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Don’t Panic

So we decided to mix things up a bit and do something a little different this week. We hope you will find it helpful.

We received a submission from a fellow reader who is panicked about the recent market volatility and thought since others are likely having similar concerns and feelings that it might be helpful to share our response with all of  you. In keeping the reader anonymous, much like ourselves, we have given him an alias; “Captain Awesome”.

FI Heroes!

I’ve been reading your site from the beginning and could use some advice. The market is going nuts and I’m checking my account multiple times a day! I can’t help it; CNBC is on the whole day at work. How are you not jumping out the window? I don’t know if I should be buying or selling; I feel like I’m doing both constantly! The only stock that I made money off of is my bet on WWE (World Wrestling Entertainment)! What do I do?   – Captain Awesome

 

Captain,

This is a short note but there is a lot to break down here.  With that said, here are a few suggestions based off of our experience and observations so far:

(Disclaimer: Remember, we are by no means financial / investment professionals so please do what feels best for you and always seek out personal investment guidance from a professional.)

 

1. Don’t be a day trader:

It sounds like you are trying to be a day trader! This is not something we recommend for the every day average investor and here’s why.
By riding the emotional roller-coaster with the big numbers changing every day, you are causing yourself a lot of unnecessary stress. There are investment departments with entire teams of analysts studying the market every day at all hours of the day. Not only do they have the manpower advantage, they have the technological advantage over you. They have massive systems analyzing everything from Twitter trends to weather patterns.Also, more than half the trades that are made in any given day are not triggered by a human. Bots are not emotional and will make a trade in a microsecond. No human can beat that. In fact, some institutions consider it a competitive advantage to physically move their offices 500 feet closer to an exchange so that their bots can transmit their trades a fraction of a fraction of a second faster! How could you or I with our monkey brains ever have a serious chance of outperforming them? Without a massive amount of luck, we cannot.And lastly, even if you “win”, you still have to pay higher taxes over someone who holds their stocks for a longer period of time.

2. Market Volatility is normal:

We have 2/3rds of our investments in the S&P Index. We do this because we believe that US Companies will continue to innovate, grow and be profitable for the foreseeable future. But there is a lot of chaos in the day to day swings of the markets. Watching it will make you go insane which is why we try to automate everything to take the emotion out of it.We made a plan and we stick to it. If we went with our emotions before, during and after the 2016 election timeframe, we would have sold everything because we were in a “big fat bubble”. If we did that we would have missed out on 2017’s huge >20% growth.The real cost of investing is the emotional stress that goes along with big numbers moving up and down and for what seems to be no reason. To put things in perspective, I downloaded every trading day in the last 30 years and figured out the percent changes each day.

Observations:

  • 3,592 of the last 7,814 trading sessions the S&P index went down (46%)
  • That means 54% of the trading days, the S&P index went up
  • 1,961 of the last 7,814 trading sessions moved more than 1% in either direction.
  • This works out to be one out of four days in the last 30 years.

If you are a long term investor, like us, you will need to be okay with volatility in the market. Big numbers go up and big numbers go down.

In just the last nine days we have “lost” about $125,000. There will be plenty of times over our lives where we will lose even more and that’s okay, because a real loss doesn’t happen until you give up and sell. We aren’t betting on the price of stocks today. We are betting on the price of stocks 10, 20 and 30 years from now.

To put last week in perspective, here is the twenty worst trading days for S&P in the last 30 years:


With all the headlines last week there is something striking about this list. The absence of any days in 2018. Most of the worst days in the last 30 years happened in 2008. In fact the 2/5/18 “Monday Crash” is only the 38th worst day as a percentage in the last 30 years:

38th worst day in the last 30 years does not make a compelling or attention grabbing headline. It is certainly far more accurate than what we have been seeing though!

News agencies are trying to make sense of it all but there doesn’t seem to be much of a consensus. When it comes down to it, there were more bots / people wanting to sell than bots / people wanting to buy. When sellers outnumber the buyers, prices go down. It happens. The long term investor always remembers that swings also go in the other direction and trends higher over time:

Remember when I said most of the worst days in the last 30 years happened in 2008? Well six of the best ten days in the last 30 years also happened in 2008!

If you get out of the market at the bottom because you are afraid of it going lower, you also miss out on the gains which cancel out those losses over the long term. Once again, 2018 is nowhere to be found in the top 25. We are far from the maximum volatility the market can do.

If you are going to invest, be willing to accept that on paper, your total investment will go down. Be willing to accept that the numbers will go down (and up) in even bigger swings over the next 10, 20 and 30 years. That’s a prediction I can stand by.

 

3. The Index cannot go to zero:

Even though we are incredibly exposed to the stock market in our net worth, we don’t feel like we are taking much of a risk.  Being invested mostly in the S&P 500 means that we are betting that the 500 largest publicly traded US companies continue to do well into the future.

Every year 20 to 30 of these stocks are swapped out of the index with companies that are growing faster.  It is an evolving list which means we feel really confident that the index will not go down to zero.  There is a graveyard of single stocks that have gone to zero.  If the entire S&P 500 were to go to zero, we would have much bigger problems to deal with than worrying about retirement.

Sure, Index investing might be considered a bit of a lazy way out.  When you buy individual stocks you need to do a ton of research, be smarter than the institutions that have full teams thinking about this and keep up with the company as long as you own the stock.

I feel really strongly that autonomous driving will change our economy dramatically.  Dozens of companies are investing billions in R&D in the technology and its application. While I have this strong belief, I will not be investing in a single company. No one knows which bets will pay off, but most likely the “winners” will be listed within the index if it’s US based.

It sounds like you are following the “invest in what you know” strategy with your WWE bet, which is okay. Just make sure to balance it out with lots of other companies if you are going the non-index route to help safeguard yourself and mitigate the risk.

 

4. It’s not all about share price:

Our personal plan is to not sell a single share to fund our early retirement. We want to just live off dividends to survive so we don’t have to care about share price. This is most likely way too conservative, but from a financial perspective we have always been that way. Most likely we have already worked years longer than we needed to. Over the last 6 months we have been getting concerned that share prices were rising much faster than companies were raising their dividends. Our investment accounts have gone down by over $125,000 when you subtract that we added in $15,000 of additional funds over the period.

It going down is actually a relief. When I told FI Girl, we both had a laugh about it. Our plan doesn’t change. Why? let me demonstrate…

At the end of January we had $1.486 million invested between S&P and an international ETF:

Our theoretical passive income off of those investments is about $30K. It’s theoretical because a lot of those dividends get reinvested in 401K, Roth and HSA accounts that we aren’t getting taxed on. This was at about the height of our net worth.

Today after the correction our situation looks like this:

Our theoretical passive income off those investments is STILL about $30K. This is because the share price does not really impact the earnings of the companies we are invested in.

When analysts comment on “the fundamentals are still good”, they mean that companies are still doing well and are projected to return money to their shareholders.

When share prices go down, dividend yields go up. When share prices go up, dividend yields go down. Our early retirement plan is actually easier to execute with this drop because the shares we are buying right now will generate a larger rate of return than the shares we were buying 2 weeks ago! This is why we are shrugging off the big numbers changing.

 

So to recap:

  1. Whatever you do…Don’t panic.
  2. There is no danger of us jumping out of windows or out of our stocks. We are in it for the long term.
  3. Get diversified. Stick with indexes over single stocks.
  4. Put the recent news in perspective.
  5. Any money you invest shouldn’t be money you NEED in the short term.

 

We hope this eases your mind in some way. Keep staying awesome!

 

 

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1 Comment

  1. Hiep

    Great post Heroes. This does ease the pain of seeing my account dropped these past weeks. thanks

    Reply

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