Stock Market Crashes: What To Do in 20%+ Drops + A Guided Meditation from JL Collins | Military Money Manual Podcast Episode 42

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Don't have a good asset allocation or investment strategy for when the stock market crashes?

Three main takeaways from today's episode:

  1. The stock market has normal cycles of ups and downs
  2. Don’t panic- it’s not a realized loss until you sell
  3. When the market is down, long-term investors, like most people in the military, especially younger ones, have the chance to buy index funds basically on sale

Continue your education:

Outline of Episode:

  • Book recommendations
  • Common terms used
  • Bear Markets
  • What do I do when I start doubting my long-term investment strategy?
  • What to do if you are close to retirement or already retired
  • Is crypto a good fail-safe or backstop for your portfolio's risk?
  • Margin borrowing or margin trading
  • A guided meditation by JL Collins

Military Money Manual Podcast Episode 42 Transcript

[00:00:00] Jamie: Since 1950, the stock market has fallen 10% or more 37 times. Every time it does, everyone feels like the world is ending probably. It, I don't mean to minimize people's emotions, because it can be fearful. It can cause fear and anxiety. I get it. But every time the market recovers 37 times since 1950.

[00:00:23] Spencer: Hey, podcast listeners, Spencer Reese here from militarymoneymanual.com and author of The Military Money Manual, A Practical Guide to Financial Freedom. 

At the time of this recording, the US Stock Market is down 19.6% from an all-time high. This is the worst performance of the US stock market since 1939.

Is it time to sell? Is the party over? Has the music stopped? Nah, not at all. Find out about what we're doing with our portfolios as the bears roam and roar on Wall Street. Today's episode is all about what to do when the stock market crashes. I'm here as always with my co-host, Jamie, to talk about stock market crashes, dips, corrections, whatever you want to call them.

Jamie, welcome to the show again.

[00:01:29] Jamie: Hey, thanks, Spencer. My normal voice is mostly back to after being sick last week. Sorry, everyone had to deal with my voice sounding like that. Just a quick reminder before we get into the meat of today's episode if you do have any questions or feedback, as always, you can send that to us on Instagram @MilitaryMoneyManual.

Or via email at info@militarymoneymanual.com. Also, just a reminder that today's episode is for informational purposes only. We are not investment advisors, and this episode does not constitute investment advice. Lastly, I would like to read a review from Apple Podcast from FlyLoco. 

He says, “Love the podcast. Spencer was preaching this information back in 2010 when we were at pilot training. This information is perfect for all military members and I can't wait to read this book.” I love it. Thanks for all the reviews for everyone. Keep them coming. On Spotify, we're up to 62 5-star reviews now. So Spencer, nice. Great work and thank you, everyone. 

The three main ideas for today, like Spencer Sever, we're going to be talking about stock market crashes, dips, and corrections. The three main ideas for today, number one, the stock market has a normal cycle of ups and downs, and we have experienced that all throughout the history of the stock market.

Number two, don't panic. It's not an actual loss, it's not a realized loss until you sell your shares or your stock. 

Number three, when the market is down, long-term investors like we want you to be like we are like most people in the military, in it for the long haul, especially younger ones in the military have the chance to buy index funds basically on sale.

And so that's how we'd like you to think of it when the stock market goes down. So let's get into it, Spencer.

[00:03:04] Spencer: Yeah. Great points there, Jamie, and if people can just listen to those three points and take those away, then I think they'll pretty much learn everything that we have to share today. One of the most important things you mentioned there is that the stock market is basically on sale right now.

And if you are a net buyer of stocks, if you are buying more shares of companies than you're selling, then you should want it to be cheaper. Starting your investing career during a down market is the perfect time to be in it because you're going to get all these great companies on sale, and some of these tech stocks are down like, 40, 50%, and nothing's changed about their business, right?

Most of them, a lot of them are actually making more money than they did last year. It's just that Mr. Market, this imaginary, individual has priced the shares of these companies a little bit cheaper. So a lot, they're still paying dividends. One of the most frequent questions I get, like if I'm investing through the TSP, am I getting dividends?

Yes, you're absolutely getting dividends. They're being, they're just being reinvested into the funds. Same thing with most Vanguard funds, where they just reinvest the dividends right into the fund. But yeah, you've got a great opportunity here to purchase all these shares on sale. So a couple of books that I'll mention before we get too deep into this, that if you want to deep dive into, why the stock market has these normal cycles of ups and downs.

It's, it's basically just, it's a boom bus cycle. It tracks these normal stages of just human psychology where everybody gets excited about something, the money pours in, and then all of a sudden everyone's ah, doom and gloom. There's a war in Ukraine, there's Monkeypox, Covid is worse than we ever thought it was going to be.

And when the market. Encounter something that it didn't anticipate, right? Because it's a pricing machine and it's always taking in future information. When new information is introduced, that's when you see the price of the stock market move. When there's something that is completely surprising.

And if you look back at 2020, yeah the US stock market, fell, I think it was 34% in 30 days. Basically, what investors, what the market was saying was, Ooh, we don't know what, what's going to happen in the future. What the future holds. Yeah, but the market actually started its recovery on March 20th, which if you think back to that, that was I think right after the president locked down the country for a week or maybe it was two weeks and, we were all lot 15 days to flatten the curve. Exactly. If you think back to that, for a lot of people it was a very scary time and a very confusing time.

There were a lot of unknowns. I think if people look back at that time and they were like, why did the stock market start coming back right away? You had all this money sloshing around you had a lot of people who were at home and so they had more time on their hands.

And I think also, people started realizing that while it was going to be bad, it wasn't going to be as bad as they thought it would be. So they priced that information in and then you start seeing the stock market take off again. Yeah. In a very short amount of time. So a couple of books, like I mentioned Little Book of Common Sense Investing that's Jack Bogle wrote that one.

A Random Walk Down Wall Street is another great one. That's Burton Malkiel. Finally, JL Collins has The Simple Path to Wealth. Also an excellent book. If you read all three of those books, you'll probably know more than 80 or 90% of the US population on stock market investing. 

In JL Collins's book The Simple Path of Wealth, he talks about the ups and downs, but he also has this great guided meditation for what to do when the stock market is crashing. We're going to put that into the end of the episode. If you can fast forward to the 55th minute, you can listen to JL Collins's Guided Meditation, or you can go get the audio right now.

It's on YouTube. If you search “JL Collins Guided Meditation”, it'll pop up. But one of the things that he talks about in this guided meditation, and one of the things that we want you to take away today is that remember that this has happened before. If you're young, and you're like, let's say you've just joined the military and this is your first stock market dip.

You might have been investing in 2020, but maybe you didn't have too much cash in the market, but maybe this is the first time you've lost, four figures or lost five figures, or lost six figures. Just remember that this has happened before and this time is no different.

And go back and look at history, right? If you think back over the history of the US stock market, let's say since the 1880s, right? You've got World War I, you've got World War II, you've got the Great Depression, you've got the oil embargo, right? You've got 9/11, and you've got the dot com crash. You've got the 2008 global financial crisis.

When. As an econ major, studying that in college was fascinating because we got so close to the gears of the world economy grinding to a halt because of, some mistakes that investors made with these collateralized debt obligations. CDOs. Just go back and look at history.

And I think one thing that you'll realize is that if the US stock market survived that and the world economy survived that, then what's going on right now? It might sound bad because we're living through it right now, but in the grand scheme of things, it's not the Spanish flu, right? It's not World War II, it's not World War III yet.

And hopefully, I don't have to eat my words there but, there might be bad things happening and you might see. The US stock market and the global stock market never fall in a vacuum, right? There's always something else going on, whether it's a war in Ukraine whether it's a global pandemic, there's always something else happening in the background that makes the stock market drop that much scarier.

But if you go back and look at history, there have been scarier times before and the stock market has come through now, why does it come through? At the end of the day, what are you buying, right? You're buying companies, and so when you buy an index fund, you know you're buying a little piece of Apple, a little piece of Microsoft, you're buying all these giant global companies who have all these incredibly smart people working for them to produce products, to produce goods and services.

And a little bit of their profit is going back to you in the form of dividends. You get to own a little, and then maybe if they're a smaller company, they'll get bought up by a bigger company, and then you'll get a little bit of that money as well. Don't think of it as this completely, it's not like Bitcoin, right?

Where you're just, you're literally just buying numbers in a math equation. When you buy shares, when you buy shares of companies when you buy stocks, you're buying little bits of these giant companies and they're all out there working for you and sending you a little bit of their money. So that's a Spencer rant for sure, right there.

I just implore you, if this is your first stock market crash or your second, or your third, don't go to cash. Don't try to time the market. This time isn't different. It's going to be okay. Go listen to the JL Collins guided meditation if you're thinking about changing anything. If you are really panicked and you really want to change something, then I think it might be a good time to think about what is your asset allocation and why are you so panicked. And if you’re having trouble sleeping at night because of your stock market losses, you probably need to change something.

[00:11:31] Jamie: Yeah, it might be that you're too heavily invested in individual tech stocks or something like that. Maybe transitioning to more passive index fund investing, it might be a good move or something like that. So it doesn't mean we don't, mean to say don't change anything.

But it doesn't mean selling everything either. So I guess to help normalize that the market has a normal cycle that we hinted at already. 

Spencer, what I want to do now is just talk through a couple of the terms that people might hear when they talk about the news or when their friends are talking at work about the cycle of the market.

And then just help show that it's happened before like you said and it's no different. So the first term you might hear is a pullback, which is just a dip of 5% from the previous high. If you look back at the graph, if you Google stock market returns or something like that and you get the graph if you're if you can visualize that with me, what is it 120 years of returns or whatever.

So anything any big drops, like what we experienced, look so small when you're zoomed out at the thing, and basically, every time we have a good month or a good year like we did last year in 2021, we're constantly hitting all-time highs. So even a 5% dip is going to start making the financial analyst on the 24-hour news networks start using words like a pullback because fear sells, and then that drives their marketing budget, which gives them more money.

The next one you hear is correction, which is 10% from most recent high. This happens periodically and is normal as well. It's happened 10 times in fact, since 2000, in the last 22 years, which seems weird, that 2 years, 2000 was still that far away, but only three of those turned into a bear market, which we'll talk about in a second.

And on average these corrections, which again, is a 10% drop from a recent high happens about every two years, and they last three to four months. So just know that it's normal and it happens and it's going to correct. Even when you hear terms like a bear market, which we briefly dipped into last week. In mid, or late May 2022. That's 20% down. It hit that for a couple of hours and then came back up. 

What are your thoughts? Anything else? When you hear words like a bear market? Anything you want to add to that? Spencer? Is it, you already said it's not time to panic, but what do you think about dipping into bear market territory now?

[00:13:56] Spencer: Yeah, we've seen, in my investing career, I think we've seen two bear markets. So there was the 2008 global financial crisis where the market fell, I think 54%, 57%. Something about that was like 57 from the all-time high to the all-time to the next low basically.

And imagine that a 57% drop and just, and it was grinding too. It wasn't like the covid crash that happened in 30 days. The 57% drop I think happened from, I'm probably going to get my days wrong. Is it October 2008 to like March 2009 or something? It took a few months, right?

It wasn't all at once like we had. So there was a global financial crisis, 2008, 2009, and then the Covid crash, and for a lot of people like our age, Jamie, who started investing in 2009, 2010, we've enjoyed the longest bull market. 

That’s another term that should probably be defined.

A bull market is basically just the market's going up. It might have a technical percentage definition, but usually a bull market, the bulls are in charge, and that's that if you're bullish, that means you're buying. In a bear market, the bears are in charge and everybody's selling. But the technical definition is if the market drops 20% from its high, its previous high, that's when it enters the bear market territory.

So you might hear where we May 2022, it's silly, but the financial media and this is just another reason to just completely shut off CNBC and MSNBC and all the financial media. And Facebook. They say, “oh, the S&P 500 briefly touched bear market territory before rallying.”

Yeah, but dude, it's still down 19.6% since the beginning of the year. Just because it didn't hit this magical 20% number that we've somehow come up with doesn't mean that people still haven't had substantial losses. 

Yes, the technical definition of a bear market is, it has to be 20% down.

The last one we had other than the one that we're probably about to enter here in 2022. Was February 2020, it dropped the market dropped 34%. When we say market, pretty much we're talking about the US stock market as defined as the  S&P 500 or the total stock market. 

So like VTI would be one. That's the Vanguard Total Stock Market Index Fund. If you go look that up, VOO is the ETF for the S&P 500 from Vanguard. Then SPY is the iShares Spy Index Fund. 

So again, yeah, 34% drop, but it recovered in three months. As Jamie said, usually in a correction territory, you're looking at every three to four months before they recover.

And it's very hard to time. That's one thing that, I talked about in my book that time in the market is way more powerful than trying to time the market because the problem with timing the market, we've talked about this in previous episodes, Jamie is, you have to be right twice, right?

You gotta see the crash coming, get out to cash or to bonds or something else. Then when the market hits the bottom or is close to the bottom, you have to be right again. You have to get back into it. I think a lot of people, at least in my experience, the people who do try to time the market, they’re are always too fearful to go back in.

And even if they called the crash, right? And they typically don't call the bottom right. So then the market starts coming back up and it's too late before it's back up and it's too late for them to move back into it. 

Jamie, a couple of other terms that we've got here that we want to define recession and depression.

[00:18:08] Jamie: So recession is definitely in the news a lot right now. That's when there's a sustained loss as defined by GDP and that GDP has gone down in two consecutive quarters or more, and that has an inflation adjustment as well. But we may see that at the end of June of 2022. Everyone that's a professional analyst, a lot of them are bouncing around the term recession.

But in the end, like everything else, You can put a label on it, but it doesn't change the fact that the market goes down, the market comes up. It's a normal cycle of fear and anxiety. The more that they can stress you out and make you worry, the more it's going to drive their sales. That's really what they want, and I don't mean to sound cynical about it, but they're there to make advertising dollars.

And the way to get more viewers to read their articles, look at their website and watch their news channel is to make you fearful of something. So even if we do hit recession, which again, that's a sustained GDP decline two quarters in a row it's not the end of the world. Don't change your strategy.

Remember, as Spencer said, it's happened before and it's no different. I just found a number I want to share too. Just going back quickly to a correction, which again, that's the 10% since 1950, the stock market has fallen 10% or more 37 times. Every time it does, everyone feels like the world is ending probably.

I don't mean to minimize people's emotions, because it can be fearful, it can cause fear and anxiety. I get it. But every time the market recovers 37 times since 1950. If we do hit the depression thing, which is, I don't know, I'm not a professional, but highly unlikely in my opinion, that's a long recession that lasts a long time and is particularly severe.

That's like back to 1929 for example, the Great Depression. We recovered from that and it was devastating for a lot of families and it took a generation, or a generation and a half to recover from that. But we do recover from things even when they're bad. 

So what we want to just leave you with is to take advantage of all the market scenarios and when in doubt when you're panicking because you're looking at a red on the graph click “zoom out” and look at a longer timeframe of the index fund or the stock market.

You mentioned VTI, VOO, and some other ones like that. Zoom out on the graph and look at a 10-year view. Look at the max view. It has a 50-year, or a hundred-year view, depending on the fund or whatnot. You'll see that in general, the stock market continues to. But as I mentioned, the cycle of fear and panic is real.

It goes from hope in euphoria to fear and anxiety and panic. There have been 12 recessions since World War II on average they last 10 months. So the market in 2022 dropped pretty severely starting in January. 

So I have this little quote I want to read, “In the midst of a market dip, it's easy to get caught up in waves of emotion. Fear and worry can lead to panic, which could cause you to make serious and costly mistakes. To be an educated investor, it's more important to know how to deal with the emotional side of investing. So you can avoid making mistakes in times like these and avoid losing thousands of dollars.” I'm pretty sure that's from The Psychology of Money.

But we all feel it. Even the most prudent long-term investors that favor index funds and seed the market. Some days they're going to wonder if their strategy is still working. Spencer. 

So what advice do you have for someone who has listened to all our podcast episodes, they've read your book, and given it five-star reviews on Amazon? They've bought into the philosophy of passive index fund investing and they're starting to doubt themselves some days like probably they have a couple of times this year.

[00:21:50] Spencer: Yeah, I think, like you were talking about zooming out and looking at the hundred-year view, you have to take the long view and if you are investing, every week, every month, with your TSP allocations or a Roth IRA contribution, I mean as long as you're not nearing retirement and even if you are getting close to retirement I wanted to let you know that it's going to be okay.

I remember in I think it was like 2015, there was like a small dip in the stock market where it was maybe 10% or something down, and there's all these articles in the mainstream media about financial independence is over. The FIRE movement is dead, because there was a 10% drop in the stock market, and that's just ridiculous.

When you run the numbers and you look at the long-term view, a 4% safe withdrawal rate is actually low. If as long as you didn't retire in 1969, which is the worst time to retire, you could actually do a five, six, or sometimes even seven or 8% safe withdrawal rate, which is insane. 

So when we talk about 25x your annual expenses and go listen to our episode on military FIRE, military financial independence, if you want to dive into more of the details there. But understand that a 10% dip in the market is no big deal. It's absolutely, it's been priced into all of the models that we've run on financial independence.

If you still are getting an income from working and you're still putting that money to work in the stock market, it's a good time for you to be a buyer of shares when they're on sale. As I was mentioning earlier, if you're feeling panic about the situation just remember you still own all of your shares as long as you haven't sold anything.

So an unrealized loss is not the same as a real loss. So if you go look into your TSP fund or your Vanguard fund, look at your shares and compare your shares today to what they were six months ago. They're probably actually increased because you've had dividends come in and they've been reinvested, and so you own more shares.

And remember that these shares are not just lines of code in a computer. They represent real people performing real goods and services and working real jobs for real companies and, delivering real goods. Eventually, the profit real profits make their way back to you, right? And that's something that I always find very comforting is that even when the stock market's dropping, right?

Every day, I don't know how many packages Amazon delivers every day, but it's probably millions, right? Every day someone goes into a Ford dealership and buys a Ford F-150, even though I know they're impossible to find right now, but somewhere in America.

Somewhere in America, someone's buying a Ford F-150 and someone's going to the coffee shop and buying coffee. There's always daily business. There are always transactions happening. Even at the bottom of the Covid crash where we lost 10 million jobs and, three months, whatever it was insane.

Most of those came right back because, and now it's, in a lot of places they're having staffing shortages. They can't find people to work. So I think it's just, as long as capitalism itself isn't broken we're going to keep pushing forward, right?

There is no limit to the growth of the US and the world economy as long as we don't, hinder ourselves or do something really stupid. Whatever the price is today, if you're not selling, then you don't care. Stick to your plan. If you're a net buyer of shares, then a 10% or 20% off discount on the price of shares is a good thing.

You want cheaper. You want to be able to buy more shares for less money and put them to work.

[00:26:05] Jamie: That's good. Amazon delivers 1.6 million packages a day. 66,000 orders per hour according to a quick Google search. 

Spencer, you mentioned a little bit already about those who are either in retirement or close to retirement, and we talked about this a couple of episodes ago when we had Doug Norman on about being on the other side of financial independence.

So are you saying there's really nothing to change or no major changes to make if you're closer to retirement or already in retirement? Any advice for that?

[00:26:40] Spencer: If you've developed a good plan, go listen to the Doug Norman episode, right? Because I'm not 20 years on the other side of financial independence, I don't have the and I also don't have his wise old man voice.

But not that you're old Doug, sorry if you're listening to this, but he's been through it. He went through, he retired during an actual recession, which was 2002, where every year for 3 years straight, the US stock market went down. We haven't experienced that, and probably since then, in the last 22 years, that's the last time that we experienced that.

We talked about, we talked with him in episode number 31 about how if you have a good plan and you trust the numbers and you stick to the plan you can ride it out. Doug's actually in the position now where the 4% rule was so conservative that he's at two or three times what he initially retired with in the year 2000. That's with spending basically blindly, his 4% of his assets plus his military pension on top of it.

So if you've got a military pension, you got a guarantee you got a cheat code right there. But if you don't have a military pension like I'm not going to have a military pension because I separated before I was eligible, 20 years for the military pension, then you're still going to be okay.

This should still be built into your plan. If your plan was so fragile that a 20% dip in the stock market over a five or six-month period wasn't accounted for, then you probably needed a better plan. A couple of things you can do if you're listening to this and you're nearing retirement is making sure you have the cash. Make sure that you've got, I think Doug talks about he has two or three years of living expenses in certificates of deposit or a money market fund. Or just in pure cash sitting in a savings account. So that's, that's a lot of gains, that he's giving up.

But it's also insurance and it guarantees that when there's a stock market dip, he's not selling shares, he's going to his cash, he's going to his money market funds, he's going to his certificates, deposits, and he's spending those so he doesn't have to sell shares when the market's down. That's what really you really want to do. You want to avoid selling your shares when the market's down.

But sometimes you're going to have to, if a sustained market decline. 

But the other thing you can do too is I think a lot of people for financial independence, they've built a buffer in there, right? Like maybe they had their baseline lifestyle can be maintained at $60,000 a year, but they've got $20,000 in their budget for travel.

Maybe this is the year that you only do $10,000 a year of travel, right? Or maybe you just say, we're going and do local trips and we'll spend a couple thousand on travel, but we're going to reduce our lifestyle a little bit while the stock market's down. Right there, if you just build a little bit of flight, you can go run all the numbers here.

The FI calculators and the FIRE calculators. But if you add a little bit of flexibility, whether it's 10% or 20% or 30% into your spending plan, I mean that right there, the 4% rule is rock solid at that point. 

Jamie, I think, I can't remember if we talked about this on a previous episode, but the US Treasury I bond, it's paying I think 9.6% right now, 9.62% and you can purchase, yeah, I don't think we've talked about it yet.

Yeah. My dad actually, Dad, if you're listening to this, hello. He phoned me up after one of our recent episodes and he said we need to mention the treasury I bond. So here you go, dad. 9.6% in 2022. They adjust the interest rate every six months, I think.

And you could purchase up to $10,000 per social security number per year. So if you've got three kids, you could put up to $50,000 a year into this because you can purchase for kids as well. But for my wife and I think we're going to be moving $20,000 into the I bonds and if you look at kind of their historical returns they're pretty good.

Are they guaranteed or do they try to keep up with inflation?

[00:31:07] Jamie: Yeah I'm pretty sure they're guaranteed once they publish the rate. I think it might adjust quarterly though, depending on when you buy into it. I'm not a hundred percent sure, but there are some caveats in there to pay attention to.

If you need liquid cash, for example, it's a five-year minimum. If you take it out in less than five years, they take three months of gains as an early withdrawal penalty basically. There are some things to watch out for, but yeah I also put some money in the IBANs in the last couple of months.

Another question I have that people talk about sometimes we've hinted at in previous episodes as well, but people thought crypto would be different in that crypto wouldn't be affected by normal economic cycles and stock market trends. I would say maybe it was a little bit different. It didn't quite follow the same trend, but some people are seeing their crypto portfolios down 50%, which is more than the traditional stock market index funds at least right now.

And some even popular coins lost all their value and down to zero. So is crypto a good fail-safe or backstop for your portfolio's risk? Have you changed your recommendation at all regarding crypto when the market's down? 

[00:32:19] Spencer: No. If you're dabbling with crypto at all, I think it should be a very speculative investment.

An alternative investment. I think I talk about my book, 90% or 95%, your core portfolio being in index funds, whether that's, a mixture of US, international, stock funds, plus some bond funds, but crypto should be in that 5%, right? If you're dabbling in crypto and let's say you invest, $6,000 a year into your Roth IRA and $4,000 a year into your TSP you can take $500 a year and dabble in crypto if you want, but it's still akin to gambling.

One of the major problems of the last crypto crash was a so-called “algorithmic stablecoin” was one of the coins that crashed the moats that went down to zero. There was 40 billion of value wiped away from investors. First of all, I'm familiar with what stablecoin is, and for those who don't know it's ba this is going to sound like your grandfather probably explaining what the internet is.

The stablecoin is supposed to be backed by something else that has value so that you can always redeem it. So one coin equals $1 or whatever the exchange rate is. An algorithmic stablecoin basically said, ah, that's too simple. We'll back it with this, like this basket of investments, some of which were Bitcoin and then you'll still be able to redeem one coin for $1, but we're not actually going to have all that money in reserve.

That obviously collapsed and failed. I'm surprised it lasted as long as it did when they were offering 20% returns or whatever the ridiculous incentive they were offering for people to buy the coin. But it basically became a Ponzi scheme. The crypto market is so unregulated, it's so dangerous right now.

And for those of you who made money on it, congratulations. But I would really consider de-risking yourself and moving away from what's pretty much the modern-day Dutch tulip bulbs. It's if your investment plan includes crypto and you thought that you were going to be able to FIRE off of your crypto investments, then I urge you to go read some more about market manias and what the long-term value of basically a digital commodity is where anybody can produce a new coin.

And there are still a lot of risks there. If you've made money in crypto I would urge you to take some of that risk off the table.

[00:35:24] Jamie: Yeah, I have less than 1% of my total portfolio in crypto, and it's like you mentioned, it's more of just like fun money.

It's like what I would consider, I go out to dinner in a movie with a friend and waste, $120 in a night. It's kinda like that. If I never see it again, then it's fine. But it's interesting to talk to friends about it and things like that. But you mentioned 5%. I personally have way less than that in crypto, but I have a lot of friends that love it.

We'll see. We'll see. But, Okay. I have another quote from The Psychology of Money book by Morgan Housel. We've talked about it several times on the podcast. He says, “Failure can be a lousy teacher because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk.”

So we have a time where people who might have a great investment philosophy they've bought into all the long-term investment strategies that we talk about, and right now they're looking at the stock market being down as a failure. But that's not really what's happened because as you mentioned earlier, it's not a loss until you actually sell it.

[00:36:31] Spencer: Yeah. There's this great story that Benjamin Graham, I think was the original guy who told the story. So he was the godfather of value investing. He was a mentor and teacher of Warren Buffett, one of the most successful investors of all time. He tells this story about Mr. Market, where let's say that you have a cattle farm, right? And you've got, 20 heads of cattle and they represent shares or stocks. Every day your neighbor, Mr. Market comes over and just shouts at you for eight hours a day saying, oh, I'll give you $10 for that cow.

Now I'll give you $12 for that cow. Now I'll give you $9 for that cow. He just constantly, and sometimes he offers you an absolutely insane price for the cows, and you're like how are they worth this much when they were, twice as much as they were worth yesterday? I don't understand.

He's crazy. But the point of the story or parable is, basically that, the market goes through these phases of euphoria and panic and depression, but your cows are still your cows, right? Like they haven't changed. They go out, they eat grass, they poop, more grass go grows, and they eat more grass, right?

Like it's the same thing is happening every day. So the market is pricing these companies throughout the day. Sometimes depending on the company, you might see the value of the company swing billions of dollars in one day. But at the end of the day, hopefully, especially for the more established companies, right?

Like nothing has changed on the underlying fundamentals. You don't need to check the market daily. If this is the first time that you're hearing that the stock market is down 20% for the year, good. Like you that's fine. You could go years at a time. 

On the Doug Norman episode, we talked about the study where they tried to figure out which of the Schwab or Fidelity, I can't remember. But they looked at all their accounts and they're like, wow, some of these accounts are performing very well.

And then they went and found out that the owners of the accounts were dead. So the ones who didn't touch it, just let it sit there and let it grow. 

If you're just bought into long-term index fund investing and just buying the whole market, this is a great opportunity where you probably don't have a lot of money invested.

And so while it can sting, oh, I've put in $10,000 over the last two years and now it's down $8,000, what am I doing wrong? You're not doing anything wrong. This is normal. This is natural. Let the process work. Keep dollar cost averaging. Keep investing your paycheck every month into the TSP, into the Roth IRA, and into your taxable brokerage account.

Don't go chasing performance. Don't go chasing yield. You don't need to put all your money into an algorithm. Mixed stablecoin offering you 15% a year based on the Luna Blockchain. That is a word salad of nothingness. You're not buying a company that's producing a good when you're buying crypto, so you don't need to worry about that.

[00:40:00] Jamie: Spencer, another term that people may have heard before, or that they may have a buddy who tries to sell them as this is like the next best thing out there when, especially when the stock market's up, is about margin borrowing or margin trading. Can you explain that a little bit and is it a good idea for any of our listeners to get into margin trading?

[00:40:20] Spencer: So we did say that this podcast is not investment advice or financial advice. So I will caveat by saying I don't know your situation. Your situation might be completely different, but in general, I would never advise someone to use margin to increase their returns. So essentially what margin is allows you to borrow against the value of your shares. 

So let's say that you have a thousand dollars of shares and the brokerage account, Schwab, fidelity, Vanguard, or whoever it is will let you borrow up to a 50% margin. So if you have a thousand dollars of shares, you can borrow $500 and now note that the value of your account went up to $1,500.

But you owe them $500. So your assets are 1500, and your liabilities are 500. 1500 minus 500 is still 1,000. Your account is still only $1,000. The other thing with margin two is that they're going to be charging an interest rate, which is usually charged monthly, but it's calculated annually.

And I'm not going to mention what the interest rates are because they're going to change every day and all day. Just note that they're not going to let you borrow money for free. No one lets you borrow money for free. Especially now that Amex got rid of that 0% loan that they used to offer under SCRA.

You had $1,000 of shares, then let's do a 50% margin. So you buy your $500 and you can take that $500 and you can just spend it like cash. But now you owe the bank the brokerage $500, or you could buy more shares with it. So let's say you buy more shares with it, and now your shares are worth $1,500.

And let's say the market rallies and goes up 50%. If you had just had your thousand dollars of shares and the market went up 50%, you would earn $500. But because your shares are worth $1,500, you earn $750 and you still only owe the bank $500. So you'd be feeling pretty good. You'd be feeling pretty smart, right?

The problem becomes when the market drops, so let's say instead of a 50% gain, you hit a 25% decline. So now the value of your shares goes from 1500 to 1125, but you still owe the bank $500. So the real value of your account is $625. So instead of losing $250, as you would've if you had not used margin, you end up losing a lot more because you are you end up losing 25% more, $125 because you borrowed the money.

And what's even worse with margin is the brokerage might take a look at your account and say, Ooh, you just lost 25% of the value of your account. We're afraid that you're not going to be able to pay back your loan, so we're going to sell your shares or margin call you and get our money back. Now you're left with $625 in your account and you're like, shoot, that was really dumb.

And it could have gotten even worse than that, where you could lose your losses, could exceed the value of your account. If you run into that situation now you have to put more money in just to pay the bank back. You'd hear horror stories of this happening, like on Robinhood and stuff during some of the trading that was happening during the Covid crash in 2020.

So I'd never recommend margin, especially for new investors. There are very niche examples where margin might be a good idea. Let's say for instance if you're a more established military investor, right? Let's say you've got a million-dollar portfolio invested in VTI, right? A Vanguard total stock market index fund.

And let's say you need $100,000 for a down payment on your house. So you could sell $100,000 worth of shares and use that for a down payment on your house. But then you have to pay capital gains on it. Now those shares aren't making you money anymore.

They're not paying you a dividend. They're, they don't have the potential to grow. You've just put a hundred thousand dollars into your house. So it might make more sense in that kind of scenario for you to take a 10% margin loan against your million-dollar portfolio. So you don't need to sell your shares and pay the capital gains.

You can put that money into your house and there you go. Now you've got a house, and you've still got a million dollars portfolio. You do have a $100,000 loan from the bank, so you're going to have to pay that off eventually. Maybe you can refinance that into a mortgage. But that's the classic buy, borrow, die technique employed by wealthy investors.

But if you're just getting started investing or let's say your portfolio's under a million dollars, you probably don't even need to think about any of that. That's just an advanced technique that I wanted to mention in case anybody out there is listening to this and they've got over a million-dollar portfolio.

[00:45:07] Jamie: Yeah, I think it's dangerous. Like you mentioned Robinhood, that was the first thing that came to mind when you started talking too, is news stories about people committing suicide or whatever. They just got backed into a corner. When you have an open infrastructure like Robinhood introduced to the trading market it allows anyone to do something that could potentially be dangerous, like margins and you hear, celebrities and billionaires doing it, and it's just a little bit different depending on your situation. 

If you're a beginner or you don't have a large net worth or even if you do have a large one, just be careful with it if you do go down that road like Spencer said.

Spencer, one other quote that Warren Buffet has, we've mentioned before on, on previous episodes, “Be greedy when others are fearful and fearful when others are greedy.” So how do we relate that to our investment strategy when the market's down right now? Greedy might be a little bit of a strong word but it's maybe a good reminder to throw money into the market when it's down.

[00:46:07] Spencer: Yeah, so this was something that I was able to do in the 2020 Covid crash where I had some money sitting on the sidelines and I just hadn't gotten around to investing it yet. I did invest on February 19th, the all-time market, high half of it. Then I had half of it sitting there, and I was just watching the stock market fall, 10%, 20%, 30%.

And I just thought, geez, this thing is really going down. It's really crashing. And when it hit about 25% down, I was like, yep, I should probably throw in the other half of my money. I did. Then it fell like another 5%. I was like, that was dumb. But it wasn't because it ended up being within a couple days of the bottom.

So I got lucky with that. I'm not advocating for market timing, but what I am saying is when you see these opportunities, when the stock market is down, 10% is down 20%. Don't sit on the sidelines if you have cash sitting in an account and let's say that you don't need it right away. So I'm not talking about investing your emergency fund.

I'm not talking about investing your kids' Christmas money. I'm talking about, let's say that you were setting aside money for a down payment for a house, and your plans change, right? You PCS somewhere where you don't want to buy a house or the housing market's crazy. So you're like, you know what we'll be good with renting for a few years.

So let's say you got $50,000, sitting there in an account. Maybe it's time to put it to work. Then the question becomes, lump-sum investor, or do you do dollar cost average in, we'll do an episode on this in the future. But the essential answer is it doesn't really matter. Just get the money to work.

In so many things in finance, and in investing, it's psychological. So do you want to put it all in and it's February 19th, 2020, and you lost, and you just, you lose 34% of it in the next 30 days? You're like, oh shoot, that was dumb. Or do you put in, a sixth of it every month for six months?

But if you do that in most markets, you're going to lose out on a lot of gains. So it's really, yeah. Are you the kind of person that wants to take the risk upfront or do you want to spread the risk over a couple of months? But the risk is you lose out on gains as well as mitigating your losses.

But there are a lot of behavioral economics and psychological studies that people are much more psychologically damaged by losses than they are rewarded by gains. I'm not going to go into all the science of like why they think that's true, but most people are more loss averse. If they lose $10, that impacts them more than gaining a hundred dollars for instance.

But to answer your question, Jamie, I think make sure you've got a good strategy and I talk about my book, like low-cost, automatic, diversified, simple Investing strategies. If you've got a good strategy, then a stock market crash or a correction, or even a sustained depression, while it's not good and you shouldn't be praying for them.

If you've got a good plan, then it takes into consideration that these things happen and the market does go up and it does go down. When it's down, you have an opportunity to purchase shares at a good price.

[00:49:46] Jamie: It's so true. As we mentioned before, though, it can be hard to do this. You mentioned your LADS principle in the book, so I just want to pull it up, this is on page 83 for those that have the book, talking about how having an automatic investment strategy can help you overcome the emotional trauma or fears of investing when the market's down.

“Automatically investing every paycheck or on a monthly schedule takes emotions and market timing out of the equation. Yes, you will buy high. Sometimes yes, you will buy low sometimes, but in the long run, you'll buy through both good and bad times. The important thing, (like you mentioned already today) is time in the market, not timing the market. Make your investments as automatic as possible. Take decision-making and emotions out of the process of selecting your next investment.”

So that was page 83 of the book, by the way, for those of you that have not yet given it a five-star review on Amazon. That's a great way I think, Spencer, that you put there to use as an automatic investment.

It's automatically contributing every month or every two weeks, or however your paycheck comes to, just to not even give your emotions, the opportunity to change your strategy. If you're thinking about going into the TSP and changing your contributions or canceling your automatic contribution when the market's down to your IRA.

Don't do that. There's a reason you have your strategy. Don't bail on it now, just because the market is down. 

So with that rant over, thanks again for joining us today for this episode about what to do when the stock market drops and a lot of people around you start panicking. We hope today's discussion will help keep you well on your way to achieving financial independence while in the military

As a review, the main ideas from today's episode were that the stock market has normal cycles of ups and downs, and don't panic when it goes down. It's not a realized loss until you actually sell the value of your portion of that company of the stock market. Your shares are still there as long as you don't sell.

And when the market is down. Long-term investors, like most of you listening to this episode, especially our young people in the military have the chance to buy passive low-cost index funds on sale.

[00:51:56] Spencer: Subscribe to the podcast so you don't miss future episodes. If you got any questions or feedback, message us on Instagram @MilitaryMoneyManual, or I've got my email info@militarymoneymanual.com.

Stick around after the episode, we’ve got the JL Collins Guided Meditation. Thanks again for listening and we'll catch you in the next episode of The Military Money Manual podcast. 

[00:54:57] JL Collins: A guided meditation for when the stock market is dropping by JL Collins. Welcome to this guided meditation for your journey to financial freedom. Let's begin. Find a comfortable place to sit. Breathe in and out. Settle into your space. Now, slowly close your eyes or perhaps hold them half open and unfocused.

Breathe in and out. In and out. Focus on the sound of my voice. Breathe in and out. In and out. If you are listening to this, you are working on building your wealth with regular investments into VTSAX. Or a similar total stock market index fund, or perhaps you are retired and have a portfolio balanced between VTSAX and VBTLX or a similar total bond market index fund to smooth the ride.

Now the stock market has taken a dip, or perhaps it has dropped about 20% into what is called bear market territory, or perhaps it is even crashed further, or you are worried it will. For the purposes of our time together, let's assume it has. Relax. Focus on the sound of my voice. Breathe in and out.

In this relaxed state, let's acknowledge what you might be feeling. Perhaps you are afraid. After all, you are hearing the voices of panic all around you. Perhaps your stomach is clenched and your nerves are beginning to fray. Now, a lot of those fears, intentions to melt away. As we focus on what we know as index investors.

That is, the ride may be volatile, but the market always goes up over time. Turn off all the screens, put down all the newspapers, tune out the voices of panic, especially those in your head. Step away from the noise. Gather all those fears and tensions, and on your next exhale, Breathe them out. Feel your stresses release and drift away. Take a deep breath, exhale, relax. Focus only on the sound of my voice. Everything is going to be alright. The talking heads are wrong as they always are. The stock market is not going to end. The world is not going to end. Everything is going exactly as we expected. This is all a perfectly natural part of the process.

Market drops, bearmarkets, crashes are all to be expected. They are a perfectly natural part of the process. We have been expecting this one. We know what to do. Nothing. We do nothing. We know deep in our minds, deep in our gut. This is natural and it will naturally pass. When it does, the market will resume its relentless rise. We simply wait. We do nothing thing. These periodic expected natural drops are what we accept as part of our wealth-building journey. They are a part of the path. They are what lead to the long-term gains we seek. They are welcome. Everything is okay. Everything is as it should be. You are going to be fine.

Your money is right where it should be. You are right where you should be. This too will pass. The market will rise again. The market will fall, then the market will go up again. It is like breathing in and out, up and down. This is natural. This is to be expected. With each breath, you grow stronger. With each market cycle, your wealth grows stronger.

This is the way of things in your mind's eye. Zoom out now. Zoom out beyond this day, this week, this month, this year, beyond this decade. Zoom out until you can see the big picture. Envision the historical trend of the index. You can see it. It grows and then it dips, but it always recovers to new heights over time.

It climbs and climbs. You know this. You have seen this. You are on this trajectory. Your money is growing. You don't have to change a thing. If you are working and building your wealth, keep adding to your investments as before you are buying them now on sale. If you are living off your portfolio and now holding bonds, here is the opportunity you have been holding those bonds for when you rebalance your portfolio.

That money flowing from those bonds into stocks is buying those stocks on sale. You are unconcerned with this temporary dip in the price of your shares. You know you still have the same number of shares as before. You still own the same piece of all those productive companies in the index. You still have all those people in all those companies from the factory floor to the CEO working to make you richer.

And now with this wonderful market drop, you can buy still more of those shares on sale. Perhaps you even adjust your spending to free up more money to take advantage of this wonderful opportunity. Continue to buy as much VTSAX as you can, as often as you can, and hold onto it forever. You will be fine.

Stay the course you are doing just fine. The market is fine. This is all very normal. This is all entirely expected. All that panic is only for media ratings. It is not real. The end is not here. This is, but a pause in the market's relentless rise. Nothing more. Stay the course. Keep calm. Keep it simple. Keep investing.

Stay invested. Ignore the noise. Let it drift away on the breeze.

Now slowly open your eyes. Notice the world around you. Everyone who loved you before the market drop still loves you. The earth is still rotating on its axis, taking us from day to night and back again. Children still laugh and play. Puppies still wag their tails. The sun still shines. The world is still a beautiful place.

And you are yet one step further in your journey to financial freedom. You have met this test and have won, recommit to your plan, and continue confidently on your simple path to wealth. Now go do something wonderful in this wonderful world with all your wonderful freedom.

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