Do Stock Market Losses Freak You Out?

Do Stock Market Losses Freak You Out?

When the market opened this morning, the Dow Jones briefly dropped by over 1,000 points. Market circuit breakers were tripped across the globe, stocks opened without price indications, the internet was littered with headline photos of pit traders looking like somebody just punched them in the jewels, and we saw some good old fashioned capitulation. I’m not sure why stocks like Aflac or Proctor & Gamble tumbled deeply into new 52-week-lows this morning (I’m still using band-aids and paying my health insurance…) but who cares! The world is ending! We never believed China was growing as fast as their government said, and now with the Yuan devaluation, it seems as though they’ve given up the ghost. The Korean peninsula is on the verge of war. WTI crude oil is now around $39/bbl (shout out to my now-reasonable looking 2015 prediction that crude would bottom at $38/bbl). The collapse in all commodity prices has killed emerging markets, who are all in a race-to-the-bottom with their currencies. This has led the U.S. to once again be the only stable currency on the whole planet. That is great if you’re planning a European vacation, but terrible if you’re a U.S. company having to translate global profits into a strengthening USD. Then, we have perpetual uncertainly around whatever Yellen will do next month, and the angst about what will happen to the economy if rates start rising. And lastly…yes, it appears to be…indeed…and I look outside and it is confirmed, the sky is falling. Take Shelter.

Scary, right? We’re at 2015 lows. Between the NASDAQ and the New York Stock Exchanges, just 14 stocks hit new 52-week-highs today, while a whopping 2,043 stocks hit new 52-week-lows (many of which are in my own portfolio). Two-thirds of the stocks in the S&P 500 are at least in bear market territory. And, like clockwork with every market decline, the financial media comes out peddling fear, uncertainty, and images of market traders hyperventilating into paper bags. Did you hear, the Dow is headed to 5,000?

My advice: sell everything. Move to remote Wyoming. Homestead on a plot of fertile land. Bury a shipping container as a makeshift fallout shelter, and prepare your family for the impending apocalypse. Fear The Walking Dead.

Or not…


Let’s back up for a moment for two quick Retire29 lessons:

Lesson 1: Every investor on earth can be categorized as those that are accumulating assets, and those that are withdrawing assets. You’re either putting money into your portfolio, or you’re taking it out. There’s really no such thing as “holding steady,” because many stocks (and nearly all passive indices) pay some sort of dividend–and you’re either choosing to reinvest those dividends (accumulating assets) or you’re withdrawing them.

Lesson 2: There are only three numbers that any investor should care about:

  • the price you pay;
  • the price you sell;
  • the payments you receive in between.

Nothing else matters. Nothing.


Now, when you’re talking about stock markets, rationality seems to go the way of the Cecil The Lion (too soon?), but let’s pretend for a moment that you’re a rational person and let’s put those two lessons together into one thought.

First of all, if you are ‘withdrawing’ investor, such as retirees who are selling assets to fund their lifestyle expenses, then market declines are unarguably bad. Not only are you selling assets into a declining market (potentially getting low value for your shares), but you also will be forced to sell more shares for the same amount of cash. This leaves you with fewer assets available to participate in a rebound. It’s literally the opposite of dollar-cost-averagingselling more shares when prices are low, and fewer shares when prices are high. Market declines are precisely the reason why I never intend to be a “withdrawing” investor, and plan to fund my retirement solely on the passive income that my portfolio generates. I never want to have to sell into a declining market to fund my lifestyle.

But, what about an ‘accumulating’ investor—which is probably everyone reading this right now. Market declines are unarguably good. As hard as it is to watch the value of your existing portfolio plummet into the abyss, the cash you have on hand (or adding each month or whatever) is suddenly much more valuable.

Today, I dipped into the chaos and bought a bit more Kinder Morgan (KMI). I bought about $1,000 worth. Three months ago, that $1,000 would have bought me about 22 shares of KMI. Today, it bought me 32 shares. The difference? At KMI’s $0.49 quarterly dividend, my monthly income just increased by $5.23. Had I bought at higher prices three months ago, it would have only increased my monthly income by $3.59. The selloff gave me $1.64 in additional income for free–thanks, market!

But, it’s still hard. It’s hard looking at your portfolio and seeing a month’s salary or a year’s salary wiped out on paper in just a day or two. So, here’s your gameplan:

4 Things To Remember in a Market Selloff:

  1. Every single bear market and correction has ended in even higher levels than the previous peak. We didn’t quite hit a bear market this morning (oh so close, just 2.5% away in the Dow) but it certainly seems to be the direction we’re going. On average it takes about three years to recapture previous market highs after a decline of 20% of more. However, we’ve seen highs taken out in less than six months (1990 bear market) or as long as 25 years (Great Depression). Being that the S&P is now trading just above its historical forward P/E (16.5 vs. 15.4 average), I’m not sure we’ll see the 87% decline in averages like we did in the 1930’s. So, no matter what markets do in the next few days, weeks, or months, in 2020 or later, I think we’ll be considerably higher than the June highs.
  2. Unless you sell, the market today doesn’t matter. Imagine logging into Zillow and discovering your home price suddenly declined by 20%. “OMG!,” you say. What’s your first action? Call your real estate agent, “Get this POS on the market. Just sell it! At any price!” No, of course not. The only price that really matters to you is what the price will be when you sell it, and (potentially) what rent you can collect between now and then–which may or may not be loosely correlated with price (rent is analogous to dividends).
  3. This is what covered calls were made for. I extol the virtues of writing covered calls here, and today those covered calls are the only green in a sea of red. Covered calls mean forgoing some of your potential upside of price gains in exchange for some guaranteed premiums. If stocks hold steady, rise only a little bit, or fall, you get to keep the premium and nothing happens to your shares. I see it as a perfect complement to dividend growth investing, and with days like today, I look pretty intelligent.
  4. This is healthy. Markets and economies can’t go up in a straight line. Even in China, where the government has manipulated markets to no end, nothing can stop eventual market forces. Market declines clear out some of the weak hands. They give an opportunity to buy at better prices. They clear out over-speculation. Smaller, frequent declines prevent huge, generational declines (Nikkei, anyone?)

 4 Things To Do in a Market Selloff:

  1. Probably nothing. Don’t look at your portfolio. Don’t go selling into the herd. Had you sold this morning at the open, you would’ve been pretty peeved at the 800-point rally that occurred in the minutes that followed. Its chaos out there. I’ve seen enough Teen Mom 2 to know that any decision made in haste tends to turn out badly.
  2. Patiently wait for the rebound. I’m not saying the following will happen, but it certainly could happen. The fed decides to wait on raising the fed funds rate. Until December, at the earliest, but the language in the minutes seems to indicate the desire for a more stable global environment, or increases the emphasis on the lack of inflation (0.2% YoY in July), giving the markets reason to believe in a 2016 (at the earliest) rate hike and potential for QE4. Or, North/South Korea negotiations are quick and talk of war is quickly diffused. Or, OPEC ministers call an emergency meeting. Cuts need not be discussed, but just this recognition would likely stop the oil slide. Or, oil and materials prices stabilize. I mean, low oil leads pump prices, and pump prices are always good for the consumer. The discretionary sector could certainly lead us out of this decline. At any rate, oil ain’t about to be $0/bbl. Plus, U.S. rig counts have risen now for four straight weeks—that says to me that those on the inside say that the bottom is nigh.
  3. Play with your kids (or similar). Misery loves company, and it’s easy to log into the financial press and see the carnage, look for explanations, and seek a course of action. However, this can really only lead to fear, uncertainty, doubt, and depression (and selling). I’d rather look at the baby, who couldn’t care less what’s happening with the market. There’s a beauty in this simplicity. Get your head outta the game. Go work out. Watch a movie. Anything, other than feeding your paranoia.
  4. Bargain Shop. As I said earlier, Kinder Morgan was getting into “silly” territory, so I couldn’t help myself. It’s a classic case of the baby getting thrown out with the bathwater (KMI makes money on commodity volumes, not price). Take a look at the list of dividend aristocrats (companies that have increased dividends 25 years straight or more), and take some nibbles at those that are getting sold off simply because they have an “incorporated” at the end of their name. Sure, the prices might continue to decline, but your cash flow from the shares will almost certainly only increase. There are some truly crazy yields out there right now (XOM, CVX, HCP, PG), and investors looking for cash flow should be giddy right about now.
  5. Your search for experienced stockbrokers ends at suretrader that offers excellent customer service in the trade market.

I wish you the best, and I’ll see you on the other side.

Eric

18 Comments

  1. As much as I dislike seeing an overall drop in my net worth on a day like today…. Today’s flash sale was awesome. I had several open orders that filled on the panic and I made out really well in such case… HD, HACK, KMI, HAS, PG Picked up a lot of dividend payers…

    • Awesome job! There were some pretty crazy prices at the open yesterday. I know SCTY rose intraday over 50% from trough to peak–those kind of moves are just bananas.

      Eric

  2. No way Retire29. I freak out when the market climbs day after day, but with little volatility. Significant volatility (in sell offs) gives me the chance to search for all the babies thrown out with the bathwater. I snagged Union Pacific at $80 this morning, but missed several others. Happy hunting!
    -Bryan
    Income Surfer recently posted…Sunny FloridaMy Profile

    • Nice snag on UNP, Bryan. Looks like you’ll be sitting pretty on that one today, but great work on getting good income on sale. Yes, I tend to get nervous as well when stocks only rise. Every time we get a big selloff like that, I always wonder why I don’t hold more cash.

      Eric

    • Hey Alexander,
      Thanks for commenting. Yes, market dives are somewhat welcomed by me, I just need to control my emotions.

      Why wouldn’t you want this to happen to the real estate market? Wouldn’t that enable you to acquire more rental properties more quickly, thus increasing your cash flow? You’re not selling any of your current properties, I know that, so wouldn’t a market plunge help you a great deal?

      Eric

  3. I think it’s important to think about it this way: We aren’t “losing” any money unless we sell while the market is down. If we don’t sell, then all we’re really seeing is a bunch of numbers on our screens. It’s completely immaterial, and you alluded to this point in your article. I completely agree.

    The market “correction” this week didn’t freak me out in the slightest. In fact, we took the opportunity to throw more money into the market because my wife and I prefer to buy stock when their are on sale, and they definitely were for the past couple of days.

    These dips in the market are actually CRITICAL for long term growth. It’s not all roses and cherries out there, after all. These things happen, many of us expected this to happen, and now it finally has. Everything appears to be right with the market at the moment.

    Excellent piece!
    Steve @ Think Save Retire recently posted…Do retirees need to rethink the Trinity 4% SWR rule?My Profile

  4. I loved this statement: “yes, it appears to be…indeed…and I look outside and it is confirmed, the sky is falling. Take Shelter” I peaked outside just to make sure the sky was still there – it was! 🙂

    I am cautiously optimistic with this correction and waiting to see how it plays out. It’s weird how I view my investments. I received a six-figure haircut this week in the market yet have suffered a lot less financial hit this year in my rental real estate. So why does the real estate bug me so much? It demonstrates that we can be quite irrational with our money.

    All the talk about the market recently got me to set aside multiple years of bonds/cash in our retirement accounts just in case we needed to draw on something in early retirement. We rebalanced last month reducing equity exposure and transferring more into bonds and cash investments. We are in equities for the long hall and have at least a 5-year window before we would need to start selling any stock. My guess is the market will have recovered.
    Bryan@Just One More Year recently posted…4 Significant Lifestyle Changes in the Past 40 YearsMy Profile

  5. There is so much overreaction to stock market downturns. In fact, I’d be more worried if there weren’t significant declines every now and then. At the end of the day, the correction over the past couple of weeks (especially on Monday) is a normal and expected dip. Over time the market will provide positive returns. Every text that I received on Monday I responded with “stay the course”.
    Dane Hinson recently posted…Investing is a Long-Term GameMy Profile

    • Hey Dane,
      I would say normal, but man I wasn’t quite expecting 2,000 Dow points in like a week! I am certainly staying the course, down even more today. It’s gettin pretty sporty out there.

      Eric

  6. Thanks for the timely article Eric. Serious investors know when markets pull back like what we just had, which was nothing crazy yet… it’s nice to pick up some stocks for cheaper. It’s a game. Thank you for creating this and reinforcing our strategy.
    Hope you keep hustling it up, spend time with your love ones and take care of yourself. Cheers bud.
    Dividend Hustler recently posted…Recent Buys. August 24 2015.My Profile

  7. That is some good perspective people need to know. I snatched up a few dividend stocks, but right before they dropped even lower. I am happy getting Disney at $101, though. It can be frustrating to see a net worth decrease when know you saved several thousand dollars in a month into retirement accounts, but I try to look at the longer term.
    Vawt recently posted…The Homemade Laundry Soap ExperimentMy Profile

    • Vawt,
      Yeah, August was brutal. Even with my savings contributions, my investments fell by like 8%–not a fun thing to see. Luckily, September has brought me back up slightly. Disney, at any price, is a pretty awesome company. Nice on getting in at $101; nothin wrong with that.

      Eric

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