We’ve seen quite a few moments of volatility in stock market during recent months — including dramatic drops of more than 200 or 300 points. But do you really need to freak out and sell when the stock market goes down?
The reality is that too many people realize losses when they panic and sell while the market is down. Instead of making a terrible decision and locking in your losses, you should step back and examine your options when the stock market goes down.
If you have the right approach, you can ride out a stock market downturn — or even make some good money if you know how to go bargain hunting.
[00:00:02] ANNOUNCER: Welcome to the Money Mastermind Show. Let’s Talk Money.
[00:00:18] GC: Welcome to the Money Mastermind Show. With the stock market acting so nutty lately, it’s so easy to panic and sell, sell, sell. But is that the right thing to do? We’re going to go over tonight, we’re going to talk about basically what the stock market’s been doing in the last week or so. But maybe the bigger picture is what you should do with your own portfolio is when the stock market is starting to act a little crazy.
Welcome to the money mastermind show, tonight’s panel is the Money Mastermind Show, we have Kyle Prevost from Youngandthrifty.ca, Miranda Marquit from Planting Money Seeds, Peter Anderson from Bible Money Matters, Tom Drake from the Canadian Finance Blog and I am Glen Craig of Free From Broke. We’ve been doing this show for over a year and I think I’m always peeking down to make sure that I get each and every one of your sites correct because I know that if I try to do an automatic I’m going to really pork it up somehow.
[00:01:23] MM: Did you just say hork it up?
[00:01:24] GC: Pork it up, pork it up.
[00:01:26] MM: My dad would say hork it up the other day and I just was like, “Are you and my dad has this wavelength?”
[00:01:34] KP: That’s a scary thought.
[00:01:39] GC: Before we start, we do have an event page setup so if you’re watching us live and you have a question about what to do when stock market starts acting nutty, post it because we do want to hear it, we want to discuss it and we want to give you at least some sort of answer, it may not be the answer you should take but you know we’ll discuss it and see what we can come up with.
So, the stock market, pretty crazy this past week or so. If you missed the whole thing, maybe it didn’t make that too much of a difference, but if you’ve been paying attention to it daily, it’s enough to tear your hair out depending on who you are. So what do you guys think? It’s been pretty crazy.
[00:02:22] MM: So I missed the monumental four, 4 or 500 point drop, whatever that was, that one Friday. I missed that completely because I was doing more important things like, I’m not even sure what, but it was not paying attention to what the stock market was doing. So I missed that Dow drop, which is what most people think of as the stock market, they think of the Dow which of course obviously is not the entire stock market but that’s what most people think of.
Anyway, so I missed that completely. I only found about it when somebody was like, “So, your job must be pretty fun right now?” I’m like, “What are you talking about?” And they’re like, “The stock market,” and I’m like, “Well, maybe I should go look.” So then I looked!
[00:03:04] KP: Maybe it’s good because I think we’ve all mentioned on this program before a little bit on our views towards ignoring the noise and stuff. What would make a person, what are some common things you guys have saw amongst friends and acquaintances and whatnot, non maybe financial blog readers or hardcore readers. What are some reasons why people would sell? What’s the mindset or what are people trying to gain when they see the stock market going down, they’re like, “Sell, sell, sell.” What’s their rationale there?
[00:03:33] PA: I think the rationale is, “Oh my god, I got to get out before everything is gone, before every last single penny is just gone.” You know?
[00:03:42] GC: Yeah, I think a big part of it is a misunderstanding of what to do in the long term-ness of what’s happening.
[00:03:53] MM: Yeah, for sure, that’s the thing is, in the moment, all people are doing is they’re looking at this situation where they’re like, “Oh my gosh, it’s falling and if it falls more, what if I lose half my retirement fund or what if I,” — they’re looking at this balance on paper and they’re not really realizing that right now, those losses aren’t realized right now. They’re not realized until they actually sell.
So it’s just a paper problem until they actually lock those losses in. Ask anybody who just freaked out in 2009 right? They freaked out, they’re like, “O my 401(k) has lost half its balance, I got to get rid of all the stocks and sell now and get out now because it’s so awful.” They sell, they get out, they lock in all their losses and then what happened in 2010 up till now, we’ve been running practically a six year bull market at this point. And they locked in those losses, if they had stuck around, they would have overcome them and then some.
[00:04:58] KP: Yeah, I think I’ve mentioned a program before the interesting reaction I get, when I teach personal finance and we talk about stocks and that in my course, the kids go home, they talk to their parents and the parents go, “What is he doing telling you get into stocks, everyone lost their retirement!” That’s the common phrase, “they lost their retirement in 2008, 2009.”
And I explained just what you said Miranda and I say “You know, let’s take a look, get a hypothetical portfolio or whatever the case may be, let’s throw darts at an S&P 500 chart and say we had these stocks in 2008 and we held them till now,” and of course almost every time you’ve, in any cases, gained 30, 40, 50% on your basket full of random stocks or even mutual funds or whatever you’re doing.
And they’re just amazing, they go home, the parents say, “No, people lost it all, I know that they lost it all.” And it seems like that fear tends to stick with people over the long term, a lot more than sort of gradual gains do.
[00:05:53] GC: I think also, everybody I think feels like they might know somebody that know somebody that’s somebody that did take a big hit on it. I know people who got hurt in retirement because of the stock market but there’s usually reasons for it and it’s not necessarily because the market is going wacky over one day or two days, I think there’s bigger reasons that are probably we should talk about as far as why…
[00:06:20] MM: The reason is they sold.
[00:06:24] GC: It could be that they sold but I think there’s more to that too. I think some people get hurt if they’re not diversified enough.
[00:06:31] MM: That is true.
[00:06:32] GC: When the stock market go down because maybe one company fails and if you’re heavily into that company and it goes down, yeah, you’re going to be hurt. Or if it goes down and you’re retiring the next day, maybe you know you’re going to be drawing money from it, it’s very recent then maybe you’re really exposed to it. But I think diversification is a big part of it.
[00:06:57] PA: I was just going to say, that’s a big thing, you hear about a lot of people that have lost their entire retirement, a lot of times because it’s these people that are nearing retirement, they’re 60 years old or something and they haven’t actually sat down and thought out, “Maybe I want to start transferring some of this money into something a little bit more stable than stocks. Put a little more of the money I have into bonds as supposed to stocks so there isn’t as much fluctuation in the values and so forth.” That really needs to be part of your long term strategy, is thinking “How is my assets? How are they going to be allocated over time as I get older?” And that’s going to be changing over time ideally.
[00:07:37] GC: It doesn’t even necessarily have to be stocks but I think other companies or other sectors too, you know? And, “Am I all too much into one thing?” If you love one company and you’re putting everything in it and you’re letting it ride on that one number, what happens when that one thing somehow goes down for some reason?
[00:07:54] TD: I have talked to some people too where they realize the market will go back up, they get that part but it’s almost this thought of it’s gone down but it’s going to keep going down so I’m going to get out now and I’m going to buy lower but this might be the bottom, it might just be a one week drop, they almost think they’re being extra smart but I’m going to sell it now and I’m going to buy it again later and it may not go down for months and months.
[00:08:19] MM: Right, and that’s the thing too. I was kind of in the more recent drop, I’m like, “Well you know, should I buy two extra things? I mean it could go lower,” I mean really but look at today? Today it’s up almost the Dow is up almost 300 points at the end of today, the day that we’re recording this and talking about this. The Dow’s almost up 300 points but it’s had this massive fluctuation in the last month, it’s down more than a thousand point on the last month so what are you going to do?
[00:08:52] KP: Yeah, I kind of get a kick out of the whole “everything’s on sale”. Then you look at the historical price to earnings, which I’m certainly not a stock market genius, I have like three metrics that I pretty much base just about everything on and one of them is price to earnings. Historical price to earnings which is, it makes sense to me, how much am I paying for the company divided by how much money did it make right?
That’s pretty much right on average for the most markets. If you look at historical versus future earnings, it can shift up or down but it’s not far from historical averages right now using the metric I use. So I don’t see this like this big rush to go buy, buy, buy and try to time the market like Tom was saying.
[00:09:37] GC: Maybe, let’s talk about — I’m going to admit, I’ve been doing so many other things and maybe that’s a good thing too but I’m not sure I have my head around why the market’s been acting so crazy. I know China’s involved.
[00:09:52] KP: That’s all you need to know.
[00:09:53] GC: Yeah, but can any of you say why? Why people are panicking and going, “You know, we have to sell, we have to not sell.” You know?
[00:10:02] MM: China’s growth numbers are not as good as everybody had hoped, China’s not growing at eight or 9% a year and so people are getting a little worried because China is the second largest economy in the world. They surpassed Japan a couple of years ago. And so they’re the second largest economy in the world, everybody’s worried that a China slowdown will mean a global economic slowdown.
The US hasn’t recovered sufficiently to make everybody feel good about stuff, you add in there the fact that the Fed is still saying, “Hey, we still hope to raise rates by the end of the year,” which of course makes companies upset because when it comes down to it, those rates influence what they borrowed their money at, it influences their profit margins down the road. And so that kind of gets traders getting all crazy and thinking weird stuff. There’s just this kind of mess of things but right now, it’s mostly China scaring the crap out of people.
[00:10:58] KP: In Canada, it’s real simple, the US buys half our stuff, China buys the other half. If China’s not buying our stuff because their crazy government-ran economy that no one really knows about and half the books aren’t even public on, if they’re not buying stuff, our market doesn’t do very good. So Tom’s province of Alberta there has seen longer employment lines. The end.
[00:11:20] MM: In Alberta you’ve got oil issues too.
[00:11:24] TD: We’re officially in a depression here in Canada, just announced this week. That’ll add on top of it for our country.
[00:11:30] MM: Right, right yeah, because your oil prices are down, so nobody feels good about buying stuff. You better sell your house Tom, you better sell it now.
[00:11:41] GC: When you were talking about numbers not being published and not really understanding where the things are coming, is that what you were saying Kyle? From China?
[00:11:50] KP: Well basically, like again, I’m the furthest thing from a Chinese academic who could explain this but the Chinese market is part capitalistic based I guess you might say, it’s a free market for some companies but with a strong government element. Which means government owns large swaths of the market and some of it is still supplied economy, which means the government determines how much is being sold and produced.
And so what that does is there’s a lot of speculation around if these companies are reporting the real thing or if the government is trying to artificially reduce things using different strategies and it’s pretty complicated stuff that I think most people would be quite safe ignoring At least I hope so because I am.
[00:12:38] MM: Let’s not forget that China devalued their currency a couple of weeks ago relative to the dollar. Let’s not forget about that either and that kind of freaked people out to China sitting here trying to be like, “We want to be reserved currency, come on IMF, throw us a bone.” And IMF is like, “Dude, you’re still pegging your currency to the dollar.” But yeah, they just devalued their currency twice in a couple of weeks.
[00:12:59] GC: I’m only playing an accountant on this show, I do have an economics degree but it’s not like a deep, deep degree. But yeah, when China says they’re growing at 20%, whose saying that? For all the things we’re supposed to believe from them, this is what we’re going to believe. “Oh okay, that’s great, everything is good.” I’ve always had that.
[00:13:24] MM: I don’t think they’ve ever said they’re growing at 20%
[00:13:26] GC: They’ve had like double digit growth, they’ve had very high growth compared to the rest of the world. Certainly compared to the US, compared to other place and that’s why people care so much about China. “They’re growing at such a rate that it’s they’re growing up fast, that’s great, we could build a thousand billion more McDonalds there and Starbucks and everything else,” that’s kind of the hope right? “We could sell them that much more stuff.”
[00:13:47] KP: Everyone will buy a car.
[00:13:49] GC: That’s it, right? Who are we really believing? If I could at least an inkling of doubt about what their numbers are and how feasible it is, okay, there’s a lot of China and there’s a lot of potential for growth but that doesn’t mean that everybody that was agrarian all of a sudden is going to be doing tech stuff. It’s not just like the board going right through the country and redeveloping it all where they’re just going to buy everything up.
So if I have that inkling, do the professionals don’t have that either, do they really know something more than I don’t? I kind of have a feeling they kind of don’t. So it’s like, it’s not a surprise that they change their numbers and say, “You know what? Yeah, maybe it’s slowing down a little bit.” They massage their numbers a bit. Should we flipping out over it when they do that?
[00:14:47] PA: No, we should not.
[00:14:48] KP: There’s your answer.
[00:14:49] GC: Even though it happened, for sure it happens. I would love to be able to see some kind of synopses of like how the market actually happens, I bet if somebody can just pull all that data up and go, “What was that first big sale that started it?” Somebody saw something happen.
[00:15:09] MM: I’m sure the market is totally efficient and works on logic and is not influenced by people at all. Did I convinced you that I believe that?
[00:15:23] KP: On any given day in probably the last 200 plus years that the stock market has been a thing in most areas, you could probably find a reason not to invest. Even you look at the last six years which has been this incredible bull market, we’ve had, “Oh the USA is down, they’re never coming back,” and then, “Oh China and then the Greek debt crisis and all of a sudden there’s pigs now, it was Portugal, Italy and Greece and Spain and then all the BRIC countries, they weren’t growing anymore,” and there’s always a fear button being pushed.
[00:15:53] MM: Don’t forget that the dollar is just screwing all the companies over in their earnings because the dollar is just too strong now.
[00:16:00] KP: Yeah. And I take a long term look, you look at the last 100 years where the stock market’s averaged, well at least in the USA and in Canada, between nine and 10%, there was two world wars, several other large scale conflicts, there was insane labor strife. Just crazy stuff, there was like nuclear war threats relative to now and the stock market did just fine over that length of time. It all looks pretty minor when you think about like a few government accountants in China shifting columns from one to the other, it seems pretty small potatoes to me.
[00:16:33] PA: Yeah, this is one of those things, it can be easy to get caught up in the flood of negative media and everything these days but it’s also not anything new, this has been happening since the markets began. If you look it up and look at for a stock market crashes or those types of things, you’ll find all sorts of them even way back when it was first started. The panic of 1837, the panic of 1857, black Friday in 1869.
[00:17:00] GC: That was a bad one, I remember that. [Laughter]
[00:17:03] PA: All the way through today.
[00:17:04] KP: Did okay during the civil war but ’69.
[00:17:09] PA: Back in those days the markets were a little bit crazier, they could be shifted by one or two extremely wealthy men, the Vanderbilt’s of the world and so forth, they could take their money in or out of the market and completely crash things if they wanted to or save things on the other end of it.
Really, what it comes down to, if you look at the last eight decades, S&P500 has only had two decades where it’s been negative growth or whatever and it’s been averaging almost 10% over the past eight decades. You really need to take that long term view especially if you have a long term to invest. Now if you have a shorter term to invest, that might be another matter you might want to think about a different strategy but yeah.
[0:17:54] MM: I think it bears some talking about too, when we’re talking about the stock market, you know, like most people look at the Dow, but that’s only like 30 stocks, that’s only 30 companies. And that’s one of the reasons why I like what people mentioned was the S&P 500, he was talking about the S&P 500 and that’s 500 — that’s 500 companies and I personally as a boring, boring indexer, that’s what I choose. I like the S&P 500 because it’s more inclusive, it’s got more.
But I also have, I do also like an all market fund or an all-world fund. And so when you’re talking about the stock market, it’s important to realize that even though most of the time when we talk about “oh the world is ending, the Dow is down 500 points,” we’re talking about 30 stocks here people, we are talking about 30 stocks. There are more than 5,000 that are publicly traded in the US alone. So I think a little perspective here on what we’re talking about when we start like freaking out about the stock market going down
[00:19:08] GC: Look, I think we’re coming to a consensus here that…
[00:19:14] MM: So boring.
[00:19:14] GC: …you can’t put too much into maybe what you see in the news or what you hear. But do you think there are times when a person should pay attention to what they read in the news? Like the market is moving down, the market is doing this and the market is doing that. I don’t think that people shouldn't pay any attention to it at all. When should somebody go, “Alright, that’s something I need to take note of, maybe I need to adjust based on this?”
[00:19:40] KP: Let me maybe rephrase the question a little bit Glen. My rule of thumb is, if you need money within the next five years, it should not be in the stock market, period. And I know that some people will take a stance about it. If you understand how stocks and bonds and everything else works, great, you can pay attention and do what you want. But for the average mainstream individual, my rule of thumb I tell people is if you need that money, if you need it to send your kid to college, if you need it for down payment on a house, if you need it for a wedding or whatever the case may be, that money should not be in the stock market. And if you follow that very conservative, granted, rule, then I think you can pretty safely ignore all the news. Now if you don’t want to follow that rule…
[00:20:24] MM: Here’s where I don’t follow the rule… [Laughs]
[00:20:28] MM: Well you write, so you have to know.
[00:20:32] MM: I actually keep my emergency fund in an all market fund like my emergency fund that I might need money for next month, I keep that in an all market fund. And then I also recently started a travel fund for my son and I and I have that in — well that one’s a more conservative mix of stock index funds and bond index funds. The travel fund has a little bit of bond fund goodness in it.
But one of the things I’ve found about having it in there is even if I have to sell at a loss to pay for when my basement flooded, I still got a tax deduction for it because a tax loss harvested the loss. But here’s the thing; even if it’s down a little bit and I still have to pull it out and lock in those losses, overall, for the most part, I have enough in there now and it’s built up in nothing, it’s been enough of a return that even if I have to take the capital out, what I’ve got there is an amount of capital that is large enough that it can withstand a thousand point drop or whatever and move forward. So I don’t know? So I guess…
[00:21:53] KP: I’m interested in this because we so rarely disagree on this show.
[00:21:55] MM: I know right?
[00:21:56] KP: Would you advice? Because I see what you’re doing in tax loss service, I mean I have no doubt that you will be ahead of this game Miranda at the end of the day. Would you advise 80% of Americans and Canadians follow that?
[00:22:07] MM: No, god no.
[00:22:09] KP: Ah dammit, I thought we were going to have a good back and fort.
[00:22:12] MM: No, no, no.
[00:22:15] GC: So let’s discuss what’s wrong with that?
[00:22:17] MM: No, well I have three weeks worth of expenses saved up in a liquid savings account that I can get to tomorrow. So if something like serious happens in my financial life and I have to get to it now, I’ve got three weeks that I can do some stuff with. But if I need something longer then I have time to liquify what’s in my investment account. Most people don’t have that buffer and most people can’t handle the stress that comes with it and I’ve only had to use that emergency fund one time in the five years I’ve been — six, seven years I’ve been doing this.
I’ve only had to use the emergency fund one time in the seven years I’ve been doing it. And I didn’t even have to — it only comprised like a very small percentage of what was in there. So yeah, that small amount of capital that I pulled out at the time that I did it, the market was down and I had to take a loss on it and I just did a tax deduction for it.
But for most people who are living on the edge and what are the most recent things? Like what? 65% of Americans are still living paycheck to paycheck and have no savings? If you’re in that situation then no, this is probably not the plan for you because it’s not very liquid, you can’t just go down to the bank and get it right now and you’re probably going to be stressed out about when the market is down.
[00:23:53] KP: When accountants in China start playing with figures.
[00:23:55] MM: That’s right. So somebody else tell me why I’m wrong. Go!
[00:24:01] GC: From what you just said, it sounds like you have different layers of emergency funds?
[00:24:05] MM: Yeah, yeah. Yeah because once I get to more than three weeks worth of expenses sitting in my emergency fund, I’m sad because of just the really poor yields that you get on any sort of savings account. So once I’ve got more than three months’ worth are like chunked in there — I mean three weeks. Three weeks’ worth chunked in there, I feel sad about my yield, and so I just want it actually working for me in a different account.
[00:24:30] GC: In your stock part of that emergency fund, you don’t have to think of it as numbers but how far of a cushion is that? I’m going to guess you have a pretty big cushion in there if you could take a big drop?
[00:24:44] MM: Yeah, I’ve got six months’ worth of expenses in there and when you think about — so it’s not like it’s huge or anything. That’s the other thing, once I get more than that, I’ll move it to a different account because if I have room in a retirement account, I’ll move it to that or if I have room in my new travel fund, that’s probably where I’m going to move it now, is just move it to the travel account.
[00:25:13] GC: The big thing about emergency funds is there’s no one definite amount that you need to have in there. Right? It really depends on each person and what their industry is too. If you have six months there and they’re in stocks and for some reason the stock market goes —let’s put this into context, we’re talking like a few percentage point in the last week or so, you would have to lose half the market for you to go for like six months to three.
[00:25:41] MM: Oh yeah, yeah. Yeah.
[00:25:41] PA: Right? I mean, so you’re still in a pretty strong position there and yours is an industry where you’re producing it yourself. You’re pretty familiar with what you’ve had a lot of consistency, nobody’s really going to fire you from one job where that’s going to hurt you. I’m putting this…
[00:25:58] MM: You’re right though.
[00:26:00] TD: That’s the big difference with Miranda, yeah. She’s got freelancing working for various people but if you have just a regular job.
[00:26:08] GC: Her job itself is diversified.
[00:26:09] TD: Yeah, with a regular job the time you’ll likely get fired is probably the same time that the stocks are dropping or whatever the economy starts to go down. You wouldn’t want that, that perfect storm of losing your job and your emergency fund all the same time period.
[00:26:24] MM: Right, and that’s the point that Tom makes. Like I said, when you ask 80% of the people in US and Canada should probably not be doing what I do.
[00:26:35] GC: But it also shows that when you have all your other, everything else in place and it’s working for you and you’ve built up a cushion, you can do more with things and you can be a little more flexible too. It’s certainly kind of an idea maybe if you want to shoot for it one day but like you said, I don’t know that that’s a practical for most of the people who will be watching and listening this show.
[00:26:59] MM: That’s true. But hey, if you’re a freelancer, you know?
[00:27:03] KP: Miranda has a lot of options, she just explained she has given herself a lot of outs, doing different things. Where I see a lot of people sort of panic is the retired, people entering retirement and they’re retired folks that have to withdraw their portfolio and their savings in investments in order to live, to cover their day to day cost. And man, if you are approaching retirement and you are 100% or 90% or 80% in stocks or stock-based neutral funds and ETF’s, man you had better know what you’re doing and better be really confident because you are really setting yourself up for some stress when you — I mean no one has any idea what’s going to happen in China. If they do, they’re running a hedge fund somewhere and making money off it. The guys on TV you will never convince me, they know what China or Greece or whatever. The people in Greece don’t even know what Greece is going to do. So how can you be basing your retirement on that, that’s really risky to me.
[00:28:00] GC: Yeah, there’s one thing that I was thinking of. We’re talking about how you know how long you’ve got, usually somebody can have an idea, you know age wise when you’re getting close. But one thing that popped into my mind in the last week is a 529 plan, like a college savings plan for those that are north of the border, they might not have a 529 probably have other things. Right, your window is a lost smaller, that five window is now like if your child is 12 or 13, now you really do have to start thinking of this.
So when you start hearing these numbers start playing around, you go, “Wait a minute, that can be the difference of a year’s tuition and maybe a year’s books,” if you’re not playing it the right way. So I know that that came to me for me. I really need to look into my kid’s 529 plans and look at what their ages are and look at how it’s going to play out and how safe or not it is.
I think I’m really going to have to diversify some of that myself based on what I’ve heard in the week. Not necessarily because of the news, I’m not worried about what China is doing or anything like that. Just because it was a great reminder that I have to maybe play with the volatility of my oldest’s account to make sure that it’s not going to be too affected by that if I need tuition and the week before everything drops a few points.
I think that’s maybe a good example of a case where you might want to start maybe just investigating, not necessarily sell at all but look into how you have it setup.
[00:29:38] KP: Yeah, I know, we’ve had Rob Carrick on the show before and he’s written about that in Canada with the RESP’s how I think with his children, he was aggressive, I want to say, don’t quote me, but 60 to 70% in a broad based index and equities when he started and then as the children got older and yeah, by the time they were 12 or 13, he had, it was either none or maybe like 20% invested in stocks and the rest were cash equivalents.
So you can see how, I agree, as your children get older, if you have a family plan the average the age of your children, you need to start taking some risk over that or live with the consequences right? If you’re making 250 grand a year and you can pay it anyway, you can pay your child’s bills regardless of what happens, you can take the risk in that account but I don’t make that much money so.
[00:30:24] PA: Yeah, really, that 529 or RESP is kind of like a normal person’s working career in miniature, you could almost look at it that way. Instead of 40 or 50 years, you’re looking at 15 or 20 years. You really just have to kind of take that whole career thing and miniaturize it and say, “Hey, I need to start shifting things one way or the other,” and yeah.
[00:30:48] TD: It goes back to what Kyle said earlier too with his five year rule I would will apply it just for that too. Like Glen said, 12 or 13 or whatever start to take the risk out because you need it in five years.
[00:31:01] GC: I think time always seems to just zip by you, the older you get, the quicker it goes. But with your kids, you forget 12 and all of a sudden, now they’re in high school and you’re going, "Wait a minute that account, what about that?” All of a sudden you starting to think about college and go, “Okay yeah, how much do we have in it? Wait a second, we had it all in high risk stock. Oh man!”
[00:31:27] KP: “I had it all on that Chinese railway but.”
[00:31:31] MM: Yeah.
[00:31:33] GC: The telegraph.
[00:31:36] MM: The nice thing about, did I say about a broad based stock fund is that even if it tanks and you’re going to have to say, “Well, I’ll put off using it for a year or so,” or something like that. I dunno? The thing about the broad based index fund as opposed to individual stocks is that you kind of spread that risk out a little bit more with diversity.
[00:32:03] KP: Yeah, I think about it this way, I have no idea, you tell me any one or two specific stocks on the S&P 500, I have no idea. Apple? Looks good, so did Microsoft until Apple surpassed it. I mean Microsoft is still doing fine.
[00:32:18] GC: I think they might even doing better these days, who knows?
[00:32:19] KP: Yeah. One or two stocks, I have no idea but I know that it’s a pretty safe bet historically and looking forward, it seems to me logically that if you take the 500 biggest companies in the USA and you look at maybe, I don’t know where China is going but I know that the best companies out of those 500 are going to have a pretty good idea and they’re going to have a pretty good idea of where to open a Starbucks or how hard is Amazon going to push their employees to make their stock go up or whatever, the news has been there.
I have faith that those 500 biggest companies will keep on doing what they’ve been doing and that’s make a lot of money overtime. They might take a hit here or there but overtime, as a group, they’re going to make a lot of money.
[00:33:01] GC: Yeah. Go ahead Peter.
[00:33:04] PA: I was going to say, investing in single stocks here and there can be kind of fun, it’s almost, you can almost get a little bit of rush from it just because you find a certain stock and you watch it go up 50% in value or whatever. But the flip side is, they could have a bad earnings report or something and then it’s going to drop drastically as well. It’s kind of like a rollercoaster ride, it’s a lot of fun until you go flying off the rails. On the other flip side of the coin, those index funds and diversifying across the market is kind of like a slow car ride up a long, long hill. It’s not super exciting but it’s going to get the job done when it comes to it.
[00:33:44] KP: It’s not just us — I was just going to say Glen, it’s not just us that don’t really know where this stuff is going. I love looking back with experts say, there’s a guy up in Canada, Jeff Ruben, he’s like one of our top economist, he was a big guy with CIBC bank, now he writes articles. He wrote this huge book called The End of Oil. Wrote it several years ago and it was, like, “Oh, manufacturing’s gonna come back to North America, oil is going up to $200 a barrel, it’s going to save the planet.”
And everyone was like, “Oh my god, this is the preeminent book of our age,” and then of course, where’s oil today? Wherever it is, it’s going up or down between $40 and $50 a barrel, it doesn’t look to be going up anytime soon and we’re finding more oil and how to get it out of the ground all the time for better or for worse. Now Jeff Ruben’s like, “Oh actually, I saw this coming all the time, that’s why I was writing why how it would be bad for the environment.” And I have that book, someone bought it for me because they were like, “Oh you’re interested in this stuff.”
And this guy was literally the head of CIBC’s entire trading department. So if he was so badly wrong and wrote a book on the one part of the market he was an expert on and was atrociously wrong, I think that shows how dangerous it can be to try and predict commodities and things like that.
[00:35:02] GC: Maybe it’s a scary thing, maybe it’s a good thing too. Technology’s changed so much in the last five, 10, 15, 20 years. If the stock market’s even going down, there’s going to be so many new advances that come out that it’s just going to be insane. Think about Apple’s growth, where did they come out of? They made their computers look really nice with the see-through tops and you’re like, “Oh that’s great.” All of a sudden this iPod thing comes out and then iTunes comes — nobody was able to expect what their next product was going to do.
Now their next product can completely tank and somebody else come out with something better and all of a sudden it goes down. But what I’m saying is there’s always something bigger that’s going to come out. You’re talking about oil, well what if Elon Musk comes out with some kind of sun whatever that revolutionizes everything and now all of a sudden, he’s the next oil baron but he’s the oil baron of the sun. We don’t know what will happen.
[00:36:02] KP: I love that.
[00:36:06] GC: It’s like the next Montgomery Burns and he’s blocking out the sun and making money off of it. We don’t know, but the opportunities for those things to happen are there. There’s always going to be some growth in technology that some company is going to be growing that we’re going to be able to ride its back as part of a diversified portfolio.
[00:36:27] KP: Yeah and I was just going to say, and that company will be in the S&P 500.
[00:36:31] GC: Or in the NASDAQ or something at some point. Whatever company that you think you need to invest in, it’s going to be represented for the most part in one of these funds, unless you’re really one of these high end guys who can actually just buy in like and angel investor which most of us aren’t. You’re really going to be able to find those somewheres else.
[00:36:54] TD: Speaking of not wanting to panic with stocks, that’s why I don’t individually buy technology stocks because as you’re saying, one company can come out of nowhere but normally that’s at the expense of another company that was doing something before. Keeping track of that would drive me insane. So I never touch technology stocks.
[00:37:12] KP: It seems like the barrier to entry in tech is like nothing. If you read any of Warren Buffet’s stuff, what does Warren Buffets buy? He bought Heinz ketchup, you know why? Because if a new ketchup company comes in, how are they going to take on Heinz, right? It’s not going to work, they’re not going to. A comet could hit the Heinz plant and they’d still be the top selling ketchup.
But if you’re Apple, who comes up with the next thing? Microsoft was going to be the king forever, yeah, agree, tech, there’s some people that make a ton of money in that field but man, you better know what you’re doing, better be smarter than I am because I don’t want to try and predict and read the news.
[00:37:52] TD: Well look at the biggest online companies and stuff, 10, 15 years ago, they basically don’t exist now. I just can’t imagine investing in these companies.
[00:38:00] MM: AOL is totally legit.
[00:38:03] KP: Their valuations aren’t even based on metrics like I love shocking people when I’m like, “Yeah, Amazon’s actually never made any money.” And they’re like, “What? How is that possible? I just ordered like $500 last week, how have they not made any money?” And I’m like, “No Amazon has never made profit. They’re totally based on their expansion right now.”
[00:38:24] GC: At least Amazon has a product. Like they sell something. They rent space, they do something. How about these social networks, that are like worth billions and you’re like, “How? They really don’t earn any money, because they don’t really do anything.”
[00:38:43] TD: It seems so hard to imagine something like Facebook being gone, but who is on My Space nowadays?
[00:38:49] KP: That’s right.
[00:38:51] MM: Well here’s the ting, Twitter’s evaluation is like billions. But they’re like, “But how do we monetize it? How do we make it profitable?” But it’s worth billions but how do I make it profitable, right?
[00:39:05] PA: That’s really the thing, there’s always going to be the next big thing that people are going to get excited about and want to buy in to it. If you — I’m reading this book about Cornelius Vanderbilt right now, back then, the big thing the people were getting into was steam ships. “Oh my gosh, this is the next big thing, it’s going to be here for 200 years and you got to buy into steam ships.”
Well shortly thereafter, the railroads started getting real big, everybody’s trying to buy the railroads and all these steam ship stocks are going down the tubes. You always have to think about these things in the long term, there’s always going to be something new and something better. Why try to pick because you probably are going to get it wrong half the time.
[00:39:43] GC: And most of us aren’t Cornelius Vanderbilt either. We don’t have the money or the knowledge to get into these things, to really know about it. Usually if we think something is big, it’s probably already too late.
[00:40:01] MM: Oh my gosh, yeah.
[00:40:02] GC: I don’t know who it was but it was like he was getting his shoe shine and the kid was trying to tell him what stocks to buy and then he knew like, “Okay, this is done, we’re about to…”
[00:40:13] MM: We’re all done with this now. It’s like that story that this guy JD was telling us at JD Stein who does Money For the Rest of Us. He was telling us at dinner in Dallas a couple of weeks ago — well about a month ago now — and he was talking to us about it and he’s like, “Yeah, when my exterminator was talking about some of these stuff, I know that it’s the end.”
[00:40:13] KP: David Chilton who wrote for The Wealthy Barber, he has a great one. He goes, “When teachers talk to me about borrowing money to get into the stock market, I know that that’s it. I cash everything out because I know, that’s like my weather vein. When teachers are borrowing money, get out because you know that something’s about to happen.”
[00:40:58] GC: I’ll have to keep my…
[00:40:58] MM: We’ve reached the top.
[00:41:01] GC: …my finger up for that one, that’s interesting.
[00:41:04] MM: Basically you just need to watch Glen and Kyle, when they start borrowing money to leverage their positions in the stock market, that’s when the rest of us need to be done.
[00:41:17] GC: I’d like to think we’re the exception.
[00:41:19] MM: You’re not going to leverage your whole life to get into the stock market?
[00:41:23] GC: No, but if you go 20 bucks I’ll — If I really wanted an individual company I’ll supplement it as a small portion of everything else that’s diversified.
[00:41:37] MM: Kind of a fun, like…
[00:41:39] PA: Fun money.
[00:41:40] MM: …your play money, your play portfolio?
[00:41:42] GC: Yeah, yeah, You know, and I like to think I do well in that but I’m not putting enough in there because I know even if I happen to be doing okay, I don’t know, nobody knows what’s going to happen.
Do you think people should genuinely be afraid though?
[00:42:05] MM: I think you should be worried if you don’t have a plan and if you don’t know what the purpose of your money and what it’s doing there. If you’re just randomly going, “Well, 401(k),” and you don’t know why you’re doing something with your money. At least have an idea of what is your goal, what are you trying to hit, what is your money trying to do, what do you want your money to accomplish?
If you don’t understand that and then it really just doesn’t matter and then that’s when you should be worried.
[00:42:39] GC: I think also like talking while we were discussing and when every person is talking about one thing, maybe that does add a little bit of caution when everybody’s so positive about this one thing and then maybe you gotta go, “Alright, maybe it’s time to pull back a little bit.”
You think about real estate in 2006 or so, it was like the thing, it was on TV, it was everywhere, all you have to do is buy a property and flip it and you’re going to be rich. Cause property values were going — when so many people are doing it, you gotta kind of go, “You know, if I’m invited in that maybe now’s a good time to pull back.” When there’s four TV shows talking about it.
[00:43:25] MM: That’s the thing though, it’s like what you were saying before, by the time it’s common knowledge, you’re already reaching the top. That’s once again the beauty of indexing is instead of having to worry about one thing and whether that one thing is really going to still be the big thing or is really going to be helpful to you, if you’re doing a broad market index then you’re just doing the whole market over a period of a long period of time.
Over a long period of time, over 25 year, if you look at it, none of the indexes have ever lost, have been a negative over a period of like 25 years. If you have a long term view and you’re okay with the broad market, do that because eventually you’re still going to be better off. I mean think about even if the market drops to 9,000 tomorrow, if you got in while the Dow was at 6,000, even if it drops from where it’s at today, you’re still ahead. Right?
If you got in in 2009, when the Dow was down to 6,000 and if tomorrow it suddenly drops to 10,000, you’re still ahead. And a lot of people just look at it and say this is what I had today and now here’s what I have — this is what I had yesterday and now here’s what I have today. Compare that to what you had five years ago and you’re still ahead.
[00:45:03] KP: In 20 years the financial podcast will be talking about Black Thursday, “Remember that black Thursday of 2015?”
[00:45:10] GC: “That Miranda cursed us all!” But it is all relative right? Okay, China, they lowered their projections, they didn’t say that they were going to close their doors and not buying anything ever again.
[00:45:29] MM: Oh I know, like China slowing down is, “Oh my gosh, we’re doing 6% a year, good lord, we’re slowing down.” That’s china slowing down and what would we be happy, we’d be thrilled to death to be seeing 6% year over year, it’s ridiculous.
[00:45:46] PA: Yup, it all comes down to having that long term view, you look at any one or two year period, “Oh my gosh, the world is going to come crashing down,: and you have the line going down to the right then you pull back just a little bit and you see, it’s starting back up, in the long term, it’s just basically going up to the top right. So yeah, take a deep breath, take a step back and try to get a bigger view of what you’re looking at.
[00:46:16] TD: Panic affects stock investors so drastically that like I’ve done a lot of reading and whatever it takes, however conservative your portfolio needs to be to allow you to sleep at night and that’s different for everyone depending on every one’s situation, do that. Because nothing’s going to hurt you worse than panicking and selling and buying and just doing all these terrible things that we’ve talked about in the show before that really, really cripple your long term return. So whatever you got to do to convince yourself that you can ride out anything, do that.
[00:46:48] GC: Yeah, if anything this last week or so really is a great litmus test for your own risk tolerability. If you really were worried in this last week, it doesn’t mean you should sell everything, but what will make you comfortable? If you need to maybe pull back a little bit on stocks and push a little bit here for now, you don’t want to tell people to just get so safe that they’re not going to take advantage of that growth that stocks give. But if you think you’re doing something that might be a little too risky, okay, now might be a time to change your diversification or your allocations. Not because of the Chinese thing or anything else but because long term that’s what you need to do to be able to sleep at night.
[00:47:36] KP: Yeah, I think you hit on a good point there Glen, a lot of people have written about the millennial generation and we are scared to death of stocks, we don’t understand them. It was like, I don’t think any generation, the main streams really understood stock, but at least the general feeling was that they were a good thing, like owning businesses was good for you. But now, Millennials have this weird super fear because of all this newspaper headlines and these 24/7 news channels and all these crazy things just blowing everything up.
[00:48:06] MM: Don’t forget they watched their parents freak out over their retirement funds.
[00:48:11] KP: That’s right.
[00:48:11] GC: Also maybe the rate of change of technology has been changing probably more now than maybe ever before also. You can’t hold on to any one thing and expect it to always be the case. I don’t know that the iPod 19 will ever exist.
[00:48:27] KP: But Heinz ketchup will. [Laughs]
[00:48:33] GC: So what do you think might really crash things permanently? I’m thinking like zombie apocalypse. Then I think real productivity might stop and you might not get that growth again.
[00:48:48] KP: Invest in guns next.
[00:48:51] GC: Even production’s going to stop.
[00:48:53] KP: Right. I meant hard market. Like black market, buy guns.
[00:49:00] GC: All these people who are buying gold, what are you going to do with gold? You’re going to throw it at people?
[00:49:04] KP: That’s what I always think Glen, I never understood that philosophy. Buy gold, the world’s going to hell, “Oh there’s my brick of gold then go get some fresh water.”
[00:49:13] GC: It’s like, “No, get a can of beans maybe.”
[00:49:17] MM: Well I’m back in the mountains, back to just outside of wilderness. My big investment is I got my fishing pole fixed and I’ve got my tackle and I got my gun, I can go get any food I want. The river is just right there.
[00:49:38] KP: You sound ready to run for president there Miranda with a stump speech like that.
[00:49:42] MM: Right. I really think the only thing that would really crash the system, it’s like in Sneakers right? Oh gosh, I’ve dated myself. Please Glen, Glen’s seen Sneakers.
[00:49:55] TD: I have that on VHS.
[00:49:57] MM: Okay yes, thank you Tom. Thank you.
[00:50:04] GC: Was I talking? Was that in color?
[00:50:10] MM: It’s classic, it’s Robert Redford, it’s funny as hell, go get it. Anyway, the point is, even as old as this movie was, they understood information and what the guy says, he says, “It’s all about the information, the world is run by ones and zeroes.” The only thing that I can really see, like really crashing is if something really crashes our technology and wipes out the information.
Because really, honestly, most of our wealth, most of everything we have is basically digital. Think about it. How much cash do you have right now in your wallet? It will be worthless in this scenario anyway because of inflation. How much cash do you have in your wallet right now? Our entire economy is based on the way information moves and the way that your company says, “Oh by the way, we’ve direct deposited this money into your account.” They didn’t deposit real money in your account, they sent some information to your bank.
[00:51:15] GC: I’m not sure that you’re instilling confidence in the people right now Electromagnetic can knock you out.
[00:51:23] KP: Once again though, I’m not overly concerned because I’m a student of history and as long as the rich, powerful people have their money where I have my money, I’ll be okay.
[00:51:34] GC: Oh so you think that they do.
[00:51:39] KP: It’s all in gold.
[00:51:45] GC: Or in cans of chili.
[00:51:45] PA: Gold and guns, ketchup.
[00:51:48] KP: Heinz ketchup is good now or good if the world goes to hell, everyone still want it.
[00:51:52] GC: I prefer Trader Joes actually but.
[00:51:55] MM: Oh yeah, the Trader Joes ketchup, that’s great. I can’t get it anymore.
[00:51:59] GC: A lot of these people who are billionaires, their money is paper money anyway or virtual money. Like Mark Zuckerburg, he’s got a lot of money but a lot of it is in the stock of his company.
[00:52:16] PA: You’re so off the rails there.
[00:52:24] MM: We are so off the rails [Laughs].
[00:52:27] PA: We’re onto the zombie apocalypse.
[00:52:28] MM: Don’t freak out. You’re either going to be just fine if you stay the course or everything’s going to go to hell anyway and it won’t matter. There you go.
[00:52:46] GC: Moral of the story is…
[00:52:47] MM: Who is feeling good?
[00:52:51] GC: I’ll let you guys develop the moral of the story. Let’s go around and wrap this up. What are your final thoughts on market volatility, what do you do? Tom, tell us your thoughts.
[00:53:03] TD: It’s basically what we said was diversify and just kind of ignore all the noise, I haven’t looked at my stocks in the last couple of weeks, partially like you said Glen, you’re just too busy but also I didn’t need to know, I was good not knowing. Just keep calm and carry on.
[00:53:26] GC: Worked in World War II.
[00:53:27] KP: Thanks for the sponsor of the show.
[00:53:31] GC: Peter, what are your final thoughts?
[00:53:33] PA: Just more of the same, just set yourself up so you don’t have to worry about this short term crashes or bubbles or whatever. They’ve been happening since the markets began. Great crashes in the 1800’s the 1929 crash to 2007, 2008 when we had the bit crash. So you know, those things are going to happen just set yourself up, diversify, index funds, know your tolerance for risk and adjust your investments according to that and know your time rises and how long you have to invest and again adjust accordingly.
[00:54:06] GC: Miranda, what are your final thoughts?
[00:54:09] MM: My main complaint is that, S&P hasn’t fallen far enough for me to feel like it’s worth it to buy extra shares. So you know, I could handle it falling a little bit more because I’m bargain hunting.
[00:54:20] GC: You are hoping for a big drop tomorrow.
[00:54:22] MM: Sure! No, the bottom line is, I’m not taking anything out, but if it gets low enough, I might put something in. Because when I’m looking at the long term, once again, like Peter was saying, like Tom was saying, look at the long term and stay the course and if you’re going to do something, if you’re going to go out there and do something, for heaven’s sake, get a bargain. We buy everything else on sale, right? Might as well do this too.
[00:54:54] GC: I was just thinking Dana Carvey doing George Bush, “Stay the course, 1,000 forms of light.” Anyway.
[00:55:01] MM: Why are we still talking about buying stuff on sale? “Go buy on sale, go comparison shop,” well now is your time for a bargain.
[00:55:09] GC: Kyle, what are your final thoughts?
[00:55:12] KP: Yeah, despite my stress-induced extreme aging, I am only 27 so I’m definitely cheering. I hope stocks tank, I’d love if 2009 happened again and the newspaper headlines went berserk, I’d be like sharing them on Facebook trying to get people to go even more wild just so I can continue to buy more stocks.
The bottom line is that, one stock, one sector, one market can go down, can go down for a long period of time. But I have faith that the 60 biggest companies in Canada or the 500 biggest companies in the USA over time, they’re going to keep making money because that’s what good companies do.
[00:55:48] GC: There you go. Look, don’t let any short term news make you go crazy and do something you’re going to regret. Long term look and until next week, it’s been a lot of fun, be good with your money, good night.
[END OF MASTERMIND]
[00:56:06] ANNOUNCER: Thanks for joining us on the Money Mastermind Show. Get more information at Moneymastermindshow.com. Don’t forget to subscribe to the show on iTunes and YouTube and follow us on Google Plus.
Important issues discussed in this episode:
- Is it really the right time to sell when the stock market goes down?
- How can you protect your long-term portfolio during times of volatility?
- What are some of the best strategies for sleeping at night as an investor?
- When is it time to turn off the TV and ignore the noise?
Panelists In This Episode:
- Glen Craig | Free From Broke
- Kyle Prevost | Young and Thrifty
- Miranda Marquit | Planting Money Seeds
- Peter Anderson | Bible Money Matters
- Tom Drake | MapleMoney
For a quick bio of each of our show participants, head on over to our panelists page.
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