#217 – How To Handle A Market Selloff

Wes Moss [00:00:31]:
Love for you to be one of them.

Wes Moss [00:00:33]:
Let’s get started.

Wes Moss [00:00:36]:
How to handle a market sell off typically, here on the retire student podcast, we are what would be called Evergreen, meaning that our content and our shows are about topics that are good today and tomorrow and six months from now and a year from now. Even though we talk about markets, we’re talking about markets typically in general and not what happened yesterday or this past week. Because the nature of listening to podcasts is you listen a week later or two weeks later, or this is not the medium for, hey, what happened yesterday or today, at least the retire sooner podcast is not. With that, though, as you are listening to this podcast, whether we are in the middle of a market correction or the correction that really started in July of 2024 has totally wiped itself out and everything’s back to normal and the markets are back at all time highs. Who knows? But we just went through an event that is something that happens to investors over and over and over again. It may happen once a year or twice a year, may not happen for two years, may not happen for three years, but it happens over and over and over again in market history. And that’s market selling off. And in this case, not just a steady sell off over the course of a couple of weeks and a couple of months, but a really big waterfall down day.

Wes Moss [00:02:00]:
Almost what we had very recently in markets is almost a flash crash. In the beginning of August. It wasn’t called a flash crash, but we had a period of time where the Dow Jones industrial average had its worst day in two years, down 1000 points during one day. In that same day, Japan, the japanese stock market, the Nikkei, was down 12%, 12% percent in just one day. Big global stock market sell off. And although we’re talking about the current event of the day, regardless of where we are in markets, when you listen to this, this particular episode, this is something that we all have to deal with as investors over and over and over again. And it hurts almost every single time, no matter how much you’re prepared for it and how much you understand market history and how good of investor you are. It always stings a little bit.

Wes Moss [00:02:57]:
I’d say on a scale one to ten, maybe for Warren Buffett, it stings only at a one because he’s totally fine no matter what, and he doesn’t even worry about it. But maybe he worries about it at least a little bit. So much so that he may be a buyer on a big sell off, or he may do something all the way to someone that feels these selloffs at a ten and it really bothers you. That market’s sold off and you’re close to retirement, and you’ve got a couple million dollars invested and it’s down by multi percent in just a couple of days. And the dollar signs are huge, down 100,000, $200,000 in a couple of days. Even for veteran type investors, that can hurt or sting a little bit, or at the very least, just be unpleasant. So our episode here today is designed for you to pull out and listen to. Anytime this happens, anytime there’s a big sell off, anytime there’s a crises, flash crash, market panic scare, you name it, the VIX, the volatility index.

Wes Moss [00:04:01]:
When that goes up and through the roof, you may want to listen to this episode. Now. It’s prompted by what happened in late July, early August, here in the year of 2024. But again, I think it applies to all of us more than we would like it to, because these sell offs do happen over and over again. I want to start out with just a bottom line of why the 2024 sell off that happened so quickly. A couple of things that were the catalysts of that. Number one, the Federal Reserve has been front and center for the last. I don’t know, maybe they’re always front and center, but very much on investors minds in 2024, we know that they kept interest rates almost at zero, well, at zero for a very long period of time.

Wes Moss [00:04:49]:
And then over the past year and a half to two years, went on a hiking campaign. They ratcheted rates up over and over and over and over again to the point where now, again, depending on when you listen to this, rates at the five and a quarter to 5.5% range for the federal funds rate much higher than zero. So, number one on my kind of bottom line to start out today, is the Fed. To some extent, you could say that they are behind the curve. They’ve held interest rates just too high for too long. Look no further than the log jam in the housing market. Look no further than the big rise that we’ve seen in unemployment. The unemployment rate has essentially gone from 3.4%, a historic 50 year low to 4.3%.

Wes Moss [00:05:37]:
Even though 4.3% is still not all that high for an unemployment rate, it’s gone up a lot over the course of, call it the last year or so. And that has gotten everyone’s attention, including the Fed, who may be a little bit behind the curve and have held interest rates maybe too high for too long. And the market’s waking up to that. Number two, the most recent sell off. And every sell off has its own unique fingerprint and DNA, and you can always find a reason of why we sold off at this particular time. But most recently, an unwind of an overheated, mono focused technology slash artificial intelligence trade that really has knock on effects for other areas of the market. So let’s say technology was perceived to be overheated, investors exited stage left, and as they’re running for the exits other areas of the market, we get a broader market sell off, even though the culprit or the catalyst started in one particular area that was perhaps overbought for a period of time. Again, as I talk through this, I think insert date, insert sector, insert another area of the market that got too hot for too long, sold off, and then did some damage to other places in the market.

Wes Moss [00:06:52]:
I think we certainly have seen that in the year 2024. Number three, corrections are unpleasant, but they’re not uncommon, and very much just part of the process. This is what stock prices do. The prices we see in the equity markets are overly emotional, both up and down, recently down that we pay attention to due to the pain that that causes. But it doesn’t mean that all this won’t pass, and that economics and earnings numbers that are tied to all of this are damaged forever. It doesn’t mean that they’re damaged forever. In fact, it’s quite the opposite. There’s a cure for this or any time markets sell off precipitously.

Wes Moss [00:07:36]:
And it’s simply time and progress that we know we’ll eventually make. Here in the US, we know that over the course of market history, stocks are up about 7% net net of inflation in almost any 20 year period you look at, and 7% above inflation, the way I’m arriving, that is about 10% growth on average, 3% inflation. So a net of 7% is really tough to beat. Not everyone experiences that net seven of inflation due to the shakeouts that come on a relatively repeated basis. The investors, though, that do realize that compounded rate of return, realize that the downdraft du jour or of the moment really is temporary and not permanent. And those are the investors that prosper over time. The trick to making money in stocks is to what? Not get scared out of them. The chart I have in front of me shows market drawdowns from.

Wes Moss [00:08:47]:
If I had my glasses on, I could read this 1928 through the year 2023. What percentage of years did we see a market drawdown of the following magnitude? How about 15% or worse? Well, 40%. Almost half of stock market years from 1928 to 2023, almost 40% of years saw a 15% or worse downdraft, 20% or worse bear market 26% of the time. So a quarter of those years, one in four on average. Then corrections of 10% or more, 64% of years, and corrections of 5% or more, 94% of years. So literally happens all the time, almost in any given year. So drops in this five to 10% range. Happen all the time.

Wes Moss [00:09:42]:
Literally, they happen all the time. Another historical market piece of data that’s important to remember and remind ourselves is that on average, again, going back to the late 1920s, the normal or average drawdown in any given year is about 16.3%. That’s the average drawdown in any given stock market year. But it doesn’t mean it doesn’t hurt when it arrives. Recently, the Dow Jones was down over 2000 points in just a couple of days. 2000 points. Ooh, that hurts. That’s what makes investing so hard for so many people.

Wes Moss [00:10:27]:
Why, you ask, do I subject myself to these swings? They’re so big. They’re so violent. They’re so unsettling. What’s the point? Is it really worth it? Well, it’s the pain that is the point. The pain is the toll of long term stock ownership in companies that happen to reside in the stock market that is full of the world’s collective emotional highs and lows. And there are no highs without lows. That’s the toll. That’s the price of long term market and investing success.

Wes Moss [00:11:07]:
If you’ve ever done a Jane Fonda workout, or if you remember as a kid rocky running the steps, and if Michael Keaton is still Mister mom to you, then guess what? It’s officially time to do some retirement planning. It’s Wes moss from money matters. Weren’t those the good old days? Well, with a little bit of retirement planning, there are plenty of good days ahead. Schedule an appointment with our team today@yourwealth.com. dot that’s y o u ryourwealth.com dot. We all know the long term averages of owning stocks and owning bonds. Owning stocks simply means you own a little slice of the american pie and hopefully, depending on what you own, let’s assume it’s the s and P 500 versus being a creditor or a bondholder to those companies or the government. If you were to be a bondholder versus a stockholder, we know what history tells us.

Wes Moss [00:12:02]:
Stocks have compounded at about 10% per year, again, 7% net of inflation. Bonds around 6% per year, only about 3% net of inflation. And that’s a big difference. Real terms are a big difference, meaning that what did I make? What was I able to keep after the insidiousness of inflation? 7% in real terms. Real terms are the only terms that really should matter versus 3%. That means stocks, again, on average here, looking at the S and P 500, have compounded at more than 100% per year above what bonds have done over time. We all know this. These market statistics have been published thousands and thousands of times in thousands of articles and books and anywhere you can and look up market data.

Wes Moss [00:12:56]:
So why don’t we just all own just stocks? I think it’s because of weeks like we just saw over the last few. Simply not all of us can take the pain of these downdrafts, the pain of a big minus sign, however temporary it might be. It can hurt. And the future is unknowable. We never know exactly what is around the corner. The future is unknowable. It’s totally uncertain. And there’s always the worry that, hey, maybe this time it is different.

Wes Moss [00:13:28]:
And the biggest, strongest, most innovative companies in the world, maybe they won’t prevail. Possible, but not probable. And it is within that sliver of doubt that separates the investor, the owner of companies and the saver lender, the stock investor versus the bond investor. By the way, that’s okay. The good news is that there are plenty of options for every single individual one of us to reach our financial goals, reach our life goals that we’re intent on paying for. So balance really is our friend. And balance, in my opinion, allows us to be the equity stock owners, investors that we each individually have the capacity to be. Meaning that having some dry powder, aka safety investments, that gives us more capacity to be able to invest a reasonable percentage of our retirement assets in diversified stock oriented investments.

Wes Moss [00:14:30]:
Put more simply, dry powder safety assets, that allows us to be better stock investors. So a balance with a little bit of safety, I think just allows those of us who otherwise couldn’t withstand the mental burden of bungee cord stock markets up and down to in fact be able to participate them at least in some capacity, some exposure to the category equity ownership that has the long term history and track record that suggests that it will take you the furthest in the fight against inflation. What’s the real risk here? When markets sell off, we immediately think, wait a minute, I’m getting whips sold. I’m getting whipped around thinking that the risk of these markets on these big downdraft days in general is what? Losing money? Loss of principle. But that tricks us from understanding the real risk. And the real risk is what? The bigger fear is that we outlive our money in large part because it gets decimated by inflation. We have to keep spending more and more, and our assets haven’t kept up with inflation. We end up running out.

Wes Moss [00:15:46]:
And that is perhaps one of life’s biggest worries and fears. We all know that inflation reduces the value of the paper dollars in our wallet, the paper dollars. Hence, we know that the only way to protect against those wilting dollars that is stuck in a wallet doing nothing is to have them placed in places that are most prone to outpace inflation. So my message here today, and hopefully this is helpful, particularly the next time we have another big market correction or sell off that raises the hair on the back of your neck, is a reminder to not let these big bumps along the way shake you out of the long term trends that are likely to really help us with our long term goals. Now, if you’re a regular retire sooner listener, sometimes I feel like I’m just preaching to the choir. I’m thinking if you’re listening to this, you’re probably right in line saying, I’m good with these markets going down. I get it. These losses, I can ride through the storms, the bumps.

Wes Moss [00:16:48]:
Eventually the America will be better and we’ll be higher for longer when it comes to stocks. And I’m just preaching to the choir. Yeah, wes, I get yes, you’ve said this before. I get it. We know stocks are going to be okay. I’m not worried. Then my mom calls, who also knows this and also listens to retire sooner and says, hey, wes, are stocks going to be okay? Mom, over time, I think absolutely. I can’t tell you where they’re going to be at the end of the week or the end of the month or even the end of the year.

Wes Moss [00:17:21]:
But over time, yes, I really believe they’re going to be okay and probably much better than okay. But it’s going to be painful to get there. Lots of slides backwards. But remember, if you have the patience and the fortitude and the conviction that the economy, the markets broadly, will be okay, and I think better than okay. Over time, then, yes, we’ll take these rough patches. We’ll take these tough days, these tough weeks, these tough months, these tough years, with a steady view that is not just in the valley, but beyond the valley, because that’s where we’re all headed. What’s the one thing that all of these historical market scares have in common? Every route and panic and flash crash, every crises, crisis meltdown, every correction, every bear market, what do they all have in common? Producer Mallory is staring at me saying, hmm, what do they have in common? They’re all gone. They’re all recovered.

Wes Moss [00:18:25]:
The broad market has recovered and erased them. Maybe not the most current one, depending on when you’re listening, but they’ve recovered and erased them by advancing to higher ground in some capacity. Eventually. Two steps forward, one step back, three steps forward, two steps back, five steps forward, two steps back. And so it goes. The next time the market sells off, you can’t sleep. You get worried. Are you off course? Just have a quick listen to this exact episode.

Wes Moss [00:19:00]:
Maybe it’ll help. I hope it helps. And thank you for listening to the retire sooner podcast.

Mallory Boggs [00:19:08]:
Hey y’all.

Mallory Boggs [00:19:08]:
This is Mallory with the retire sooner team. Please be sure to rate and subscribe to this podcast and share it with a friend. If you have any questions, you can find us@westmoss.com dot. That’s wesmoss.com. you can also follow us on Instagram and YouTube. You’ll find us under the handle Retiresoonerpodcast. And now for our show’s disclosure.

Mallory Boggs [00:19:28]:
This information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guaranteed offer that investment return, yield, or performance will be achieved. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. For stocks paying dividends. Dividends are not guaranteed and can increase, decrease, or be eliminated without notice. Fixed income securities involve interest rate, credit inflation and reinvestment risks and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

Mallory Boggs [00:20:06]:
Past performance is not an indicative of future results. When considering any investment vehicle, this information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investment decisions should not be based solely on information contained here. This information is not intended to and should not form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment tax, estate or financial planning considerations or decisions. The information contained here is strictly an opinion and it is not known whether the strategies will be successful. The views and opinions expressed are for educational purposes only as of the date of production and may change without notice at any time based on numerous factors such as market and other conditions.