Mind Over Money: How to Do It Right
The 'Friends Talk Money' podcast hosts on investing rationally, not emotionally
Rudyard Kipling famously wrote: "If you can keep your head when all about you are losing theirs…" And that about sums up a key rule for investing: Make your decisions about when to buy and sell and what to buy and sell based on thinking rationally, not emotionally. It isn't easy.
But my "Friends Talk Money" podcast co-hosts Terry Savage and Pam Krueger and I, along with financial adviser Kendrick Mattox of Edge Capital Group in Charlotte, N.C., shared our best advice on now to do it in our latest episode. (You can listen to it wherever you get podcasts or at the end of this article.)
To Krueger, the founder of the financial advisory vetting service Wealthramp, it's all about having an umbrella before it starts raining.
Preparing for a Stock Market Drop
In other words, don't panic when the stock market goes down — and it will go down sometime, perhaps a lot, and perhaps for a while. Instead, prepare yourself mentally for what you'll do when we head into a bear market and then do what you said you would.
"You have to look at your portfolio before it starts raining. After it starts raining, or while it's raining, it is too late."
Right now, while the market is mostly humming along and the economy isn't awful, is a good time to make intelligent, rational investing decisions.
Says Mattox, using Krueger's umbrella metaphor: "You have to look at your portfolio before it starts raining. After it starts raining, or while it's raining, it is too late."
Mattox notes that we've had basically 12 years of good stock and bond markets. So, he and Savage — the noted personal-finance columnist and author — say on the podcast: now's the time to do what you can to shore up your emergency savings and, if you can, your retirement savings, while you can afford to do it.
Mattox tells retirees to "make sure that they have three years of income and cash available for living expenses" — easier said than done. The worst thing you can do as an investor, Mattox says, is sell your stocks when the market's tanking because you're being forced to sell them to pay your daily living expenses.
Tapping Retirement Funds to Pay Daily Expenses
The data suggests many people have been tapping their 401(k) retirement savings to cover daily expenses lately. A Fidelity Investments report showed that 17% of people with 401(k)s have outstanding loans from them and 2% made 401(k) hardship withdrawals in the first quarter of 2021.
Savage is worried that some investors these days are feeling "not only calm, but scarily entitled." They assume stocks only go up. Many don't recall the terrible bear market of the early 1970s or perhaps even the one in October 1987. (A bear market is when stocks are down 20% or more.)
As someone who does recall those dark days, Savage says, it's important to understand that every stock market dip is not a buying opportunity. It might be the beginning of another dip, she notes.
"I think people have lost touch with a certain piece of reality," Savage says on the podcast.
Krueger's a big fan of ensuring that your investment portfolio is divvied up the way you intended, with a specific percentage in stocks, bonds, cash and real estate. The market's run-up may well have made your holdings out of balance, tilting more heavily towards stocks than you intended just because those are the investments that have gained so much in value.
Is Your Investment Portfolio Out of Balance?
As Krueger says on the podcast: "You may see all of a sudden that your stock allocation is higher than you realized because you haven't been looking and because the market has been going up."
The solution: rebalancing your portfolio, to get things where they should be. A rebalancing umbrella, if you will.
Savage recommends rebalancing your investments once a quarter or every six months.
If you work with a financial adviser, that pro can help you do it.
If not, you may be able to arrange for automatic rebalancing through your 401(k) or mutual fund or ETF (exchange-traded fund) company. "It's like setting an alarm clock," says Krueger.
Savage recommends rebalancing your investments once a quarter or every six months and, ideally, having that done automatically for you.
If you don't want to sell some of your stocks and then put that money into bonds or the bank, because the returns are paltry there, then move some of your riskier growth stocks into safer, conservative, dividend-paying stocks, she says.
Another way to help invest rationally rather than emotionally is by doing what I recently advised my son, Aaron, to do: set a target price for your stocks and then sell some or all of those share when they hit it. Aaron has a little money in a cryptocurrency stock and a target price, I told him, will get him ready to sell some or all of his shares when the stock hits that point.
It's a way of avoiding being greedy as the stock price goes up and then sadly, painfully watching as the stock plummets and the value of your holdings shrink like a deflated balloon.
Savage says that few investors have the discipline to sell stocks when the market's rising and not to panic-sell when it's falling.
"If people had self-discipline," she says on the podcast, "a lot more people would stick to their diets."