Ep # 74: Investment Losses Hurt. Avoid These 5 Mistakes!

Benjamin Haas | May 10, 2022

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Benjamin Haas 00:03

Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Hey everybody, welcome back to A/B Conversations starring the one and only - Adam Werner. Welcome back, pal.

Adam Werner 00:33

Hey, thanks. I get the starring role. Appreciate that. Co-star.

Benjamin Haas 00:38

Well, I'm going to try to match your expertise here today on an awesome topic. Markets are volatile. Investment losses can hurt. We are here to give you five things today that we think are very common investor mistakes and if you want long term success, we think these are five things you have to avoid doing, even when you get emotional. How's that for an intro?

Adam Werner 01:07

Yeah, you got a lot to live up to with that but I will say, I think oftentimes, we approach and other people think through the lens of okay, well, what should I be doing? And oftentimes, there's a lot of low hanging fruit. Sometimes it's better to just think, what should I make sure that I avoid?

Benjamin Haas 01:29

That I'm not doing.

Adam Werner 01:31

Yeah, and sometimes that's enough to at least put you on the right path just by avoiding some of those negatives so that's where we're going to kind of focus today's attention.

Benjamin Haas 01:40

All right, so let's start at the top. Well, what's the one thing you think people do when they get emotional that they should absolutely not do.

Adam Werner 01:47

Yeah, this one was so current for me. This example, I had somebody close to me reach out a day or two ago looking at their 401k, the markets down. Should I stop investing or should I stop saving into my 401k? It doesn't necessarily just have to be exclusive to the 401k or any retirement account, non-retirement savings, wherever you are saving. If that thought has crossed your mind, the market is down, I'm going to stop, I'm going to let things settle, work themselves out and then I'll just turn my contributions back on when I feel like the markets in a better spot. And my, yeah, go ahead.

Benjamin Haas 02:24

When you feel like it's in a better spot? How do you define that?

Adam Werner 02:29

Sure, so my response was the exact opposite of what you're feeling is probably what you should be doing. The key, everybody knows this, the saying buy low, sell high and that's obvious, but much harder to actually do when emotions are running high. When the market is down and you're contributing on a regular basis to a 401k, again, as an example, you're doing what's called dollar cost averaging. That's just a simple way to kind of illustrate if you're buying the same investments on a weekly, monthly, whatever that basis is, whether that investment is up or down, it doesn't matter. You're buying that same investment over a long period of time so it smooths out a lot of the ups and downs and an instance where we're thinking currently with the market and when we say the market, it's the S&P 500 is our benchmark for stocks. But the bond market is also down which feels weird for many investors to be starting the year and pretty much everything across the board is down roughly 10%. But the theory is, if you're continuing to add at this point, you're buying things at a discount as from where they were not even three, four months ago. So it's an okay thing to be buying things on sale using air quotes. If we think and we are long-term believers that the market will rebound at some point and make new highs at some point in the future.

Benjamin Haas 04:02

Right, as consumers, we should like buying things on sale and I think because it has to do with our money. When we see losses. It's very, it's human to go, I don't want to put more into something that I feel is dropping. But long term if you're buying something on sale, absolutely don't stop contributing, if anything, try to do the opposite. Can you increase that contribution a little bit. I realize how difficult that is to hear but yeah, great place to start. Don't stop contributing. Second one, selling when the market is down.

Adam Werner 04:42

Yeah, it's easier said than done so let me throw this to you. We'll have to put this graph maybe in the notes for this one, but the last 20 years or so, this is going back to I guess that would be the end of 2002 all the way to the end of 2021 the S&P has annualized rate of return of 9.5. Do you have any guess what a 60/40 portfolio did? Meaning 60% in stocks, bonds being the other 40%? Six and a half?

Benjamin Haas 05:16

7.4. You're pretty darn close. 40% in stocks 60% in bonds. Repeat your answer. Adam, what do you think? Yes. 6.4. Here's the baffling one. The average investor only made 3.6%. There's only one explanation for that.

Adam Werner 05:39

Conspiracy.

Benjamin Haas 05:41

That's not quite it. It's investor behavior. It's this feeling that we have to try to get into the market, get out of the market. I have to exchange this investment for this investment. This doesn't feel good so let me try this. That's the only explanation for why the average investor has done worse than just putting it in the S&P 500 or following what is very vanilla typical advice from us. Here's your 60% in stocks. Here's your 60% in bonds, or vice versa.

Adam Werner 06:12

Yeah, it reminds me of this article on a study that was done a few years back now, I believe Fidelity was the one that kind of led that study and what they found the accounts within their platform that performed the best over time were accounts that people forgot that they had or were for deceased account owners that changes were never made. It was truly that set it and forget it mentality and those historically, for Fidelity in particular here in this study, were the accounts that outperformed all the others. So, to your exact point, that investor behavior, the behavior gap between the index returns or your investment returns and then the actual experience of an investor. Yeah, it really does come down to the more times you have to make a decision, there's just a higher probability that at some point along the way, one of those is going to be the wrong move and it just takes away from that potential performance in the future.

Benjamin Haas 07:13

Yeah, and we run the risk on a podcast like this is saying, don't do this, don't do this. It is not to always do nothing and we know that but we feel like we need to insert ourselves between the investor and doing nothing to allowing those pivot points to just be maybe data driven rebalances. Or maybe it's, let's exchange this for this because of where we think things are now going to go but those are usually pivots at a point in history. That's kind of like defined by data and not just the emotional driven response of markets down I have to do this. Have to sell, have to buy, have to get in and have to get out. Yeah. I have another one on that.

Adam Werner 08:00

Yeah, within that same selling when the market is down?

Benjamin Haas 08:03

Yeah, and I guess it's just again, to look at historical data. I know that you know where I'm going with this. The average entry year decline since 1980 in the market is 14%. So from peak to trough: 14% and I think that's where this market that we're currently in is very normal from those numbers' standpoint.

Adam Werner 08:28

Right.

Benjamin Haas 08:28

But often, when you're in it, it feels so much worse.

Adam Werner 08:33

Yeah, and I think, so let me expand on that. I think part of that feeling so much worse and that was, I saw that graph recently. I saw kind of where we were at year to date and with some volatility here recently, we've kind of hit that 14% number. Even though historically, you can say that this is average, when you're in it, I think the stock market often feels, you get more highs than lows over time. So even though we've experienced volatility lately, that feels much shorter lived going back to COVID, even prior to that. These drawdowns have happened so rapidly and then the rebounds have happened almost as quickly. It's very easy to have that recency bias where you kind of forget maybe how bad things were in the past unless it kind of seared into your psyche, maybe March of 2020 and COVID shutdowns, seeing that drawdown happen. The global financial crisis, sure, a whole different ball of wax but yeah, in thinking along those lines of this being a normal market, I don't know. I think part of us just wants to not have this be normal, right? I don't want to call it losses. I don't like seeing losses, even though within that historical context, this is a pretty average intra year drawdown. I guess the inputs to that, the variables that changes every single time and I guess that's where people can kind of point to but this doesn't feel normal.

Benjamin Haas 10:13

Yeah, of course not. War does not feel normal. These headlines don't feel normal. Now it's court cases and like, unrest, again, doesn't matter. This feels normal so we run the risk when you and I come on a podcast and say this is normal. Don't worry about it. If you feel that way, I understand that. We're coming at this from the historical perspective, right. Since 1980, 32 of the last 42 years, we've had a positive market. Yeah, right. This is the old, I'm going to divert here. I tell the story to my kids all the time. It's the story where the teacher like tells little Johnny to come to the board and he has to do the math tables, multiplication. One times nine, he wrote nine, two times 9 wrote 18, three times 9 = 27, all the way down. He got to 10 times nine and wrote 99. He got ahead of himself and he's walking back to his chair and all the kids are laughing at him. Right? The kid got nine out of 10 correct but what do we focus on? We focus on that negative. We focus on that one mistake. We focus on the one year where it just feels really bad. But again, the market goes up more than it goes down. That same table, that same chart that we’ll share, 12 of the 21 years where we had double digit negatives, that 14% down, the market still ended the year positive. We still have an opportunity, we got seven more months in the year here, we still have an opportunity for things to turn around. What's the point we're making in number two here, selling when the markets down. When it doesn't feel good, the opportunity to make a mistake is there so much bigger than it does when the markets just feeling okay.

Adam Werner 11:49

Well, I guess the last fine point on this section, it's even if you got the timing right. On the downside, you were able to sell and go to something that felt safe and preserve those dollars. Going back to the first thought of I'm going to stop contributing to my account but I'm going to start it at some point when I feel like the markets in a better spot. It is again, you're just introducing another opportunity to now you have to decide when to get back in and it's impossible for any person to do that with any reliability. If someone was able to do that, we would know their name, they'd be famous for being able to time the market in out on a regular basis. It's impossible and again, going back to what I said earlier, every time you have the opportunity to make a decision, there's a chance for that corresponding decision to go wrong. So yeah, getting out is one thing, getting back in as another and that's very, very difficult to do.

Benjamin Haas 12:53

Well said. Okay, so maybe on that theme, going to a third point and let's maybe get off the selling when the markets bad, like the negative side of it. The third mistake I think that people make and I'll let you kind of speak to this a little bit. It may be chasing returns or chasing a trend. When the headlines are, your buddy or your friend or a co-worker, anybody is saying, well, here's how I've been investing this has been going so well. You should do the same thing.

Adam Werner 13:24

Yeah, it just harkens back to the.com bubble in the early 2000s. It's the meme stocks early in 2021?

Benjamin Haas 13:37

Timing Bitcoin.

Adam Werner 13:39

Yeah, just that idea of the herd mentality and that can work, right. Momentum is a real thing. You get enough people buying a stock at a certain point that will just kind of perpetuate the cycle. The stock price will go up, you'll get more people chasing in but the reality of most of those situations is fundamentally, if that investment, whatever it is, is not sound from a fundamental standpoint. It's that irrational exuberance that in the end, the reality does take over. The chasing of returns often doesn't lead to the right outcome.

Benjamin Haas 14:23

And that's why we'd say it's a mistake because typically there is kind of this reversion to the mean, the average is the average for a reason and I know he made this joke a little earlier. There's a reason why compliance departments make anything investment related have the disclosure of past performance does not guarantee future results. When I look at this past performance, I'm picturing somebody, this could be anybody. I'm not picking on anybody but I'm picturing them looking at the 401k statement with last year's return was this. Emerging markets is a great example, where there's an asset class that's very volatile. It could be the best performing asset class in one year and the very next year, it's the worst. So this was great, I'm going to buy it, I bought it and that was the worst. This is horrible. I'm going to sell it, guess what? It was the best the next year; it is this mentality that we have to kind of want to jump on board with something or want to get off the train on something that overtime, the averages are the averages for a reason.

Adam Werner 15:21

Yeah, yeah. So that kind of leads me into the next point that we wanted to make and through that lens of either chasing returns or paying very close attention to kind of the headline news or stock market news, checking your account on a daily basis or just paying way too close attention to your investments at kind of that micro level, often, again, I think leads to wanting to make changes. If you're checking your account balances on a daily basis, I think it's very hard to resist seeing in an up market and maybe it's much easier to kind of just, hey, I'm doing okay, let things ride. I think it's when you start to see those losses and you want to feel like you can exert some sort of control over your situation when the market is just kind of taking you on a potential wild ride. Again, making changes for the sake of making changes may not be the best for your situation if you kind of had a plan going into, this is how I'm going to invest, this my time horizon, this the goal. Changing that on a maybe a regular basis, again, I think just introduces more opportunity to get some of that timing wrong.

Benjamin Haas 16:43

Yeah, I'm really glad you brought this one up because I think this really does speak to the behavioral side of what we need to do. Right? How many conversations do we have or have we had just in the last couple of weeks where clients want to talk about the markets moving? I know I'm invested for the long term but like are there any changes on the horizon? What are we thinking we're going to do about this? It's so dissatisfying when we say, yes, we're paying attention but we really think we're positioned for where we need to be for the long term and fundamentally, things don't feel vastly different than what we expected so we're sticking with it. It's so dissatisfying to hear. We know that. I don't want that to be, I don't want us to sound flippant when we're saying stay the course but I think you hit the nail on the head so well. It's almost like when you're paying too close attention. Like you're putting yourself in a spot where you may end up wanting to do something you shouldn't. I liken this to if somebody really wants to be on a diet, like is there any reason to have three tubs of ice cream in their freezer? Don't bring yourself so close to it? How many things in our life do we know that we shouldn't do? Or we know the right thing to do but we put ourselves in a situation where we might be tempted to do it. It's hard. It's hard to tell somebody not to look at their account when it's falling. It's really hard.

Adam Werner 18:03

Well, yeah, and we met with somebody earlier this week that said, I checked my accounts on a daily basis. I don't know why. It doesn't matter. I'm not going to make any changes but I still like to see what it's doing and sometimes if it's down enough, it will set the tone for the rest of my day.

Benjamin Haas 18:21

It makes a bad day. Yeah, just you've, like your heart. I don't know how you felt, we were in that meeting together. Like your heart just sinks a little bit in, you're like, Man, I just, we want to take this off their shoulders. Like we don't want them to have to worry about it. I think this is why we're going to quickly turn to point five here.

Adam Werner 18:37

Seems like a good enough segue.

Benjamin Haas 18:39

I think how you structure, how you invest and your savings. It's so important. A mistake that most people make is that they invest money that they're going to need sometime soon because now my attention has to be, I really wanted to go on this vacation or I knew I was going to buy this car. I knew I needed this for this reason and now I see it's going lower and I'm creating even more panic. Part of our advice is, you need to have a cushion and if having that cushion hopefully allows you to not have to pay too close attention to something that really is supposed to be for the longer term.

Adam Werner 19:17

And that the key right there, that the last part that you just said. To us investing comes down to aligning your time horizon with whatever that goal may be, whenever you think you're going to start to need that those funds. And even for somebody that's investing in a retirement plan and maybe is 10 plus years from retirement, feeling market volatility, why I'm getting close, maybe I should start to reduce some risk, it still is aligning your investments with that time horizon to give yourself maybe some peace of mind that I can ride out some of these ups and downs if I know I'm not going need it for whatever that time period, whatever that time period is. That all comes back to our three-bucket theory on making sure you have adequate cash or making sure you have cash that you're going to need for your actual expenses and then you have your chunk of money that's going to last you three to seven years. That is more stable. Now, in this case, maybe that didn't work for right now because bonds, which would make up that middle bucket are also down 10%. But the seven plus years, that really long-term bucket, the most volatile stuff that you own, it's the stock side of things that we really, truly see the volatility on a regular basis. Knowing that I don't have to touch those for seven or more years. Hopefully, that gives somebody that peace of mind that market is going to go up, market's going to go down, I know that I have time on my side to ride these things out. Again, easier said than done but we've certainly seen that help a lot with our clients to kind of give that perspective and just kind of reset the expectations.

Benjamin Haas 21:10

And even I fall into this trap, right? Didn't we have a conversation you and I like, this is as transparent as we can be on Monday, where I'm like, hey, maybe we should increase our stock exposure in these accounts. Maybe we can help our clients. If they went through the hard time, maybe we can help get rewarded. And in fairness to you, you're like, hey, but that's not the point. That's not how we do things. You bring me back down to a place of level two. I know that some of our advice sounds boring or repetitive, especially when the markets going well, it's like, do I really need to hold this much cash? It's really these times of stress that we remind ourselves and hopefully are therefore able to remind our clients. This is why we do what we do. This is why fundamentally things are set up the way that we think they need to be set up for the long term because over those periods, hopefully we feel better and then in the bad times. But we will be rewarded on the long end if we're not making these five mistakes.

Adam Werner 22:10

Yeah, it's almost like a form of insurance. In case of emergency, break this glass. You have these funds available that, again, don't necessarily need to change the rest of your plans, the rest of the way that you're invested. When invariably, the market is going to go through volatility at some point. Maybe we'll have a recession in the next couple of years. That will again cause the market to go down. Who knows? I guess that's the point. Nobody knows when these things are going to occur. Have your plan. Stick to it. If we need to make small tweaks, we certainly will do that but yeah, overreacting making kind of knee jerk reactions often leads to mistakes.

Benjamin Haas 22:56

Yeah, and I'll maybe summarize it this way. I think these five things that we're saying, don't do these, try to avoid these or that you don't compound the negative. Losses happen. They're going to happen if you're investing, they're going to happen. Where we see these mistakes really ruining things or setting people back is when they take those short-term losses and they compound the problem by feeling like they need to do something different. When really, it's just the ebbs and flows.

Adam Werner 23:28

Yep.

Benjamin Haas 23:29

So hopefully that's helpful whether people are working with us or not. These are the five things we really hope you avoid. Agreed. You were a star again today. Well done, my friend. Thanks for your help.

Adam Werner 23:41

Thanks. You did okay yourself.

Benjamin Haas 23:43

It's why it's called A/B conversations. You should be first in line.

Adam Werner 23:47

I think it's alphabetical but ok.

Benjamin Haas 23:49

Thanks, pal.

Adam Werner 23:51

Bye.

Benjamin Haas 23:52

Take care. Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions. Thanks for listening!

Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.

Sources: https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

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Ep # 74: Investment Losses Hurt. Avoid These 5 Mistakes!