Recessions are necessary to clear out excesses. They are part of the growth cycle. They make sure that our savings get 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. You won’t know them coming. You can feel them coming but you are never so sure. Nobody is.
So never act on your feelings and commit the cardinal investing sin. Use your plan that you put together in saner times as a guidepost to navigate around downturns.
The default status of our global 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.
We know about the Apples and the Googles of the world, but did you ever hear about ASML holdings, a Dutch company without which it would be nearly 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 purveyor of alcoholic beverages.
Or BHP Billiton, the Australia-based mining giant that’ll 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. And an ability to profit from those advances.
Not all businesses survive. The weaker ones fail and get replaced by newer, better, more efficient ones. That’s creative destruction, a powerful force for societal good.
But the inherent direction of the value of an account filled with businesses is up. How do I know? Because businesses are profit-driven enterprises. What do they do with that profit? Part of it gets reinvested 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. 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 be ready for 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 called financial independence. There is no other way out.
Markets often stray towards the extremes. One moment, it is as happy a times as ever. The next, things 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 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. Imaging not having to know about discount rates and PE ratios and sequence of returns risk and life expectancies. Imagine spending more of your time doing what you are good at instead of worrying about what the markets did that 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’ll turn 50 and you are 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’s nothing. It’s not nothing. That’s 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 barely $88,000 in retirement savings. Hope there’s more to that number but if that’s all they’ve got, it won’t be pretty.
Some parting thoughts on navigating downturns…
- Keep plenty of cash reserves. You won’t earn on them much, but you won’t go poor either.
- 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 scams. No SPACs, no meme stocks, no crypto. Never make hasty money decisions. There is no rush.
- Last, there are no certainties in investing. Not even with treasuries. Even they lose value sometimes. So, you must rationally assess those chances when building your plan. But once you have a feel-good plan, the only job that remains is to dollar-cost average into it with all that you’ve got, and financial independence would be yours sooner than you think.
Thank you for your time.
Cover image credit – Gerd Altmann, Pexels