- Investment Workshop 59: Are Robo-Advisors Compatible With FIRE? - June 22, 2020
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- Real Estate Agent Gets Crushed by Real Estate Math - June 8, 2020
One of the nice things about being sequestered away in Greece for two weeks was our rather serene and much appreciated seperation from the daily news cycle. For two weeks, we were completely sheltered from the day-to-day shootings, terrorist attacks, and whatever the Hell Trump said/did/Twittered that day, and I gotta say, it was awesome.
So it was a with a great deal of trepidition that I returned back to the real world last week and turned on my phone again. And as I feared, I got inundated with emails like this.
“OMG, are you seeing what’s happening in the stock market?!?”
“I’ve been reading your Investment Workshop, but is this still a good time to invest? Everything seems so unstable right now!”
“I’m so scared right now. Should I sell everything?”
So still smelling like Ouzo (it was such a CRAZY two weeks, you guys), I frantically pulled up my news feeds to figure out what everyone was panicking about. And as soon as I did, the headlines blared out at me in big black-and-white typeface.
Worldwide Stock Markets Drop 10%!!!
Seriously, people. Yawn.
A 10% correction is not something to panic about. Especially one in which the US jobless rate is at a record low, the economy is expanding, and the Fed is raising interest rates because they’re afraid of the economy expanding too fast.
I know everybody wants a simple rulebook for what to do in a time of crisis, and most of the time a simple rulebook doesn’t exist. But in the narrow case of investing, and specifically investing in low-cost Index ETFs, there is actually a simple rulebook.
When stock market crashes happen:
- The WORST thing to do is SELL.
- The OK thing to do is HOLD.
- The BEST thing to do is BUY.
Why? Because the Index can never go to zero. It’s an aggregate of all successful companies in the stock market, and even if an individual company goes bankrupt, the Index never does. Because the Index is market-cap weighted, as companies shrink into oblivion, they get sold and pushed out. And as other companies expand and grow to take their place, they get bought and brought in. The only way the Index goes to zero is if all companies in the US go to zero. And if that ever happens, your retirement portfolio will be the least of your worries, because the aliens will have invaded, as depicted in the documentary below.
But, I’m Scared!
OK, let’s take a moment to deal with something we all feel at some point in our lives: Fear.
Don’t get me wrong. Fear is healthy. Fear is good. Fear keeps us from running into traffic or confronting angry grizzly bears. But sometimes, fear holds us back.
Every successful investor has had a moment of pants-shitting terror. Of seeing their hard-earned money lit on fire, and then flushed down the toilet. Every investor has had a moment in which their finger is hovering over the “SELL ALL” button, every instinct telling them to take what was left of their money and run.
We should know. We were those people.
During the years of 2008/2009, in depths of the Great Financial Crisis, we were faced with that exact dilemna. We had money in the stock market (or at least, in a 60/40 split of the stock market). Our savings were evaporating, and we were panicking. During that time, I distinctly remember putting $1000 into our investment accounts, and then having the stock market drop so much that the next day that $1000 had vanished. It was like that South Park cartoon. You put in money, aaaaand it’s gone.
And during that time, the news was crazy. Lehman Brothers had just declared Chapter 11. Entire countries like Iceland were going bankrupt. Capitalism, as a concept, was on the verge of collapse.
And yet we didn’t hit that “SELL ALL” button.
Why? Were we brave? Were we courageous? Were we smarter than everyone else?
We were just as scared shitless as everyone else!
So why didn’t we hit that “SELL ALL” button? I distinctly remembered every cell of my body screaming at me to do it.
Because we realized two things:
- If this crisis is literally the end of the world, it doesn’t matter what we do. Again, who cares about our retirement portfolio in a post-apocalyptic Mad-Maxian world?
- But if this crisis is just temporary, then we should buy. Because then we’re buying stocks at the greatest discount anyone has ever seen.
After a few tense minutes of finger-hovering, I moved my mouse cursor from the “SELL ALL” button and towards the “BUY MORE” button. After a few deep breaths, I clicked. And two weeks after that when we got our next pay-checks, I clicked it again. And two weeks after, I clicked it again.
We continuously bought into the falling, cascading disaster that was the stock market in 2008/2009, and as a result of that, we ended up making all my money back just a year after the Great Financial Crisis started. We didn’t lose any money during 2008/2009. I don’t think most of Wall Street can make that claim.
So what does this story have to do with you, the reader staring at their 401K dropping like a stone every day?
Here’s the truth.
Investing in the stock market using low-cost Index ETFs is simple, but it’s not easy. I mean, when stock markets are just rising every day it’s easy. But when it’s plummeting, that’s when you figure out if you have what it takes to do this.
Index investing requires you to lower your fees, buy ETFs that track the various indexes, and rebalance periodically.
That last part is super important. Rebalancing periodically means that when stock markets rise, you sell some of it to buy bonds. And when stock markets plop like they’re doing now, you sell some bonds to buy equities.
It’s also incredibly hard to do, and completely counter-intuitive.
People rush to buy things that are going up without end, because they fear being priced out forever so they’d better buy now or buy never. That’s what’s been happening in Canada’s housing market.
People also rush for the exits when things go down in price, because they fear that all their money is going to go up in smoke. That’s what’s happening on the stock market right now.
Those people in both camps, by the way, will never become rich. They chase things that are expensive and shun things that are cheap.
Becoming a successful investor requires you to do the opposite. Buy things are are cheap, and sell things that are expensive. Buy low, sell high.
In fact, if you’re still in your accumulation phase you should be jumping up and down from joy because now you’ll be able to pick up stocks that are on sale.
And if you’re retired like us, you should have your Yield Shield ready to go and your Cash Cushion fully funded so you won’t be forced to sell assets to fund your living expenses, and you should be ready to pack up and take advantage of Geographic Arbitrage to reduce your living expenses by moving to a low-cost locale like SE Asia, Mexico, Portugal, or Eastern Europe.
Like we always say, “If shit hits the fan, we’re going to Thailand.”
So to all the people asking me whether the recent stock market correction scares me, the answer is of course not. We’ve been much worse than this before, and we still made it out alive. We know what worked last time, so we know exactly what to do.
The question is, do you have what it takes to do it too?
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