe that this time is different, oh, this time's different.

SPEAKER_03 3:43

It's always feels different.

SPEAKER_06 3:44

Trump is trump Trump is present this time. He wasn't president last time. He's gonna screw this up, right? Or Biden's gonna screw this up.

SPEAKER_03 3:51

You know, there there was the dot-coms, there was a 9-11, there's 08 and 09, there was it always there was COVID. I was there in all those market downturns. It always feels different. Yep, like this is the end, right? It's not different, it's it's the same, but different.

SPEAKER_06 4:06

They always consider moving everything to cash, uh or half, like do half and half, yeah, right.

SPEAKER_03 4:12

Hedge.

SPEAKER_06 4:13

That's that's when we take investors and they turn themselves into gamblers at like the worst possible time.

SPEAKER_03 4:18

Right.

SPEAKER_06 4:19

Um, they're gonna delay their retirement. There's a lot of sad stories of people delaying their retirement.

SPEAKER_03 4:24

Yeah.

SPEAKER_06 4:24

And they should they shouldn't have, they shouldn't have had to have done that.

SPEAKER_03 4:27

Not when you put a plan together and you have the bucket system built up, like we're gonna talk about.

SPEAKER_06 4:31

This one, this one kills me. Um, they stopped contributing to their 401k, which is like you should increase it at that time. I remember I was still doing a dual career, but during the financial crisis in 08, I was flying airplanes for a living and I was building a wealth management firm. I was flying at night, working here in the daytime. And I remember so many pilots were like, Oh, yeah, I quit, I'll quit contributing to my 401k plan. Like, this is crazy.

SPEAKER_03 4:51

That's when you put more in.

SPEAKER_06 4:53

Oh man, man, you imagine how much money that money would have made.

SPEAKER_03 4:56

Yeah.

SPEAKER_06 4:56

I mean, the Dow was at 6,500. We're at uh Dow, what, 50,000 right now? Dow 6,500 in the bottom of the financial crisis. And these guys were some of these guys were were not contributing a penny because the market's just gonna lose it all. Crazy. If they have money to invest, they say, well, we need to wait till things settle down in the market before I invest money. They hear that a lot.

SPEAKER_03 5:20

Waiting for a dip and then the dip happens and they wait.

SPEAKER_06 5:23

You know what thing about the dip is though, is it it's all psychological because the market goes up, you know, say market goes up five percent, and then there's like a four or five percent drop. And they go, Oh, there's the dip. Okay, I gotta invest now. Well, if you would invested four months ago, yeah, you would have collected those dividend payments for that quarter. Yeah. And and now you're just investing right where the market just was. Right. I mean, yeah. I mean, typically a dip in my mind, it's not the four or five percent, it's gonna have to even the last 10% pullback was only getting you back to the beginning of the calendar year.

SPEAKER_03 5:59

Well, if the market is up 260% over the last 10 years and it dips 30%.

SPEAKER_06 6:04

Yeah.

SPEAKER_03 6:05

Well, it's not really like you're not really giving up all your gains if you would have just started investing years ago, right? Right. I mean, it's maybe a little dip, but yeah, you know, so if you've been in it, if you're in it for the long game, that's not 30% is not that huge. I mean, it is, it feels we feel it, we see it on our balance sheet. We see if you're getting closer to retirement, you feel well, maybe we should delay retiring, or people cut back, and you know, but if if you're strategically uh consistently investing and strategically have it planned out where you when you're retiring and what your allocation is, you can still do that, you know. It's just wild.

SPEAKER_06 6:42

And a lot of times it's people selling after the market has already sold off. They're like, I can't take this anymore, I'm out. Right. Uh and we're laughing at kind of about this and maybe poking a little fun right now. But the reality is this, it's human nature.

Market Timing Horror Stories

SPEAKER_06 6:59

Even I have those thoughts. The difference is I'm surrounded by professionals, and even during the financial crisis, during 2022 sell-off, during COVID sell-off, even I was like, I don't know, maybe we take like 10%, start moving to cash in case this thing gets really, really bad. And I surround myself with people that are also very smart, and that's when we have a committee, and the committee says, No, what's wrong with you? It's like, I don't know, I'm just saying.

SPEAKER_03 7:24

Well, I mean, I I do it's human nature. I feel like I have the benefit though. I've I started in the industry in what 1997. So I have been through all these cycles. So it's easy for people to sit across the table for me and say, Well, you've never retired. And I'm like, no, but now, you know, that this long into my career, I've walked beside so many that have, and I've seen the decisions they've made and the repercussions of it. And I tell you, during 08 and 09, I watched someone turn $7 million into $3 million by three phone calls. It was awful. It's like you have to do what the client wants. It's like the market fell really, really hard and couldn't stomach it anymore. He's like, get me out, don't do it. You know, the advice was don't do it. But we do what the client says ultimately.

SPEAKER_05 8:05

Right.

SPEAKER_03 8:05

It's their money sold at the bottom. So what did the market do? It spikes like it always does. And you can't recover from that. Watched it go up, called back and said, Get me back in. I can't do this anymore. Got back in, close the top, it fell again during that time period, literally then sold again. Wow. Three phone calls turned seven million dollars into three million dollars. And you can't recover from that.

SPEAKER_06 8:30

You can't recover from that.

SPEAKER_03 8:31

Even though it's like I'm I'm very fortunate time period.

SPEAKER_06 8:33

I had one client that was also a close friend and neighbor, and he he was he he he he wanted to to do that. And I told him he could drive up here and he could hit the inner button himself. But I wasn't responsible.

SPEAKER_04 8:46

Yeah, you can say that to a friend, but not to a client.

SPEAKER_03 8:48

Like if they say you have to do it, like you know, and it's just like it's just like write the letter, like we don't advise this, and you know, but it's still it's like it's just awful to know.

SPEAKER_06 8:58

And uh, and the fact that you probably worked so hard to help get that money to seven million, yeah, and then to watch it just disappear. But those are all I mean, banks were shutting down and it was a scary out of all of them.

SPEAKER_03 9:09

That was the you know, it was only four and a half years that it took to recover, but it was that was the scariest one out of all the downturns. I was the dot-coms, I was, you know, during 9-11, COVID. Right. The the financial that was scary. People were losing their houses, people were losing their jobs, they couldn't find a job. Yeah, um, you know, it was everything was down, including bonds. That I think financially, you know, that was the scariest time period, probably that I've seen in the markets, and we still did okay.

SPEAKER_06 9:38

You know, it's it was sad about that rebound and others, but especially that one because it was a longer period. Yeah, was that people said, I'm gonna reinvest my money when there's more certainty. And the more certainty part was when the market was back near all-time highs, and that's when they come back with their money. And I met also met a lot of people who had um a million dollars that used to have two million dollars, and they cut literally cut their assets in half, self-trading. Uh, and then they they come in and they you see these old statements. You're like, did you spend this? Like, oh no, the market it was the stock market, and I'm like, but it should have recovered by now. And yes, you're you they're like, Oh no, we went to cash for a while, then we reinvested later. And it's like well, that's the problem.

SPEAKER_03 10:19

You have to be right twice, you have to know when to get out and when to get back in. And that's that is total gambling. Yeah, it's that's you can't do that. So that's why it's like having a plan and a strategic plan and being diversified. Uh I mean, that's yeah.

SPEAKER_06 10:34

Morningstar did a study um uh basically 150 years worth of market history goes back pretty far. Uh a few notables there uh where markets experience deep declines regularly. And we've seen that in the 26 years of been doing this. There's gonna be periods. If you're 30 something years old, you're most likely gonna see a 30% decline at some point in your life. Oh, absolutely. If if you're much older than that, you've already seen it, probably won't see another one, uh, statistically speaking. But nobody can reliably predict bottoms in the markets. Um markets can be very emotional in the short term, and so you is it's it's it's just very hard to time that, if not impossible. Um long-term investors, however, have historically been rewarded. If you look someone, uh look at someone's had a fairly passive portfolio over um a 10 10 plus year period. The worst case scenario is kind of a flat period.

SPEAKER_03 11:30

That was during and passive, you mean index.

SPEAKER_06 11:32

Yeah, index, index like funds, not active, not active managers, right? Right. They the 10-year period has been flat. There was a flat decade uh between 9-11 and the financial crisis and Enron and all that mess, right? But outside of that, uh typically you're looking at, I think a worst case scenario is like a 5% rate of return, historically speaking. Um and now obviously more recently we've seen a 13% rate of return over the last or 13 and a half, I think actually is the number over the last um 10 years. Now it doesn't mean any of this is gonna change going or any of this is continue happening going forward. There's no guarantee of that. Uh, but obviously, history is telling us that time heals. Right. Um, but you know, panic selling uh in that report, Morningstar report, panic selling is one of the biggest mistakes investors make. There's also uh Daniel Kahnman and Amos uh Triv Tversky. They have um that's an economist and a behavioral uh behavioral psychologist that uh got together and did a lot of research. And basically in their study, uh making $100,000 feels really good to investors. Losing $100,000 feels really, really bad. That's kind of saying the obvious, right? Yeah, but that causes people to um sell to stop emotional pain. So they're having people are having emotional pain if they're watching their dollars decline.

SPEAKER_03 12:59

Well, they feel like they can lock in their gains and then wait for it and then catch it back on the upswing.

SPEAKER_06 13:03

Yeah. And and and this again, that's a behavioral finance kind of topic, which we have lots of podcasts on that. But that that is a um thinking that you can beat the system that way is is is is is not accurate. Uh even if that was possible, you'd have really, really smart people that would do that. And yeah, it doesn't really happen. Um so anyway, uh that emotional pain stop uh allows you to abandon your long-term plan. So you might have this whole long-term financial plan laid out, but that emotional pain is so great that you're willing to abandon what should work over long term. Well, that's why I feel like to relieve the short-term pain.

SPEAKER_03 13:42

I feel like that's why it's so good to work as an advisor, though, especially one that has ha been through those market cycles to see what actually happens. Yeah. Because you you may be entering a period you've never retired before, you've never been in this market cycle, you're a newer investor and you haven't seen what transpires. But history doesn't always repeat itself, but you you know, it is still a good indication of what could happen.

SPEAKER_06 14:02

So they've been in their long-term plans and they moved to cash at precisely the wrong time. That's what their study, um, that's what their study came up, came up with. There's another one um by uh Barber and uh Odine, uh kind of the same situation, uh, economist and uh behavioral uh person, behavioral finance person. But individual investors often trade too much, overestimate their ability, they chase performance, they sell winners too early, and they hold losers too long. Uh and then these behaviors worsen in uh extreme market volatility. So you can look at those. Uh trading is a hazardous to your wealth, is that's a 2000 report that they did. Then boys will be boys in 2001 was another report that uh that they produced. So let's kind of shift. Like

Build Cash Buckets And Safe Liquidity

SPEAKER_06 14:53

we know we know why people do it. Is it's it's a fight or flight kind of thing, and most people are gonna choose flight.

SPEAKER_03 14:59

Um we understand Or some just get they don't know what to do and they just paralyzed or they stay in cash and they don't do anything.

SPEAKER_06 15:06

Yeah, that's true.

SPEAKER_03 15:07

We have clients that come here and like, I went to cash a long time ago, I don't know what to do with it now. Because now the market's like here.

SPEAKER_06 15:13

Yes, you missed out on 260%.

SPEAKER_03 15:15

So it's like, do I invest now? So now they're just stuck, yeah, paralyzed, really.

SPEAKER_06 15:20

First of all, before I'd say what we would do, we'll kind of put a caveat here that um there's you should always be prepared for a market downturn. And that's what financial planning does for you. It helps prepare you. So you should always have cash reserves. If you're a retiree, we call it our cash bucket. We have two years worth of withdrawals available ready. You love the cash bucket uh chart, right?

SPEAKER_03 15:44

And then we also have fixed income bucket that like between those two buckets, we have like, you know, eight years liquidity or just something to help with the downturn. Yeah.

SPEAKER_06 15:52

But if you're still working, then this is your emergency reserves.

SPEAKER_03 15:56

Right.

SPEAKER_06 15:56

So so the the important part is that you don't have to access that portfolio if something happened to you. If you lost your job, um market's really volatile for some reason you feel like you gotta you gotta access that money and pull it back out somehow. Most people can't do that because of retirement accounts, they just go to cash. Right. But but the that you you should have your cash reserves set. Um second thing is that I would say you need to have a low debt to income, meaning that if you had a job loss and it streamed down market like we happened in in uh oh eight, yeah, you gotta make sure that your debt your debt service payments are low enough and your cash reserves are high enough that you can go six months to a year without having to tap into that tap into any any emergency uh or any portfolios. Yeah, even your brokerage account, right? Your brokerage account is not emergency reserve account.

SPEAKER_05 16:48

Yeah.

SPEAKER_06 16:48

Brokerage account, unless there's cash in there. Um, it it it has to be separate from all that. And then next part is portfolio construction. So if you're in a 60% stock, 40% bond portfolio, you're not losing 30% because 40% of your portfolio is probably up in a normal environment. In the financial crisis, it would have been down for a little while because it was a credit crisis. It started in the bond market and spread to the stock market. Uh, 2022 was a massive sell-off in bonds because of rapidly rising interest rates. Because in 21, we got inflation all wrong. The Fed did. Uh, so they had to make up for that, which created a down stock market and a down bond market. That's a very, very rare that you get both of those. So, but theoretically, 40% of your portfolio would be up uh while the 60% is misbehaving. Or level. Or or yeah, or level at least, right? Um and and you can shift that, right? You you can you can hedge that uh the best hedge, uh, in my opinion, is short-term US treasuries uh to a volatile stock market. So if you can't take on a hundred percent risk of the stock market, just keep adding treasuries to the point where you can handle that volatility, and that and that's what uh Andrew and our investment committee here does. We build out models that that make sense for individual families, right? So so that that's how you prepare for a market downturn. So if you're if you have prepared properly, then the next part is executing like a list of things, yeah, right. Um so a couple of things. One, uh revisit your financial plan. If the market's down 30%, you're revisiting your financial plan. You are not uh following the headlines. The headlines will lead you astray, make you scared. Uh that that's a um uh that that's a time period that that uh you should be questioning things. Am I on the right path? Um there are probably some questions you should ask yourself. Um has your need for money changed? So you still have your job, market's down, how's this affecting me? Well, in fact, you don't like the fact that your portfolio is down and the statements are down and do you still have a job? Are you paying your bills or did they call your mortgage? Has that ever happened? I don't think it has.

SPEAKER_03 19:03

No, not that I've ever heard.

SPEAKER_06 19:05

Not for your primary home, anyway. Um, has your time horizon changed? Do you need to retire tomorrow instead of 20 years from now? That might shift things a little bit. Um, this is this is funny. Uh, has my ability to tolerate risk changed? Oh, that's a good one. They do change over time, but I think it's hilarious how people are so gung-ho in in when the market's high. Oh, I can take on full risk. Yes. And when as soon as it flips, yes, they they go back to I'm pretty conservative. I'm not sure why I was ever in this portfolio that was so aggressive. You're like, you're that's why I've completely removed the risk Thomas questionnaire.

SPEAKER_03 19:45

Yes, from our firm. You don't know, you don't know until you go through a downturn with a client. So you I mean, really, you you don't know. That's why we have to look at what are the actual liquidity needs, but then what makes them feel comfortable on top of that? You know, it's like that's the base. Like if you have withdrawal needs, we need this set aside. Right. And we need a cushion, but also what makes you sleep at night? You know, how did you back to no eight and oh nine? How did you feel?

SPEAKER_06 20:10

So so my thing is look at what the the what what kind of portfolio do you need to build to hit the lifestyle that you were looking for?

SPEAKER_04 20:18

Right.

SPEAKER_06 20:19

And then I want to know that the probability of you having to change that lifestyle before age 95 to 100 is basically zero percent.

SPEAKER_04 20:29

Yeah.

SPEAKER_06 20:30

So your kids would inherit less money theoretically, but you're not to you know you don't have to change your lifestyle.

SPEAKER_05 20:36

Right.

SPEAKER_06 20:36

That that's all you really should focus on. Right. And and then build up your reserves to where you have these anywhere from two to eight years worth of this is I'm talking about retirees. Right. But two to eight years worth of savings, and probably closer to eight to ten because no one's gonna have a hundred percent stock who's retired right now. No. So um prepare for that, right? Just you know, but that's typically in the past when when a client says, I want to go to cash as an adult, I kind of go down the list of like, oh no, yeah, my my risk tolerance has changed. I don't like this. And you just you're like, Really? Yeah, really. Yeah.

SPEAKER_03 21:17

I mean, I've had some clients that had a lot of stock. If you look at their age, you know, be like, why are they so much in stock? But I've had some clients that have pensions that are equal to what they made while they worked, and now they have social security on top of that. So and they're still, you know, saving in retirement. So their income covers their expenses.

SPEAKER_05 21:33

Right.

SPEAKER_03 21:33

So sometimes they do have 90% in stocks, but you would look at them and go, Oh my goodness, they're 80 years old. Now, this makes them feel comfortable, though. It's a very rare situation where your income covers your expenses in retirement and then they're saving for the next generation. But that's that's a rare situation. And it just depends on how they feel about 08 and 09 and things like that, you know.

SPEAKER_06 21:53

I mean, during COVID, or there was one client that called in every week, and it's like, he's like, I need to get a cash. And it's all there is. Why he should be going to cash. And then after the third week, I told him, I said, I'm I'm running out of things to tell you.

SPEAKER_04 22:08

Yeah.

SPEAKER_06 22:08

And he literally, I was just being honest with him. That's what he pays me to be, he pays me to be honest.

SPEAKER_04 22:12

Right.

SPEAKER_06 22:12

I said, I'm running out of things to tell you. I don't think this is a good idea. He's like, Well, tell me what you told me last week. And so I told him I told him last week. He goes, Okay, well, I'm gonna call you next Friday and you tell me the same thing. And you tell me that, and then we'll eventually be out of this. And that's the day I realized, I was like, Oh.

unknown 22:30

Yeah.

SPEAKER_06 22:30

They just need reassurance. People just need reassurance. This is the plan, this is why. And they're not gonna get it from their spouse or or anybody at home. So call the person that they're paying to watch over their financial life, and I want to hear it from you that I'm gonna be okay. I had 100% confidence he's gonna be okay.

SPEAKER_05 22:46

Yeah.

SPEAKER_06 22:46

Uh in fact, I would during uh the COVID sell-off, I was impressed with all of our education that we had done. How many people were like, how do we get more money in the market? This is an opportunity.

SPEAKER_05 22:56

It is.

SPEAKER_06 22:57

Even working people were like, like, how can I get more money in the market? It's like, do you have any extra cash flow? No. Okay, we can front load your 401k, put like 50% into your 401k uh for the first part of the year, you know. Um there's only one family out of 400 or something families, there's only one family that that uh was freaking out. There everyone else was was cautious, but didn't make any changes, right? Sure. Except for the, you know, a lot of phone calls.

SPEAKER_03 23:21

Well, I mean, that's what the plan and and we tell them when we're building the plan because it's going to happen. The market is gonna go down at some point. We can't tell you when, but this is why we build it this way. But I'm gonna remind you when this happens that this is what we've built and how, you know, we stress test the plan too. What if we have another 08 and 09? What does that look like? And you want to make sure that your probability of success is successful even during those times, long term.

SPEAKER_02 23:46

Right.

SPEAKER_03 23:47

Long term through a downturn and a recovery.

SPEAKER_02 23:50

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SPEAKER_06 24:10

So assuming that you have a plan on file here or somewhere, and that it that plan includes how much cat emergency cash you should have. Yeah, you have the right portfolio for your situation, then really it just starts down with uh a whole checklist of things. So here we are.

Rebalancing And Tax Moves In Downturns

SPEAKER_06 24:33

Market's down 30%. What are we doing with our money, Shauna?

SPEAKER_03 24:35

Well, there's a lot of opportunities when you do that. We can do tax loss harvesting, taking losses in taxable accounts, um, rebalancing the portfolio, making small shifts maybe a little bit too stocks to take advantage of the downturn in the market.

SPEAKER_06 24:49

So let's stop there. Rebalancing your portfolio.

SPEAKER_03 24:51

Yep.

SPEAKER_06 24:52

Right. So this is something that said we're gonna rebalance the portfolio if the market goes down. Uh during 2022, we had a slight group of clients who do not understand what that meant. I was a little shocked. So let's talk about that. Rebalancing does not mean you're changing the portfolio to a different risk category. Right. They thought rebalancing meant, oh, I'm 6040. Now I'm gonna go way down to 30% stock. No, no. Rebalancing means if you're 6040 portfolio after a sharp decline, it's probably flipped. Your your stocks are now 40% of the portfolio and your bonds are are are now 60.

SPEAKER_03 25:31

Yes.

SPEAKER_06 25:31

So what you would do is you're gonna sell those bonds and you're gonna buy stock back to the point where it goes back to 6040. So what you just did is you bought low. Right? What did all the old timers tell us? Buy low. So you're forcing yourself to buy low. Yeah. In that scenario. Yeah. Now let's flip it. Let's say the market is up 260% over 10 years. Right.

SPEAKER_03 25:57

We would have trimmed before that.

SPEAKER_06 26:03

Yeah, correct. But let's say the market the market goes up 30 by 30 percent theoretically or greater. Um, you're gonna have you're gonna have the opposite problem. You're gonna have uh uh stocks well way higher than the biggest. Yeah, and so you would take those gains in stock, you would then go buy bonds back. So you're selling your stock high and you're buying bonds probably at a lower price, most likely.

SPEAKER_03 26:25

Right. But even if you're not, you're still locking in your gains.

SPEAKER_06 26:28

By low, so high. That's what that looks like. That's not what that's not what those Morningstar and Vanguard and and Common and all those other guys, that's not what they're telling us was happening. What they're telling us is happening is the opposite. People are doing the opposite in downturn.

SPEAKER_03 26:40

Right. Now, I will caveat the whole rebalance of the fix to the growth if it goes down. You still have to make sure that you have enough liquidity. And so be careful with that. You may not do a full shift if you're in retirement and withdrawing and things like that. But um, it just depends on you know how much you actually need in reserves versus just how much you have aside for safety or for helping with declines.

SPEAKER_06 27:04

So again, that's buy low, sell high. That's how you do that. It's called rebalancing your portfolio. You're taking taking the opportunity to buy stock at a lower price.

SPEAKER_05 27:12

Right.

SPEAKER_06 27:13

Or bonds on the on the flip side of that. Now you said um uh earlier you said uh tax harvesting. So that would be inside taxable accounts, taxable accounts or brokerage account. So that's where you probably rebalancing at the same time if you're looking at funds. Yes. Um, individual securities, a little bit different strategy there, but but similar. Yeah. Um, so that's where you're taking losses. Now you can write off how much in losses each year.

SPEAKER_03 27:40

Well, you can write off up to your gains plus 3,000 against ordinary income.

SPEAKER_06 27:44

So if you had no capital gains on the books for that year, you had nothing but losses because everything's down 30%. And let's say you you can create a $30,000 taxable loss.

SPEAKER_03 27:56

Exactly. So then you would use $3,000 against your ordinary income, meaning like your, you know, work income, you know, your W-2 income, your dividends, et cetera. So you would only use $3,000, but then you would carry forward $27,000 in losses for future years.

SPEAKER_06 28:13

For future gains or 3,000 years. Or 3,000. Right. Exactly. So tax loss harvesting is very powerful because that's real money.

SPEAKER_03 28:21

That's like 15% to 20% plus the you know, state tax potentially that you're saving each year against those.

SPEAKER_06 28:28

Let's go, let's go back in time for a minute. I don't talk about the firm's past very much, but I actually I actually bought this firm in 2007. Prior to 2007, I had my own company that I operated under. But I bought the firm for a guy from a guy named Mr. Weiser. Mr. Weiser was a stock jockey. He was trained through Merrill Lynch, he owned individual stocks, he didn't understand ETFs. And I would look and he did a lot of option trading. And when I started looking at portfolios, I was like, okay, well, he made a lot of money for these people, but then I looked at their tax returns and the net the total between tax and portfolio, the net was less than the SP 500. Well, technically he had he had better gains than the SP on the on the paper from the brokerage company, right? But not after the taxes were paid. And so I went to all the families. There weren't that many back then, but I went to all the families and I said, I want to move you to these new things called ETFs. Yeah. We're not gonna have to pay $20,000 in quarterly estimated taxes anymore because your tax bill is gonna come way down. Yeah. And we're just going to we're just gonna invest long term and focus on that versus picking individual securities. And I I had one family that was like, no, I'm here for the individual stock picking. Um so 99% of the families were like, okay, sounds great, let's do it. And so we divested of all the stocks. We bought these things called ETFs and we haven't looked back. And and uh, you know, there was an it was an older client base and uh very, very, very sweet people. Um, I I wish I wish I had a podcast back then. I think I would have would interview each one of them just to tell their story. Uh just so such cool stories, but most of them passed away in between 20 and 22. Um and some of the fan couples uh within a month of each other, they're just these solid families, husbands and wives that loved each other so much. And then one, I think the second one died of a heart, heart, um, heartbreak. I mean it was crazy. It was crazy. But um sad. Such sweet families to work for. But um the the point of all that was you know you have to look at your total return. I think we have so many people out there that are at firms that are like, look what we did in for your investment strategy, and they're not paying any attention to the tax side. And in the end, they're actually they're actually losing or not making as much as they think they're making because no one's doing tax lost harvesting, no one's looking at tax implications of anything, right? No one's doing even doing direct indexing. Like right now, for large accounts, we wouldn't even buy the SP founder, we just create it ourselves in-house, right?

SPEAKER_03 31:09

Then we would do individual stocks, but it's not stock picking. It's not stock picking, following an index. We're just being more tax efficient to be able to tax less harvest.

SPEAKER_06 31:17

You're getting and and imagine how much money uh direct indexing and tax credits create for people and a 30% downturn. Yeah, that'd be that'd be huge. The downturn would would kind of stink, but you'd have so much capital gains credit. You're you're probably living tax-free for a while.

SPEAKER_03 31:32

Well, yeah, because that's what happens if you think about it. So if you if you we you know, during 08 and 09, we uh we harvested tons of losses, right? And so you're you're using 3,000 a year, but then what did the market do? It spiked. And so what do we do when the market spikes? We trim it back to fill in our bucket, our fixed income bucket. So when it goes to 70, 30, like we were talking about. Right. So then we trim it back to 60 where it should be.

SPEAKER_06 31:53

Or you sell a second home or a third home and you have capital, massive capital gains from that. Yeah, you have credit sitting there to offset those capital gains. So it yeah, it it's so many firms are not considering the tax side of all this, but that's something that you can take advantage of. That's what we did during uh 2022. Uh is that yeah, 2022. No, during in COVID, uh the that was a big drop. But we even just even if you don't have the resources to have a direct indexing, which typically you're gonna have a burge account near a million dollars for that. Yeah. Um, but let's say you don't have the resources for that, even just selling like the SP 500 and buying the Vanguard large cap growth fund. Um sorry, not large cap growth, just Vanguard's large cap fund. Um that that's enough of a difference that you're not you don't get the wash sale rule.

SPEAKER_03 32:37

Right.

SPEAKER_06 32:38

Uh, and then you can ride, you're still fully invested, you just ride that back up, and now you're sitting on this huge tax credit.

SPEAKER_03 32:44

Right. Right. Exactly.

SPEAKER_06 32:45

So anyway, um, okay, so I would say continue investing.

SPEAKER_03 32:50

Continue, yes, continue investing.

SPEAKER_06 32:54

But it's not, it's not the the human nature of fight and flights is oh, I'm not gonna put any more money in right now. Uh if you're working, unless you just change your 401k allocation to cash, you're still putting money in the market.

SPEAKER_03 33:05

Yeah.

SPEAKER_06 33:05

Right when you get it. As soon as you're as soon as it hits the pay, the uh payroll company hits hits it to the 401k custodian, it gets invested written in whatever model you've selected. Yeah. So don't change your model to cash.

SPEAKER_03 33:16

Well, especially if you get a match. Now, obviously, the airlines, they just have contributions right now from the company either way. But if you're getting a match, then that's a hundred percent return sometimes before you even invest it. So if you just stop investing, right, you're really hurting yourself because you're not getting your full compensation even.

SPEAKER_06 33:31

Keep keep the money going in there.

SPEAKER_03 33:33

Absolutely. Invest more if you can.

SPEAKER_06 33:35

Maintain your cash reserve. That's really important. Uh, if the market was down 30%, I would I would probably uh make sure that I wasn't dipping into my reserves for frivolous reasons.

SPEAKER_03 33:47

Right. Right. Absolutely.

SPEAKER_06 33:49

Uh evaluate Roth conversion opportunities. Tell me about this. Why would I want to convert an IRA to a Roth when the market's down 30%?

SPEAKER_03 33:56

Well, you get more shares in for less money. So if you have an account that dropped from, you know, 30,000 to 10,000, that's a huge decline. But if you did that and you converted 10,000 and then to the Roth, you're only paying tax on that 10,000 and then it bumps back up to 30. Well, you just had tax-free gain.

SPEAKER_01 34:15

Yep.

SPEAKER_03 34:15

So instead of converting 30,000 and paying ordinary income on that full amount, if the market declines, then you do a conversion. You're getting more shares in there for less tax money. And then when it rebounds, the growth in there is tax free.

SPEAKER_06 34:30

Yep.

SPEAKER_03 34:31

So you know, and it's sometimes it's hard to time that, but it we're not getting out of equities. You can actually just convert equities there.

SPEAKER_06 34:39

Right.

SPEAKER_03 34:40

Um, so you don't have to sell and get out and go back in.

Why You Cannot Time Recoveries

SPEAKER_06 34:44

Um, avoid trying to time the recovery. That's uh really important note. So if you if you get out, how do you get back in? You don't, you just put it back in. You say, Oh man, I shouldn't have done that. Put the money back in.

SPEAKER_03 34:57

Right, because they could have bounced back 10%, 15%, all those spikes. The market is up. If you look at it historically, the market is up most of the time.

SPEAKER_05 35:09

Yeah.

SPEAKER_03 35:09

Most of the time. So I mean, if you if you miss those upsides, you can never recover from that. You cannot recover from that.

SPEAKER_06 35:16

Andrew sent me a chart. I put reposted on LinkedIn. It's probably been a while. Most of the market movement is not during the daytime. It's at nighttime when you can't trade it. Not right now. So meaning that the market on a Monday can open at 50,000. At the end of the day, it might be at uh you know 50,500. But then the next morning, something happened overnight, right, and it opens at 45,000. There is nothing you can do right between 4 p.m. Yeah and 9 a.m. the next morning.

SPEAKER_03 35:54

Yeah.

SPEAKER_06 35:55

Now there's there's aftermarket trading, but not everything's on there. It's not, it's not you're gonna pay it, you're gonna pay a premium to trade, um, especially in with ETS. So let's say let's flip it. Let's say now now then you sell and then the next day the market opened back up at 50,000.

SPEAKER_03 36:14

Yeah.

SPEAKER_06 36:15

There's nothing you can do about it. You're off by 50, five, five thousand.

SPEAKER_03 36:18

That will just make you crazy anyway. Because you're just gonna sit in there panicking, like, what do I do?

SPEAKER_06 36:22

Historically, the market has moved more after hours than it has during uh during market hour trading. So it's a it's a losing game. Yeah.

SPEAKER_03 36:35

Um some people get lucky, but it's very rare.

SPEAKER_06 36:38

Very rare. It is. And whenever you talk to them, they're always like, Oh, it was a hunch. I just had a hunch. I just knew it was gonna be down. It's got like I was standing at the slot machine, I just knew this one was gonna be just knew this one was gonna hit.

SPEAKER_03 36:49

Well, that's when it really does become gambling. It's it's dangerous, you know.

SPEAKER_06 36:53

So remember what's happened before. Since World War II, the US stock market has experienced numerous bear markets of 20% or more. Yeah, yet it has gone on to reach all-time highs repeatedly. So while they're obviously past performance doesn't guarantee future results, market declines have historic historically been part of the normal long-term investing strategy.

SPEAKER_03 37:16

Right.

SPEAKER_06 37:18

We know that the market's gonna be down. It sucks when it happens. It does. I have a friend of mine, he says that market will never be majorly down before because during the financial crisis, they all learned how to pump so much money into the system it'll come rearing back. And you still kind of laugh at them. And then COVID happened. I was like, holy crap, we pumped so much money in the system that we had double digit gain by the end of the year.

unknown 37:40

Right.

SPEAKER_06 37:40

2022 is kind of a little bit of an anomaly, I guess. Uh, different people in charge of the system that were got behind the curve, but we recovered by March of 23, if I remember correctly. So, so again, it's it's um this volatility is just part of normal investing. It is. You just have to separate your daily life. You should you should be able to buy milk, eggs, and bacon.

SPEAKER_03 38:04

That's not healthy.

SPEAKER_06 38:05

Regard regardless, regardless of what your portfolio is doing, right? You gotta separate everyday living from your long-term money, right?

SPEAKER_03 38:13

Yes. Absolutely. No, I've been doing this for 29 years, and I can tell you, you know, if if you stay the course and you have a plan and you follow what that plan is and you stay the course, you're fine. You know, you spend within your means, you save like you're supposed to, you're diversified, you know, you don't make knee gut reactions, you know, you and it's never too late to start either, you know, because obviously it's like, well, if I didn't start way back then, yes, but uh, you know, especially if you're behind on starting, don't be playing games with it, you know?

SPEAKER_06 38:48

Yeah, and then I hear retirees often say, Well, I don't have you you invest for the long term, but I don't have a long term. I'm I'm 65 years, 75 years old. Right.

SPEAKER_03 38:57

I don't have time to recover.

SPEAKER_06 38:59

People are living in their 80s now. You do have a long time.

SPEAKER_03 39:01

But it's like even if even if you're in your 70s, it's like, well, I don't have time to recover from a down market, but hopefully your portfolio is large enough that you have enough sustainability to age 95, that you have enough set aside and fixed income and you know, cash for your withdrawals. So it's really, you know, some clients have enough liquidity to last the rest of their life and they never have to sell a stock and they're still worried about the market. It's like, you know, I have one client who is 50% stocks, 50% fixed income. And and if she never sold another stock, she could just live off the fixed income. But if the market goes down, she gets worried, you know, because it's just her. And I understand that and I love her. And I'm like, you know, just keep telling her the same thing. We're not doing anything. You could, even if I if even if this goes to zero, which is not going to, you'll still be okay. You won't, I mean, you won't like that. But I mean, really, at that point, you're really saving for the next generation, right? So they have to time to recover from this. You have enough to live off of, even if this thing does go down 30%.

SPEAKER_06 40:02

For Tyrese, you said it cash for near-term spending needs, high quality bonds for intermediate needs, and then stocks for long-term growth to help offset inflation. Yeah, she didn't have the stock in her portfolio. Um, she might struggle to pay for things 10, 15 years from now.

SPEAKER_03 40:17

Exactly. Because the inflation is just, you know, fixed income doesn't keep up with the inflation or it's right at it.

SPEAKER_06 40:24

So I

Retiree Mindset: Separate Life From Markets

SPEAKER_06 40:25

I think the mindset here that we need to have, and the takeaway is don't make long-term decisions based on short-term emotions. Be very, very careful that you're not using uh your emotions to make money decisions. That's people end up with cars they can't afford, that's how they end up with trips they can't afford, credit card debt, everything else. But the same thing applies to um to the portfolio side. I think the greatest mistake uh or the greatest risk during a market decline is often not the decline itself, but it's just abandoning your well-designed investment plan.

SPEAKER_03 41:00

That's the reaction.

SPEAKER_06 41:01

Because of fear.

SPEAKER_03 41:02

Yeah.

SPEAKER_06 41:02

Um so yeah, you don't want to turn a temporary paper loss into a permanent loss. And I I will say, I will credit all the very very smart people here. There's about what almost 18 of us now, I think, uh, that that are um a part of the wiser team that since uh the last decade of this firm, I I we don't really have a situation where our family was was doing it did that.

SPEAKER_03 41:29

No.

SPEAKER_06 41:29

And it's great, it's a great feeling because that is like during the during the um the COVID whole the COVID stuff, you know, I put everyone in a room and I was like, guys, this is our Super Bowl. Like this is this is when we get paid when we get paid. Take care of your families, make sure they're okay. It's always family first here. But I said, this is when we step up. We're gonna overcommunicate. Yes. We're we're we're gonna always be available 24-7 for phone calls. Like, this is our Super Bowl. Right. And we executed very, very well. And now since 2020, we have doubled the size of this firm. Actually, more than double, or probably near tripling the size of the firm. We are, we are, yes. Good. Uh it's a headache all of a sudden. That's true. Um, and so I I feel like that with our we we have to keep talking like this with even our new our new families to make sure that for the next crisis that we're prepared. Yeah. That's what our job is educate and and make sure that people are.

SPEAKER_03 42:24

So we're not doing nothing, I promise. During those times, we work the hardest because we want to be in front of all of them and make sure they're okay, remind them of their plan. But also those strategic moves, rebalancing, tax loss, harvesting, Roth conversions, everyone's situation's different. So we don't just cookie cutter across the board. Sure. That's when, you know, we are doing something. I assure you, we're making sure we're staying in front of you. We're looking at what strategic moves we could make for you potentially, even if it's just stay the course and remind you that your plan that we built carefully, that we reviewed with you when everything was okay. We looked at those downturns and we stress tested those. And so this is where the rubber meets the road and we show you this is how it works. And I understand, you know, for newer individuals that are just retiring, they haven't been through a downturn yet. So sometimes, and I hate it, you know, sometimes when we go through those little blips, because most of them are little blips, you know, they will see how it operates, where it's like, okay, the stocks are down. We're not selling these. We're living off this, we're living off the cash and the fixed income. If we need to dip in there, and then once it rebounds, we fill it back in, but we're making moves during that. Once they actually see how that operates, I think it brings them a level of peace. Because that's what helps me sleep at night is the way that we've built the plans in the portfolio. So even during downturns, I'm not panicking. And I realize, you know, people say, well, it's not your money, you're not the one retiring, but I'm the one that's responsible for your money. And that's a huge, I don't take that lightly, you know.

SPEAKER_06 43:53

And our company revenue is tied to these portfolios. So when you have massive moves in the market, that that affects. Our bottom line. It does. And as a business owner, you know, I'm like, oh wow, you know, we if maybe everyone should be conservative now to make sure the firm's okay. You know, I'm just kidding. I never I never think that way. Yeah.

SPEAKER_03 44:11

Um but but we build the portfellos what's right for the client, which makes them overall somewhat conservative here too, you know. Um, but it also, you know, during all-time highs, it doesn't go up as far either if you have someone fixed income. But that's what's that's what discipline is. We have the the cash bucket and the fixed income. So we're always sitting on the same side of the table as the client.

SPEAKER_06 44:34

Yeah. No, that's a good feeling. That's how we design this place. Um all right. Well, I think maybe this is a podcast episode we come back to someday if we are in a period of massive decline. Uh, I think this is a good episode for people who think uh decline is right around the corner. Uh it's all sometimes it's political and sometimes it's just people are like, I have a feeling the market's gonna decline. We need to go to cash. And and you're just like, How do you know this? Because it can't keep going up all the time. Yeah, I literally had a client tell me one time that they are no longer a client. We were not a good fit for them. But you know what they said, you know what their source was? The view. Oh I was like, are you kidding me? Like, the view, really? The view. You get your stock market information from the view.

SPEAKER_03 45:22

Okay.

SPEAKER_06 45:23

Interesting. All right. I think that's entertainment. That is definitely not even market news uh on on the view. That's crazy. But anyway, um, thanks for listening to today's episode. If

Next Steps, Website, And Reviews

SPEAKER_06 45:33

you want to learn more about wiser wealth management, you can go to our website at wiserinvestor.com. If you want to reach out to one of our fiduciary financial advisors, you can also go to that website and uh schedule an appointment online. Uh, if you're a longtime listener or maybe even a new listener to the show, please take a minute, help us uh grow our podcast. Uh, you can go to Apple Podcast and search Wiser Retirement and scroll down to the rating and reviews, tap on the stars and write one sentence about how you found this episode or past episodes helpful that helps grow our listeners inside the Apple world. Thank you so much for listening. We'll see you guys again next week.

SPEAKER_00 46:11

Thanks for listening to a Wiser Retirement Podcast. We hope you enjoyed today's episode. Make sure to subscribe wherever you're listening. That way you don't miss any new episodes. We'd also appreciate if you could leave a rating and review. If you have any questions about anything that was discussed today, head to wiserinvestor.com and reach out. This podcast is strictly for informational purposes only and is not to be considered as investment advice or solicitation to buy or sell any financial products, securities, digital assets, or any other investment vehicles, or a basis to make any financial decisions. Wiser Wealth Management Incorporated is a registered investor advisor with the SEC. The host and or guest may personally own securities, digital assets, or other investment vehicles mentioned on this podcast. Neither the host nor guests of the show are compensated for their participation, and no referral fees are paid to or received by any host or guest for clients, listeners, or similar interests. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor, tax professional, insurance professional, andor legal professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.