Episode #- 23- Navigating Market Declines.

Wealth Decisions Podcast Transcript for Episode #23

Listen to this episode on Apple Podcasts or Spotify

Welcome to The Wealth Decisions Podcast, where each week I take 15 minutes or less to discuss crucial wealth decisions and mindset hacks to help you live a richer life.

I'm your host, Brian Muller, and I've been in the financial services industry for over 25 years, and I'm also a certified life and health coach.

And I have a passion for helping people make better decisions around their money and their life.

So for the sake of time, let's dive right into it.

In today's episode, we're going to be talking about navigating market declines.

I decided to do this episode this week because of the recent drop in the markets.

You know, whether you're a novice, just starting your investment journey or you're a veteran investor, understanding how to handle market corrections is crucial for your long-term success.

The most important thing to note is market corrections are normal.

They're part of a healthy market.

On average, the stock market has about three 5% drops within any particular year.

And on average, we have about one 10% correction per year.

A market correction is typically defined as a decline of 10% or more in the market index from its most recent peak.

But it's important to note that this is different from a bear market, which is characterized by a decline of 20% or more.

Just know that corrections are a normal and healthy part of market cycles.

Sometimes the market needs to readjust valuations when they become a little too heated or overinflated.

And corrections can happen in any market, whether it's stocks, bonds, real estate, commodities or even cryptocurrency.

It can be broad, affecting an entire index like the S&P 500, or they can be narrow, just impacting specific sectors or individual stocks.

This recent downturn was led by big quality tech stocks, but it bled into the rest of the market.

It's crucial to understand that corrections are not the same as crashes.

While both of them involve some type of market decline, crashes are more severe, they're very sudden, and they're often triggered by specific events, like the stock market crash of 1929, or the most recent COVID-19 crash in March of 2020, are examples of some type of market crash rather than a correction.

And on average, most market corrections last about four months.

But this can obviously vary widely depending on, you know, underlying causes and economic conditions.

I always used to tell clients that the market, when you look at it over a 30, 40 or 50 year period, the trend is upwards.

We have temporary downs and permanent ups.

The S&P over a long period of time has averaged about 10%.

The key during market declines or market corrections is to keep a long term perspective.

I know sometimes that can be hard when you're in the midst of bad news or the business channels reporting on declines every single day or using the word sore or plunge every single time they report on the markets.

But take your home for example.

It's one of your most important assets.

It's a long term investment for most people.

But if your home was in the paper and the price of your home was listed on the exchange on a business channel, if you saw the price of your home down 20 or 30 percent, you wouldn't panic and sell because you know it's a long term investment.

That's the same way you need to look at your long term investments for financial freedom or retirement.

Studies have shown that missing just a few of the market's best days can significantly impact your long term returns.

Many of the best days occur shortly after market declines.

And historical data shows that investors who stay in the market during downturns and continue investing tend to outperform those who try to time the market.

I did a great podcast episode in the first 10 episodes called Don't Try to Time the Market.

And I'd encourage you to listen to that episode.

Corrections and bear markets are different.

They're both a little unnerving, but corrections are generally less severe and they're shorter live than a bear market.

And understanding this can help prevent you from making a emotional decision during a small correction.

Now, corrections often coincide with different phases of the economic cycle.

And understanding where we are in the cycle can give you some context for some of the market movements.

Today, the market seems to be thinking that we could possibly have a recession.

And that's where some of the fear came in that caused part of this recent market decline.

Now, I don't have a crystal ball, but our economy is solid.

Inflation has been coming down.

Corporate profits have been very strong.

And the Fed has made it pretty clear that they're going to start lowering interest rates, which will help both stocks and bonds.

I think this current bull market is still intact.

But again, I don't have a crystal ball.

There can be unforeseen events that could happen that could derail our economic growth.

But the underpinnings of our economy are solid.

And this correction probably looks like a good buying opportunity.

So to navigate a market decline or market correction, it's just important to stay calm, stick to your plan and your investment strategy.

Number one, don't panic and sell.

Emotional decisions often lead to really poor outcomes.

Number two, take this time to maybe reassess your portfolio.

Review your holdings to ensure they still align with your investment goals and risk tolerance.

Maybe because tech stocks have done so well, you're now overweighted in technology and that poses a risk to your portfolio if the market was to continue to decline.

Number three, look for buying opportunities.

Corrections can create chances to buy quality stocks or ETFs at discounted prices.

Keep a watch list of stocks that you want to own, but maybe didn't want to buy because they were near their 52-week high.

Number four, use this as an opportunity to maybe do some tax loss harvesting.

If you have some of your investments in taxable accounts, you might be able to sell some losing positions to offset capital gains, which will potentially reduce your tax bill.

This is also a really good time to think about increasing your contributions.

This correction could be over before we know it, so you may not have the opportunity to take advantage of it with your 401k contributions.

But when markets decline, I usually try to up my 401k contribution for that period of time.

That allows me to buy at lower prices with the same amount of money.

Number six, you might want to use this as an opportunity to rebalance your portfolio.

You know, if a correction has thrown your asset allocation out of whack, this might be a good time to add more to a certain area of your portfolio.

That's down.

Number seven, just stay informed, but avoid the noise.

The talking heads are going to be all over the business channel using those famous words, soar and plunge.

Plunge is the most overused word in the business world when it comes to investments.

Keep up with the market news, but be just wary of some of these headlines that might fuel more panic.

Number eight, maintain perspective.

Corrections are normal, and they're very typically short lived compared to the long term market gains.

Number nine, consider some defensive sectors.

If you're particularly concerned about the economy or the markets, you might want to shift some of your assets to defensive sectors like utilities, consumer staples, or health care, or some of the defense type related stocks.

I can still remember when Warren Buffett was interviewed during the financial crisis by CNBC, and they asked Warren how much money he had lost during the financial crisis.

And his answer was simple.

I didn't lose a dime because I didn't sell.

So be like Warren Buffett.

Don't panic and sell during market declines.

Now we all don't have a mountain of cash sitting on the sidelines like Warren Buffett does to be able to take advantage of opportunities in market declines.

But we can learn from Warren Buffett's advice.

You don't lose unless you sell.

So stay invested, stay calm, and stick with your plan.

And you'll navigate this market decline just like you will all the future market declines that you'll face throughout your financial journey.

I've been a financial advisor now for about 25 years.

I started in the business in 1997.

And I remember how good it felt when everything that you recommended to your clients went up in value.

And during the peak, all the way till March of 2000 of tech stocks, you felt really confident about the future until you didn't.

When everything crashed in March of 2000, many, many tech stocks went down 60, 70, 80 percent, even the highest quality tech stocks during that period of time.

And it dragged the whole market down with it.

And just when you thought things might get better, 2002 rolls around and it was the worst year out of those three.

Markets can do this.

And so we sometimes forget that markets can go sideways or down for an extended period of time.

And that's always the fear when we have a correction like we just had is anyone that's been investing long enough, they remember that period of time from 2000 to 2002.

They also remember the financial crisis and the great recession and COVID.

We always think that when we have a market correction, that it's going to get worse.

And that sometimes creates more fear and panic.

And markets tend to go down more than people think they will.

But when the economy is solid and corporate earnings are growing, and that's really what drives the stock market long-term is corporate earnings growth.

But when markets do go down like they have recently or any other time the markets drop, our mind goes to that period of time when things kept going down.

Markets tend to rebound pretty quickly when we have these small corrections or inter-year declines if the economy is solid.

And I think the economy is very solid today.

Corporate earnings growth, I think about 80 plus percent of the companies that have reported have reported positive results.

And that's the sign of a healthier market and a healthy economy.

And as inflation starts to come down more and the Fed starts lowering interest rates, that should put us in a really nice position for a continued growth economic cycle.

By the time this podcast episode comes out, the markets could have fully recovered.

But I wanted to do this special episode today just to give you a history lesson on market declines and market dips and bear markets and what to do to navigate in times like this.

And that's it for today's episode, Navigating Market Declines.

Listen to this episode on Apple Podcasts or Spotify


-Brian D. Muller, AAMS® Founder, Wealth Advisor

Momentous Wealth Advisors in a fee-only fiduciary advisory firm

Disclaimer: This material is for informational purposes only and should not be construed as investment advice. Past performance is not indicative of future results. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

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