Reactions to the stock market

early retirement, financial independence, how we win, personal finance

The various stock market indexes got hammered this week, before regaining some of those losses by the end of the week. I’m sure that as all of you heard about or read about the losses in the stock market you all thought one thing: BUY! Right? Wait you didn’t buy any stock this week? What are you waiting for?

 

Not too long ago Mrs. Winning Williams would have had the opposite reaction, and the reaction that most people have: “The stock market is doing bad, there is no way I’m going to put my hard earned money into stocks right now, I could lose it all!” This is the same logic that keeps most people from even starting to invest or thinking about the options available to them.

 

Then Mr. Winning Williams explained a few things that college never taught us. While it may seem counterintuitive to invest when the stock market is down, the old adage “buy low, sell high” is simple and effective. In fact most people can tout that concept, but when the time comes to buy-low many people back away and don’t take action. For most millennials this is likely a product of our experience. In 2007 when the big bubble burst it was clear that our job security and financial outlook were grim, hence making us a generation more apt to be afraid of investing.

 

However, if you look at the performance of the stock market in the LONG run, it has always gone up.

Over time the S&P 500 Index has continued to improve

Over time the S&P 500 Index has continued to improve

Yes, with each recession there has been a dip, but history has shown that it always goes back up over time. By purchasing more shares of a Market Index Fund (i.e. a little bit of everything on the S&P 500) we were betting that the stock market would go back up over time.

 

Warren Buffett is famous for quoting, “Be fearful when others are greedy, and be greedy when others are fearful”. It is important to remember you don’t realize any gains or losses until you actually sell your held positions. Want to realize a disaster scenario? Listen to your friends and family who tell you to sell when the market is down. If you sold in 2009, you not only locked in huge losses, but if you have stayed out of the market, you will not have realized an over 100% gain in the overall market since this time.

 

We know that in order to reach FIRE (Financial Independence, Retire Early) that we need to do more than just cut our spending. We need to take that excess in cash reserves and make it work for us. By keeping a balance in our portfolios we are able to experience gains over and above what we would have seen by just letting our money just sit in a savings account. Here are some of the tenants of our investing strategy. Disclaimer: look at your financial position and determine what is the right action to take for your particular situation and stage of life that you are in. We are not financial advisers. This information is presented to highlight one example of a strategy used, one that we feel will benefit us personally for long-term.

 

  1. Buy consistently!: We automate our savings through 401k’s / retirement accounts. This is automated throughout the year without consideration of current prices. Why?  We do not believe in market timing. Is the market undervalued / overvalued? It’s all speculation. However, we do believe in setting an appropriate asset allocation for our risk tolerance. We also know that based on historical performance, we need a heavier equity allocation to achieve FIRE. In addition to this consistent investing, there are times like this last week when there is a material drop in the stock market that seems like an opportunity to purchase stocks at an “attractive price”. We look to question our Cash balances, ways to make some incremental income, etc. to pump extra money into the markets when others are being fearful at times like last week. If the market continues to decline will we be upset? Hell no, we’ll continue to pump more money into the market with the belief it will do what is always does over time – increase in value and be a direct means of proving the freedom we are diligently striving for.
  2. Index Funds: While we have a small amount of stocks in individual companies we find that we prefer index funds. Instead of having to guess whether one company will perform well, our index fund purchases allow us to buy into an entire market or cross section at an inexpensive rate.
  3. Don’t lose value to inflation: We are constantly looking at the balance in our checking and savings accounts to make sure we don’t have too much in a non-interest bearing or minimal interest bearing account for too long. Effectively the money that is kept in checking loses value to inflation all the time. By moving our money into our investments we are hedging against that risk. However, we do keep more than adequate levels of emergency funds. The key is to never have to sell when the market is down.
  4. Mistakes will happen: We know that we don’t know the future for sure and that mistakes will inevitably happen. This is why we keep our portfolios differentiated so that no one stock could ruin our portfolio. Also, in the very specific case of a Triple-Short, mistakes will happen. As long as we learn from them now we will do better in the future.

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