From October 1 to November 23 last year, the NASDAQ fell nearly 14% and the S&P 500 fell 10%.
Then over the last week in November, the S&P 500 rebounded 5%.
Then it tumbled again, and wiped out its gain for the whole year.
Feel whipsawed? Sure. We all do. It’s in our brains. The financial markets are only a few centuries old, but our brains are much older — and they were “built” by evolution, not by Apple or IBM. When fear strikes, as it does during a downturn in the market, our evolved instincts tell us to run, same as we would from a fire, a flood or a predator. Applied to the stock market, our primordial urge is to sell, and preserve what we have.
But that urge is hopelessly wrong. It’s a false alarm, and a disastrous “choice” that can dwarf your portfolio forever. Both naïve and ostensibly savvy investors alike may obey that primitive instinct, cash out their portfolios with sighs of relief, and live to rue their decision. The day will come when the market comes roaring back, making new highs, as they cling to the proceeds of unwise sales, wondering when to buy back in — usually too late. There’s a very expensive lesson in this: the people on the other side of those trades were wiser.
In Why Smart People Make Big Money Mistakes, Gary Belsky and Thomas Gilovich relate the cautionary tale of a broker’s experience in the 1987 stock market turbulence. Over a hundred young clients called to sell all or part of their portfolio, hoping to stanch the bleeding. But two old hands over 80 called to buy. Experience beats intelligence.
How can we still our throbbing hearts as markets reverse or even tank, so we don’t sell in haste and regret it during the next market boom? Use the cultural wisdom already downloaded into your consciousness to mentally prepare for stock market reversals:
1. Listen to FDR.
“The Only Thing We Have to Fear is Fear Itself,” Franklin Delano Roosevelt said in his 1933 inaugural address. FDR was speaking to the nation about The Great Depression, then at its depth after the 1929 stock market turbulence. Master politician, master crowd psychologist, and member of the wealthy elite, FDR knew his history. He knew that prosperity would return in time, as part of the natural ebb and flow of markets and economies — if the sociopolitical consequences of the Great Depression could be held in check. In 1933, as in any market reversal, fear was his worst enemy.
2. Heed an ancient adage — and Lincoln.
“This too shall pass” is a renowned Persian, Hebrew and Turkish adage often misattributed to the King Solomon in the Bible. According to Sufi poets, the phrase was a passage etched upon a king’s ring. It was there to make him happy if he were sad and, sadly, to caution him that joy, too, is fleeting. But the most compelling recital of the phrase comes from President Abraham Lincoln: “It is said an Eastern monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: ‘And this, too, shall pass away.’ How much it expresses! How chastening in the hour of pride! How consoling in the depths of affliction!”
3. Think like a mathematician.
“Invert, always invert,” said the mathematician Carl Jacobi. Mathematical inversion is a favored thinking tool for both Charlie Munger and Warren Buffett. It flips life’s problems up, down, around and backward until the answer presents itself unbidden. Buffett says, “It’s like singing country western songs backward. That way you can get your house back, your auto back, your wife back, and so forth.”
How can inversion be applied to market downturns and crashes? Invert the naïve impulse to sell into an informed decision to buy. Recognize that if you are wise enough to hold onto stocks for the long term, the price anyone would pay for them in a downturn is irrelevant. If you have wisely stored a cash hoard in anticipation of a downturn, you are not obliged to sell stocks in a down market to harvest cash. And because you are free to buy, the stocks are on sale! Buffett teaches: “Be fearful when others are greedy, and greedy when others are fearful.” But take caution not to buy too soon. Wait until the market bottoms, or in Wall Street parlance, “Don’t try to catch a falling knife.”
4. Shakespeare was right.
“Cowards die many times before their deaths, The valiant … but once,” wrote William Shakespeare. If you fear the market and keep most or all your money in cash or cash equivalents, inflation will, in the fullness of time, destroy your cash hoard. It’s financial death by a thousand inflationary cuts. Though the nominal two percent inflation rate is hardly noticeable day to day or even year to year, compounded over six decades, a dollar is only worth a dime.
If you are wise enough to invest, not play the market or buy and sell, but be brave and hold a steady course through storms and routs, diversified and shielded from taxes in a retirement account, you will find yourself a hero at retirement. And, moreover, to your survivors when you are gone.
VIDEO: How Far Does $150K A Year Get You In New York City?
No matter what metric or list you look at, it goes without saying: New York City is one of the most expensive places in the world to live in.
In this video, CNBC spoke to a Millennial who runs her own brand consulting agency and wants to #WealthHACK her way to retirement by 40.
She makes $150K a year. But how far does that actually get her? Check it out.
How to Create A Financial Roadmap: Investing In A Volatile Market
The market has been heading up, up and away for so long that many investors may not remember (or even experienced in some cases) what it was like to invest during times of extreme volatility. However, the bull market has to end sometime—and probably for longer than a single quarter like we saw at the end of last year.
So how do you go about making investment decisions when it becomes very challenging to find positive returns? It can be tempting to switch out your entire portfolio when there’s a sudden change, but that may not be the wisest move. Before making any changes, you should consult your financial roadmap, and if you don’t have one, then now is an excellent time to make one. The Securities and Exchange Commission advises investors to look at their entire financial picture before making any big changes. This step-by-step guide will help you get everything down on paper.
#1. Set goals
To start creating your financial roadmap, write down any goals that you have. Perhaps you want to purchase a new home in 10 years. You’ll also want to determine when you want to retire, although this age could change over time if you discover that you can’t retire as early as you want to. Decide what types of things you want to save money for, whether it’s a new home or car, an education, retirement, medical bills, a “rainy day” fund, or anything else.
Don’t forget to set timelines for each goal so you have an idea of when you might be able to achieve these goals realistically. The SEC has a number of calculators and other financial tools to help you set realistic timelines for your goals.
#2. Look at your current financial picture.
Most investors already know the basics, but pulling everything together into a roadmap might seem a bit overwhelming because it can be so easy to forget something. Even though you may think you know everything you need to know about your current financial picture, just having all of it down on paper will help you get organized.
Make a list of all your liabilities and assets, including individual holdings in your portfolio[s]. List all your checking and savings accounts and their balances, the cash value of your life insurance policies, real estate, home, retirement accounts and other investments, and any personal property. Knowing which stocks or other assets you have money in can make it easier to decide where you want to move your money when the market turns.
On the liability side, list your mortgage, credit card and bank loan balances, car loans, student loans, and any other liabilities. Add up your assets and liabilities and subtract your liabilities from your assets to see your net worth. If you have a negative net worth, you can start making plans to get on track. The Foundation for Financial Planning has some excellent worksheets to help you get started with making your lists so you don’t forget anything.
#3. Consider your risk tolerance before making any changes.
After you’ve made a list of all your investments and assets, it’s time to think about your risk tolerance. As the winds of the market shift around, risk sentiment will move as well. There is no such thing as an investment that is 100% safe.
A good guideline for determining the best mix of risk in your investments is to subtract your age from 120 and put that percentage of your portfolio in stocks and the other percent in bonds. For example, a 40-year-old would put 80% of their portfolio in stocks and the remaining 20% in bonds.
Of course, there are many other asset classes to consider too, and picking stocks is literally a full-time job. Thus, you may want to consider an index fund for your stock holdings if you just want to set it and forget it. However, if you want to take on a bit more risk in part of your portfolio, there are many actively managed funds with excellent track records to take the guesswork out of stock picking.
As you’re setting out all your investments and thinking about making changes, make sure your portfolio is properly diversified so that when one asset falls, another one gains to make up for the loss in the other one. Think over every potential change carefully before making a move to avoid unnecessary turnover and fees associated with trading.
The SEC also has a handy guide here which explains more about investing and creating a financial roadmap.
CNBC: Here’s Why WeWork Wants To Go Public
News broke recently that WeWork’s going public in September. In this video, CNBC breaks down why they’re going public.
Before you watch, though, here’s some context.
WeWork’s recent S-1 filing — the paperwork you file with the SEC right before you go public — had the entire internet up in arms, including ourselves, trying to decode how the heck WeWork justifies its insane valuation.
Considering, ya know, IWG, a direct competitor, has nearly double the revenue, five times the members, is $2.5B ahead on the bottom line and…well, you can sort of see where this is going.
Despite earning an insane $47B valuation this year, it’s bleeding dough. Yes, WeWork grossed $1.8B in 2018…but it also lost $1.9B.
Be that as it may, WeWork is going public this year (via parent company “The We Company”), the latest in a string of high-profile tech IPOs in 2019.
And speaking of tech. Despite numerous “tech” mentions in the S-1, critics are claiming WeWork is little more than a real estate company.
As far as the We losses go, CFO Artie Minson told CNBC that investors need not worry about those grim financials, but instead to look at WeWork’s losses as “investments” that will lead to greater cash flow. (Which is very possible.)
And even if short-term losses eventually unearth long-term cash flows, will they be enough to justify its lofty valuation…and even loftier ambitions?
While we’re waiting for time to tell on WeWork’s future, if you’re looking to raise your startup game right now, go check out our content partner More Labs’ brand-new drink Aqua+. (Yes, the same More Labs behind this drink that broke the internet.)