Recessions are necessary to clear out excesses. They are part of the growth cycle. They make sure that our savings get re-channeled into the right investments. They cause pain. They are supposed to cause pain.
But that is a transitory pain. The world has endured recessions and depressions. A decent number of them will occur in your lifetime. You must get used to them because you won’t know them coming. You can feel them coming but you can never be so sure. Nobody is.
So never act on your feelings and commit the cardinal investing sin of giving up and sell. Use your plan that you put together in saner times as a guidepost to navigate through bad times.
The default state of our economic order is progress. Bad times lingering for long is not.
The best way to own a piece of that progress is through the stock market. Stocks are ownership stakes in businesses.
Businesses like these…
…and thousands more.
You know about the Apples and the Googles of the world, but did you know about ASML holdings, a Dutch company without which it is near impossible to build a semiconductor chip.
Or Denmark-based Novo Nordisk, the biggest maker of diabetes and cardiovascular drugs.
Or UK-based Diageo, the largest producer of alcoholic beverages.
Or BHP Billiton, the Australia-based mining giant that will become ever more relevant as the world transitions to green energy.
You own them all. You own their machines, you own their buildings, you own their patents.
Taken together, stocks represent the collective wisdom of the business world. They represent the promise of future technological advances.
Not all businesses will survive. The weaker ones fail and get replaced by newer, better and more efficient ones. That is creative destruction, a powerful force for societal good.
But the inherent direction of the value of a portfolio filled with businesses is up. How do I know? Because businesses are profit-driven entities. What do they do with that profit? They invest part of it back into the business to earn more profits. What remains gets paid out as dividends.
The real magic happens when you reinvest those dividends into buying more shares of those businesses. Which then pay their own dividends and the snowball starts to build – imperceptible at first and then boom.
So, owning plenty of stocks should form the backbone of any financial plan worth its salt. You cannot make the math work otherwise.
But when you own stocks, you have got to accept the occasional declines. What else are you going to do? Dance in and out of the markets?
Enduring through declines is the price you pay for that golden ticket of financial independence. There is no other way out.
Markets often sway from one extreme to the other. One moment, the times are as happy as ever. The next moment, they turn despondent. Markets overextend on the way up and overextend on the way down. It is in their nature.
But things are never as bad as they seem when all hell is breaking loose. And things are never as good as they appear when everything is going great.
So, plan for things to go bad when things are good. And when things turn miserable, know that it is going to eventually get better.
The pension systems of the past really did work. They took the burden of saving for retirement away from us. And it is a burden. Imagine not having to acknowledge that the markets even exist. You did not have to deal with discount rates or PE ratios or life expectancies. Imagine spending more of your time doing what you are good at instead of worrying about what the markets did on any given day.
Pension plans unfortunately are history. You are your pension fund manager.
And that means investing like a pension fund. Matching assets with liabilities. Assets are your savings and investments. Liabilities are the expenses you will incur during retirement.
The alternative is trying one crackpot idea after another hoping to make it. And then suddenly you are 50 and then you get scrambling.
If you manage your own money, you are potentially vulnerable to every crackpot investing idea that comes along. It only takes one.
Phil Demuth, Author & Founder, Conservative Wealth Management
I have seen folks make $25,000 mistakes in their twenties thinking it is no big deal. It is a big deal. That is a million dollars in future buying power that you just wasted.
I’ve flown airplanes, and as a doctor, I’ve taken care of kids who can’t walk. Investing for retirement is probably harder than either of those two activities, yet we expect people to be able to do it on their own.
William Bernstein
And if this was all easy, we wouldn’t have 65-year olds with a mere $88,000 in retirement savings. Hope there is more to that story but if that is all you’ve got, it is going to be a struggle.
Some parting thoughts on navigating downturns…
- Keep plenty of cash reserves. You won’t earn much on them, but you won’t be forced to sell investments at inopportune times.
- Lifestyle bloat kills. The right amount of house, the right amount of car, the right amount of stuff and not an ounce more.
- Leverage also eventually kills. Never borrow and invest, ever.
- Avoid fads and frauds. No SPACs, no meme stocks, no crypto. Never make hasty money decisions. There is no rush.
- Last, there are no certainties in investing in the short term. Not even with Treasury bonds. They even lose value from time to time. So, you must rationally assess those chances when building your plan. But once you have a good enough plan, the only job of yours that remains is to dollar-cost average into it with all that you’ve got, and then let the markets do their magic.
Thank you for your time.
Cover image credit – Gerd Altmann, Pexels