Welcome to the 8th edition of the Tech Financial Planning (TFP) Newsletter.
It goes without saying, this hasn’t been a great year for the stock market.
Interest rates are up, investors are scared, and no one is really sure what the next few months hold.
Have we hit the bottom? Are we in a recession? What should we be doing?
In this newsletter we’ll cover why down markets are some of the best times to invest, some tangible steps you can take, and what not to do.
TL;DR
Not even the experts can agree if we are in a recession, but we can agree that things haven’t been great
Looking back, you’ll be glad you invested
We can only control what we can control, like continuing to invest and reviewing our expenses and equity compensation
Some of the biggest mistakes are when we react out of fear
Current State
Are we in a recession?
I’m not really sure, and it doesn’t help that people can’t agree on the actual definition of a recession.
Generally, a recession is defined as “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.”
According to this definition, the US is in a recession.
The Bureau of Economic Analysis said at the end of July 2022, we had an economic pullback during the first and second quarters.
But other experts, including the White House, are saying that we haven’t hit a recession yet.
Definitions aside, one thing we can agree on is that inflation skyrocketed, the Fed has raised interest rates a ton, and the future is murky at best.
So what can we do?
Looking back, you’ll be happy you invested
If something normally worth $100 is now worth $75 (or lower), would you be more likely to buy?
Because that’s basically what this is.
Strip out all the headlines, and you have a black Friday sale for stocks and bonds.
A quick note - the stock market is funny.
In most other areas of life, we buy more of things when they are on sale and less of things when they are at a premium.
The stock market is the exact opposite.
Most people buy when stocks are at a premium, and sell when they are at a discount (we’ll go into this more).
As Ben Carlson said this week, “Stocks are on sale. They could get marked down even further but I don’t think too many young people are going to regret buying stocks right now when they look back in 15-20 years.
Can you believe where you could have bought stocks in 2022? someone is bound to say in the 2030s when millennials are in their peak earnings years and gobbling up stocks.”
Do you wish you invested in 2008?
In 2020?
We have no idea if things will get worse, and when they will get better.
But these are the great buying opportunities.
However, that doesn’t make it easy.
One of my favorite quotes comes from the famed investor, Howard Marks.
In his memo Calibrating (written April 6, 2020), Marks writes:
Terrible news makes it hard to buy and causes many people to say, ‘I’m not going to try to catch a falling knife.’
But it’s also what pushes prices to absurdly low levels. That’s why I so like the headline from Doug Kass that I referred to above: ‘When the Time Comes to Buy, You Won’t Want To.’
It’s not easy to buy when the news is terrible, prices are collapsing and it’s impossible to have an idea where the bottom lies.
But doing so should be the investor’s greatest aspiration
7 actions you can take
Ignore The Media
As I wrote in my email earlier this week, “Financial media sells two things: Fear and Greed.
And right now they are all in on fear.”
In our current age, it’s near impossible to avoid the media.
But do your best to ignore it.
They have no incentive to help you make good financial decisions.
Their only incentives are eyeballs on content (at best) or panicked action (at worst).
Neither are in your best interest.
This chart is one of my favorites. It’s a chart of the Russell 3000 Index (benchmark for the whole US stock market) with selected headlines from 2013.
If you just look at the headlines, it seemed like the world was ending.
Or as I like to call it, the Apocalypse Du Jour.
And this was a good year!
As I wrote in an email this week, here’s some of the headlines we might see by the end of the year:
Unemployment is Rising
Wage Growth is Stagnating
Corporate Capital Expenditures are Falling
Home Prices are Plummeting
Home Mortgage Originations are Declining
Profit Margins are Tightening
Rate Increases are Putting Businesses at Risk
Investor Sentiment Near All-Time Lows
And my personal favorite
“Investor Who Called the 2008 Crisis” Issues Dire Warning
Increase your emergency fund
We normally recommend keeping 3-6 months in cash, set aside in an emergency fund.
For most people, this is sufficient.
But with all the uncertainty, you may consider increasing your emergency fund.
How do you calculate this?
Let's take a family that spends $10,000 a month. They want to have 9 months of expenses set aside.
Emergency Fund = Monthly Spending x # of months
Emergency Fund = $10,000 / month x 9 months
Emergency Fund = $90,000
Quick note - this is just an example. For some, this might not be enough cash and for others, this might be way too much.
Reduce excess spending
Some spending is unavoidable.
We need a roof over our heads and we need to eat food.
But from time to time, we might need to tighten the belt a little bit.
And I don’t want to be the financial planner that tells you if you stop drinking coffee, going to dinner, and generally having fun, you can retire a year earlier.
So I wouldn’t go crazy, but here’s some ways to reduce your extra spending:
Postpone vacation, or take a less exotic one.
Instead of going to Europe for 2 weeks, go to Palm Springs for a week. Or push back the Europe vacation a few months.
Cut subscriptions
If you’re like most of America, you probably have extra subscriptions you are paying for that you forgot about.
Or you no longer need.
Here’s a link to 6 apps that will help you cut subscriptions.
Cutting 5, $10 / month subscriptions will save you $600 a year!
Look for cheaper substitutes
Is there an alternative internet provider in your area?
Can you switch from cable to Youtube TV?
From Verizon to Google FI for your cell phone plans?
Have you gone out and got new quotes for insurance?
As someone told me recently, it takes 100 pennies to make a dollar. The small stuff counts.
Personally, if I switched my internet from Cox to Frontier and my cell phone plan from Verizon to Google Fi, I’d probably save $1,200 / year.
Put All planned purchases in safe investments
If you are planning to make a big purchase in the next 1-3 years, make sure that money is safe.
Think a high yield savings account or short term, liquid investments.
For our clients, we are purchasing short term treasuries (3 months to 1 year) to help them get higher yields on their cash.
If there’s one upside to higher interest rates, it’s that we finally have some yield!
Short term treasuries are now yielding 4%.
Which means higher rates on savings accounts, CDs, and money market accounts.
Review Your Strategy For Your Equity Compensation
This one will be highly personal.
But with the market at a discount from the beginning of the year, maybe you sell more of your company stock and buy more broadly.
Or you have room to exercise more ISOs before triggering AMT.
It will really depend on what company you work for, what type of equity you have, and your personal situation.
But it’s worth reviewing.
Invest consistently
If you are putting money away into your 401k, then you’re already doing this.
Pat yourself on the back and keep it up!
If you have extra cash flow each month, can you put away some of the extra?
The key is to automate it.
As Ben Carlson writes,
Automate your savings so you don’t have to think about it.
Automate your retirement contributions so you don’t allow bad days or months to affect your multi-decade time horizon.
Automate your investment purchases on a periodic basis so you’re not tempted to time the market.
By investing consistently, you’re buying more of companies at cheaper prices and less of companies at higher prices.
If you have extra cash, deploy it
Like I said, I have no idea if this is the bottom.
But chances are, in 5-10 years you’ll look back and smile.
Can you imagine buying companies like Apple and Google in 2008?
We have that chance now.
The key - make sure this is money you don’t plan on needing in the next 3 years, if not 5.
Example - if you want to buy a house in the next two years, don’t go invest that money.
Same with your emergency fund.
Sure, you could make a lot, but you could also lose.
In the short term, the stock market is unpredictable, but in the long run it’s inevitable.
4 things not to do
Don’t Go to cash and wait for things to get better
Despite people trying time and time again, you can’t time the market.
It requires being right twice- knowing when to get out, and when to get back in.
Marks says later in his memo:
Some of the most interesting questions in investing are especially appropriate today: ‘Since you expect more bad news and feel the markets may fall further, isn’t it premature to do any buying? Shouldn’t you wait for the bottom?
To me, the answer clearly is ‘no.’ As mentioned earlier, we never know when we’re at the bottom. A bottom can only be recognized in retrospect…
What, then, should be the investor’s criteria? The answer’s simple: if something’s cheap – based on the relationship between price and intrinsic value – you should buy, and if it cheapens further, you should buy more.”
Further, lets say you did sell out and go to cash.
What’s your criteria to get back in?
When the news gets better?
With that strategy, you would have missed most of the returns of 2020, and of 2009-2010 (citing recent examples)
Don’t Change Your Investing Strategy
Similar to point one, don’t go changing your investment strategy.
For example, if your strategy doesn’t call for bonds, this isn’t the time to try and “cut your losses and go into something safer.”
On the other hand, if your strategy does call for bonds, this isn’t the time to sell them and go all in on stocks.
You have a plan and a strategy for a reason.
Stay the course.
Don’t Blindly Follow Emotions
In his recent newsletter, Carl Richards said it much better than I could:
Most of us make the same mistake with our money over and over:
We buy high out of greed and sell low out of fear, despite knowing on an intellectual level that it is a very bad idea.
The easiest way to see this behavior in action is to watch money flow in and out of mutual funds.
Let’s go back to early 2000.
The dot-com market had reached a fevered pitch.
People were using their home equity to buy tech stocks right after the NASDAQ had a single-year return of better than 80 percent!
Then, in January 2000, investors put close to $44 billion dollars into stock mutual funds, according to the Investment Company Institute, shattering the previous one-month record of $28.5 billion.
We all know the story from there.
Money continued to pour into stock funds, breaking records for February and March and pushing the NASDAQ to 5,000, only to lose half of its value by October 2002.
This gets worse.
That same October (at the low for the cycle), as investors were selling stocks as fast as they could, where was all the money going?
Into bond funds, at a time when bond prices were near record highs.
Think about this pattern for a minute.
At the top of the market, we can’t buy fast enough.
About three years later, at the bottom, we can’t sell fast enough.
And we repeat that over and over until we’re broke. No wonder most people are unsatisfied with their investing experience.
I realize this is a story from ancient history; 2000 feels like a long time ago.
But we do this again and again.
At this point, there’s a story like this every month.
Can you imagine doing this in any other setting?
Picture walking into an Audi dealership and saying, “I need a new A6.”
The salesperson says, “Oh my gosh, you’re in luck, we just marked them up 30%!”
And you say, “Awesome, I’ll take three!”
Look, I get it.
We’re hardwired to get more of what gives us security and pleasure and run away as fast as we can from things that cause us pain.
That behavior has kept us alive as a species. Mix that with our desire to be in the herd, the feeling that there’s safety in numbers, and you get a pretty potent cocktail.
When everyone else is buying, it feels like if we don’t join them, we’re going to get eaten by the financial version of a saber-toothed tiger.
But I’m telling you, this behavior is terrible for us when it comes to investing.”
(my emphasis added)
Don’t obsessively check your portfolio
With all the world and information at your fingertips, this is easier said than done.
But if you check your portfolio as much as you check your email, you’re going to drive yourself crazy.
Adapting from a famous verse, I’ll ask “who of you by obsessively checking can add a single dollar to your portfolio?”
Check in at a set cadence (monthly or quarterly preferred).
You’ll sleep a lot better.
Putting it all together
As I’ve said a few times, I have no idea where we go from here.
And despite what the headlines say, neither does anyone else (unless they are a time traveler or a fortune teller, which would be sweet).
Unfortunately, we can’t make any big sweeping changes.
We don’t get to set interest rates or make legislation.
All we can do is control what we can control.
Some of that is tangible, like increasing our emergency fund, cutting spending, and deploying cash.
Some of that is intangible, like having patience and not panicking.
FYI, in case you think you “have to do something”...not doing something is an action too.
But I’m optimistic.
As an investor, you have to be.
I believe that we’ll look back and smile at the investments we made and the mistakes we avoided.
I’ll end with one final Howard Marks quote. He says
“All great investments begin in discomfort. One thing we know is that there’s great discomfort today. “
Whenever you're ready, there are 3 ways I can help you:
1. Connect with me on LinkedIn, where I post every weekday (unless I’m on vacation). https://www.linkedin.com/in/marshalljoe/
2. Subscribe to the “Tech Financial Planning” newsletter to get equity comp and financial planning strategies in your inbox every Saturday. It’s free: TFP Newsletter
3. Want one on one help? Schedule a 25 minute “Are We A Fit?” meeting