I believe wholeheartedly in index fund investing, however, I’m aware that seeing the stock market fall more than 10% in a single week can make folks uneasy.
With that said, I wanted to use this Money Talk Monday to share what you should consider doing when the stock market falls.
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Michael (00:00): Welcome back to money talk Monday where we talk about money topics in 15 minutes or less every single Monday. Last Monday I released the money topic on how to start investing with index funds and then we proceeded to see the market drop into correction territory, which I assume made some of you panic and maybe just a little nervous and I want to start this off by assuring you that those emotions are totally normal. Even some veteran, seasoned investors felt those same emotions, but now that you've seen a market correction, which is when the stock market falls at least 10% from a recent peak, you may be wondering what you should be doing. Well, let's talk about it.
Speaker 2 (01:01): [inaudible] [inaudible]
Michael (01:01): as I said last week, the content in this episode is not meant to advise you or serve as any type of investment advice. These are just my personal observations based solely on what I've learned myself and how I handled times like this in my own house. So now that we've got that out of the way, let me start by saying that the way a lot of people think of investing is really totally backwards in my opinion. I mean, so many folks want to invest like crazy while the market's on its way up and then when the market's on its way down, they want to sell everything they bought. And that just doesn't make a lot of sense to me. And I say that because we don't behave this way with really any other purchase. If you think about it, like we don't avoid sales at the grocery store so we can pay full price, but we act that way with stocks.
Michael (01:53): You know, we buy new cars all the time knowing full well that those cars are going to go down in value. But we don't even blink when it comes to that. So yes, your fears and your concerns when the stock market falls, they're totally normal. But that doesn't mean that those emotions have to lead you into making a mistake. So what can you do to protect yourself when the stock market falls? Well for me, the first thing I do is I remind myself just to stop and take a deep breath. Again, it's totally normal to feel a sense of panic as you watch your 401k fall more than 10% in a week, especially if this is your first market correction, right? But it's really important that you stay levelheaded because the more emotional you are, the less rational your decisions can become. And so if you have to delete the brokerage app from your phone, do it.
Michael (02:50): If watching the news is making you anxious about your net worth, change the channel. The one thing you can control at this time right now is what you consume and what you feed your mind. Now the reason just pausing and taking a deep breath is so important is because until you actually sell off some of your portfolio, you haven't actually lost a thing. See, if you heard last week's episode and you went out and bought 200 shares, you steal a home. Those same exact 200 shares. Nobody's taking your shares away. You don't owe any money because the value of them drop. The difference is the sale price is lower. Thus the value of your brokerage account is lower, but you still own the actual shares that you bought. And that's very important to remember when the market falls. See the beauty of buying stocks over consumer purchases is that stocks tend to go up in value over time.
Michael (03:48): And I'm talking about 10 20 year periods, even with these corrections and the other stuff we buy usually just kinda continues to go down. So for us, we first just start off by taking a deep breath and trying to block out a lot of the outside noise. And once we've done that, like calmed ourselves and talked ourselves off the ledge, it's important for us to sit down and really look at our overall situation. This is a great time to do that. Like if things get really bad and the market continues to fall, are we comfortable with our emergency fund being where it is? Or would we feel better if we beefed up our cash reserves some more Right. So like I know, I mean I know for me I've actually been saying that I was going to diversify a bit with more bonds and international funds in our portfolio and I just never really did it and so this is a great time for me to sit down and look and see how that diversification could have possibly helped us.
Michael (04:47): And as I mentioned last week, I'm a longterm investor so I'm looking at things in 10 1520 year increments. And so when I do that I see that there's also no reason for me to panic and sell everything. Right now my risk tolerance is just so much higher than someone who is looking at retiring maybe one year or two years from now. And so maybe they need to be a little more conservative with their money. I am being really aggressive with my portfolio right now because I have time on my side. So again, that next move really comes down to your situation and your goals and based on my situation, we're just going to keep investing while the shares are priced so low, which is the same thing we did when the share prices were at their peak. Literally nothing changes for us business as usual.
Michael (05:36): See, you may be thinking that you're protecting yourself by just automatically selling at the first sign of a market correction, but the truth is none of us knows when the market has truly peaked or when it's actually hit rock bottom. So it definitely pays to sit down and actually analyze your financial situation before you start making moves. Just because stock market took a little fall. Finally, once we've sat down and gathered our thoughts and analyze our situation, it's time for us to decide like what we're actually going to do, right? Which for us it meant just to keep doing what we were doing and invest even more. We estimate that we have around nine to 10 more years until we reach our investment goal, which means time is on our side. That mixed with the fact that we have no idea when the market is going to recover.
Michael (06:27): Helped us determine that this was just the right move for us. So when I got a larger than normal bonus on Friday, we decided to just invest that entire thing. That whole unexpected, I'm out. I mean it's just like I said last week, past performance doesn't indicate future results. So whether the market is doing well or the stock market falls 10% in the week, we're going to keep doing exactly what we do until we reach our goals because we just don't know what tomorrow holds. And let me just say that as a longterm investor, you should expect the stock market to fall every now and then and realistically speaking, this shouldn't cause too much of a panic unless you're needing the money soon, which is why you should reconsider investing any money that you may need within the next three to five years or so. But since we can expect the stock market to fall from time to time when it does, it's important to stay calm, assess our financial situation, and then determine if we need to buy more when a correction happens or Paul so that we can raise up our cash reserves.
Michael (07:30): Not once have we really even remotely considered selling anything. I mean it's like Warren buffet says, be fearful when other people are greedy and be greedy when other people are fearful. And so that's really been our strategy for this week is to just kind of take a step back, look at our portfolio, look at our cash reserves and say, are we still, do we still believe that we're going in the right direction and we feel like we are. So that's just what we're doing. And so if this episode was helpful to you, consider sharing it on social media. Not only does it help the show grow, but this particular episode could be the one thing one of your friends or family members actually needs to hear at this time to keep them from making just an awful financial decision. Also, if you want to learn more about investing or even things you should do before you start investing, you need to download the winning the wealth money guide, which you can [email protected] slash guide it's a free book that's going to help you go from financially stuck to financially savvy. And again, you can find [email protected] slash guide and if you want to ask questions or dialogue more about this money talk Monday, you can always stop by the neighborhood, which is our private group where we talk all things money. You can find [email protected] slash neighbors but thanks again for listening to another money talk Monday segment. We'll talk soon.
Speaker 2 (09:05): [inaudible].