Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP®
Allison Dubreuil, Wealthway Financial Advisors: Tonight, we want to talk about weathering the bear markets. For those of you that watch any media outlet, listen to this radio station, or watch your own investment accounts, you have seen choppy waters over really this whole year. We were at all-time highs in the markets in January. We reached an official bear market in June. Bounced up a little bit from bottoms in June and July. And now we find ourselves back in what is defined as bear market territory.
Kevin Zywna, Wealthway Financial Advisors: Yes, there’s no official financial technical designation of a bear market. It’s really a colloquial term that signifies at least a 20% drop from a peak to trough in a stock or an index view. And so, in the S&P 500, we reached our all-time high on January 4 of this year. And where we sit today on the S&P 500 is down about 24% from that all-time high. So that is an official bear market for the second time this year.
That’s a rarity. Usually once one occurs, we don’t come out of it and then go back into it. But none of these things are predictable in the short run. And so that’s where we find ourselves. While we spend 90% of our time on this show, talking about financial planning topics, a big part of our practice is investment management. It’s appropriate, from time to time, to speak to some topics that relate to investment management and specifically to a bear market. What to do. Because we know from professional experience, this is when most people make the big mistake. And if we can save a few people from making the big mistake, or even capitalizing on this bear market, then we will feel like we have done some good in the world today.
What Should You Do In A Bear Market?
Allison Dubreuil, Wealthway Financial Advisors: What should you do in a bear market? Well, how you react largely depends on you, and your phase of life. So by and large for most people, what you should probably do is nothing. If you already have a plan in place, if you have an investment plan in place, and you have a financial plan that you’re working, then typically, you already should have planned for this eventuality. And your job is to sit back and do nothing and not make the big mistake of selling out at lows.
Stick To Your Long-Term Financial Plan In A Bear Market – Don’t Try To Time The Market
Kevin Zywna, Wealthway Financial Advisors: Generally speaking, you don’t want to react to short term market movements. You want to be proactive and thoughtful in your portfolio design and construction. Part of that process is recognizing that on average, about every five or six, sometimes maybe seven, years there is an official bear market. And you need to embrace the fact that neither you nor anyone else, myself included, can predict precisely when a bear market is going to occur. And more money is lost, trying to avoid a bear market than is ever lost in a bear market. Because people don’t react appropriately to it. The pain of seeing their account balance continually decline, day after day, month after month, eventually wears on people to the point where they feel they have to do something. And that doing something usually means selling. And when you sell you lock in your losses. Then you have to hope that you somehow have the timing right again, to buy back into the market, if that strategy is going to be at all successful. And overwhelmingly it is not. That is how you lose real money as an investor.
Allison Dubreuil, Wealthway Financial Advisors: Yes, once you sell out, getting back in is even more terrifying, because you’ve made a decision. Now you have to try to make a second timing decision, which is very difficult to do. Because getting back in, you should get back in at an all-time low, when sentiment is completely dismal. When everyone’s panicked and everything feels horrible. And it’s very difficult to do that. Very few people can actually stomach getting back in at the lows once they’ve gotten out.
Kevin Zywna, Wealthway Financial Advisors: No, it’s counterintuitive. It’s almost impossible. If you saw your account balance decline so much and you were so scared about the prospects of the economy and the stock market that you had to sell out. For that to be effective, you have to wait for the stock market to go even lower, and then buy back even worse. While more negative headlines and more negative sentiment is out there. Then you’d have to have the courage to then buy back in even lower, and that’s how it would work. But most people, virtually all people don’t do that. They wait until things get better. And the news sounds better. And the economic statistics get better. And corporate profitability gets better. The stock market rises in response to that good news. And then they wait. Then they buy back in – having missed a good part, if not all of the recovery. So market timing doesn’t work for anyone.
Allison Dubreuil, Wealthway Financial Advisors: So what should you do during a bear market? Now, we already said there’s no one size fits all plan. Your plan and how you work your plan should be very specific to you and your situation. But we’ll give you some general direction.
Kevin Zywna, Wealthway Financial Advisors: Don’t get your advice from your brother-in-law or your hairstylist or your golf buddy or your cubicle mate in the office. They’re the worst. Everyone’s got a theory in times of crisis. Everyone’s got a philosophy. Everyone’s going to tell you what they’re going to do. You do what’s best for you.
Allison Dubreuil, Wealthway Financial Advisors: Right? I mean, everyone’s personal situation is so different. And you most likely don’t really know the ins and outs of what that person giving you advice has going on. And almost invariably it’s wrong.
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Should You Increase 401K Contributions In A Bear Market?
Kevin Zywna, Wealthway Financial Advisors: We’re going to go out to Virginia Beach to speak with Chris. Good evening, Chris, you’re on Dollars & Common Sense. Thanks for the call.
Caller: Hello. My name is Chris. I’m 35. My employer matches 6%, dollar for dollar. And on that 12% Now because we’re in a program where they match up to six%. So their program has put us year after year, they bump you up a percentage point. And I’m wondering if in this market, whether or not I need to rein that back a little bit? Because I’ve lost a lot of money in my 401K?
Allison Dubreuil, Wealthway Financial Advisors: That’s a great question.
Kevin Zywna, Wealthway Financial Advisors: That’s most people’s natural instinct. It’s the exact opposite of what you should do. This is an excellent buying opportunity for people who have a company retirement plan and are contributing with every paycheck to that retirement plan.
Caller: I’m putting about $400 a paycheck. We get paid bi-weekly. So I’m putting that in. They match 6%. But I’m right at like $395 per paycheck. But I don’t have anybody managing a portfolio. It’s all company based through Voya. Do you guys have a contractor? Is there someone you can recommend me? Maybe I can diversify?
Kevin Zywna, Wealthway Financial Advisors: Yes, well, okay. Two separate things. First, how much should you contribute to the plan? And then secondly, where do you put the money inside the plan once it gets there? You indicated that the value of your account is declining with the general decline in the stock market. So you’re feeling anxious about that. And you prefer to stop the hemorrhaging and you feel like you’re throwing money into a black hole. Right? And it’s it just keeps going?
Caller: Exactly. I feel like I’m throwing $800 a month into this 401K and it is not returning. A couple of years ago, it was great. Right? It was amazing.
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Continue Your 401K Contributions
Kevin Zywna, Wealthway Financial Advisors: Right. Well, that’s exactly what it does feel like. But these occasional temporary bear markets are part of the investment cycle. One of the best things you can do to combat a bear market is, number one, keep contributing to the your 401K plan. Don’t stop, don’t reduce. Number two, if you can afford it, now is an excellent time to not just keep contributing, but increase what you’re contributing.
Caller: Buying power is greater.
Increase Your 401K Contributions In a Bear Market If You Can
Kevin Zywna, Wealthway Financial Advisors: Yes, you’re buying more. You’re buying effectively. Buying more shares at lower prices. And when the eventual inevitable recovery happens, which I’m not predicting when that’s going to be – I have no idea. No one else has an idea. But we do know it will happen. When that happens. This is where the money gets made. You described it Chris, this is what buying low feels like. Everyone knows the trade expression of successful stock, “buy low, sell high.” It’s so easy, right? Anyone can do it? Well, buying low, typically doesn’t feel good, because you’re buying it in a declining market. And you are buying when all the news swirling around you on a regular basis doesn’t feel good. And you probably have people chirping in your ear, like, “oh, man, I wouldn’t be investing in the market now, that’s scary.” This we can tell you, unequivocally Chris, from professional experience, this is the best time to be adding money to your retirement plan. Keep at it, increase it where you can.
Now the second part of your question is, “what do I do with it?” Once it’s in the plan, that’s a little bit more technical, a little bit more specific to you. We couldn’t give you that advice over the air without knowing a lot more about the plan and yourself. But it sounds like you’re in an equity, you know, like a stock type of investment. And that’s where you should be at this stage of life and this point in time, so don’t feel bad about that.
Caller: They send me a portfolio quarterly from Voya, our investment company. I don’t know what I’m looking at. Should I take that to somebody? Because we have so many options for this, and I don’t know what I’m looking at. To be honest with you I don’t know about this stock market stuff, because I’m a heavy equipment mechanic and that’s all I know.
Allison Dubreuil, Wealthway Financial Advisors: And I don’t know what you do, Chris. That is a challenge for almost everybody that has a 401k. It’s overwhelming. They don’t understand it, and they don’t know what to do. There should be a contact for you to reach out to at Voya. The place to start might be your human resources contact who might know of a specific person at Voya that is assigned to your plan that can sit down with you and talk to you about your circumstances and help you make sure you’re in the right investments for you. I would start with your HR and they should know who you can contact at Voya.
Kevin Zywna, Wealthway Financial Advisors: And if it’s not a person, then it’s at least typically a call center with people. Or sometimes it’s starting at a website, where you log into and answer some questions that that can help guide you. But there almost always are resources there. You just have to work through your employer to find them.
Allison Dubreuil, Wealthway Financial Advisors: Big picture, 35 is very young. There’s no concern, this is not the time to be conservative is what I mean to say. You have so many years ahead of you. These are buying opportunities.
Caller: It is hard with the mortgage and the car payments and everything. With the inflation we’ve really had to tighten our belts right now. And my wife and I are both paycheck to paycheck, pretty much.
Allison Dubreuil, Wealthway Financial Advisors: Well, I really commend you for saving 12% Because so many people don’t take advantage of their employer sponsored plan. You’re getting free money on that match. So you’re doing all the right things. So just keep doing them.
Caller: The program to where they match you 6%. But they want you to get to the 6%. And every year, unless you opt out of it, they bump it up. Yes, every year. Yes, it’s pretty cool. When the economy wasn’t so bad, I didn’t notice that 1% every year. But the past couple of years, that 2 or 3% has shown its face now. And yes, it’s been tough. Well, I’ll just hold on. We’ll tighten our belts. And we’ll keep on keeping on. I really appreciate your advice.
Kevin Zywna, Wealthway Financial Advisors: Okay, Chris. Yes, thanks for the call. If you can stick with it. If you can get through this point, I can tell you with a high degree of probability, when you look back at this point in time, three years into the future, five years in the future, you are going to be very happy that you continued contributing to your plan in the level that you did. Because the probability is exceptionally high, that the market will be higher than it is today. So don’t give up.
Caller: Should I keep it at the 12% and not keep going up another percent? Because I don’t know how much we’re getting at the end of the year. Whether they’re going to bump me up another percent.
Allison Dubreuil, Wealthway Financial Advisors: Will you or your wife have a pension in retirement? Do either of you have a plan?
Caller: She’s a nurse. I’m a heavy equipment mechanic. I work for a pretty reputable company. But there’s no pension.
Allison Dubreuil, Wealthway Financial Advisors: But your wife doesn’t have a pension?
Caller: No, she works for a family practice.
Allison Dubreuil, Wealthway Financial Advisors: Okay, got it. Well, long-term, I think you’re where you need to be at 12%. We typically recommend people work towards saving 15% of their income unless there’s going to be some pension income in the future. So 12% is great. If you can stomach the increase, do it. Otherwise, you can opt out until you get another pay raise and then take the opportunity to go up a percentage the next time you get a pay raise.
Caller: They decided not to give us a cost of living increase. They gave us a one-time payout, which was like 1300 bucks or something like that. Inflation being 8.3 and probably going to continue to end probably close to nine at the end of the year, I’m assuming.
Allison Dubreuil, Wealthway Financial Advisors: Yes, if you don’t get a pay raise and you can’t stomach the increase, that’s okay. If you can just hold the line at 12% until maybe inflation comes down and you get the next raise, you’ll still be on a great path.
Caller: Okay, so 15% is where I need to see myself here in a couple of years, long-term.
Allison Dubreuil, Wealthway Financial Advisors: That will be ideal.
Kevin Zywna, Wealthway Financial Advisors: Thanks a lot, Chris. We really appreciate it.
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Focus On What You Can Control In A Bear Market
Allison Dubreuil, Wealthway Financial Advisors: We’ve been talking about the current bad weather in the markets. We can call it a bear market. What you should do and should not do. Our first point, the first thing you should take away from this conversation tonight is: there’s no one size fits all solution. Your financial plan should be custom to you, based on your circumstances. Hopefully you’re not reacting to the market. Hopefully you are acting on a long term investment plan and a long term financial plan. But really, what you need to do is instead of focusing on all the noise and all the things that you have absolutely no control over, we recommend focusing on what you can control. So you can control a number of things in your personal financial situation that can help you get through this temporary decline in market relatively unscathed.
Keep A Healthy Emergency Fund
Kevin Zywna, Wealthway Financial Advisors
Yes, one of the first things you can control is how much money you have in your emergency fund, right? Or do you have an emergency fund? Regularly defined in the financial planning profession, an emergency fund is about three to six months of life expenses tucked away in a bank account, safe and sound. Not really earning much interest at this point. We know. That’s not the purpose of this money. It’s in case you have some unexpected unforeseen life event. You have that cushion of cash sitting there waiting to be used and you don’t have to go into debt. You don’t have to put it on a credit card that you can’t pay off and then all of a sudden have to pay a lot of interest and then you start spiraling. Going down the hole in the debt spiral. An emergency fund is a great security blanket that can help you weather trying times.
Allison Dubreuil, Wealthway Financial Advisors: And so hopefully you have your emergency funds squared away. The other thing you can focus on is your cashflow. So if you are in the accumulation phase, if you’re still working and earning income, your income is likely to be affected by this downturn in the market. For most people that are still adding to their investments and savings, no, this downturn would not impact their income and wouldn’t impact their daily lifestyle. So you can take comfort in the fact that you still have an income source. And hopefully, you are saving some of that income source like our last caller, Chris. He was doing a great job, deferring 12% into his employer sponsored plan. And his question was, should I stop this, this feels scary. While we talked at length that no, this is not the time to stop, it’s the time to continue, if not increase how much you’re adding into your investment accounts.
In fact, if you have, you know, too much sitting in your bank or extra money you happen to come in to at this time in your life, this is a great time to invest it and put it in the market while things are on sale. I like to use the analogy, I think it just helps put it in perspective, what if iPhones went on sale? Okay, what if smartphones went on sale by 20%. Would you automatically try to sell your smartphone? Or would you maybe consider upgrading your smartphone and investing or buying a new one? Stocks are on sale right now. You can get the same thing for less money. So it is a good time to add.
Kevin Zywna, Wealthway Financial Advisors: But like Chris started out with his question – it’s counterintuitive to the average person when you see the money, January 4 was the actual tippy top peak of the US stock market. And so here we are in late September. And it’s been a slow and steady decline in value. And while we consider that short term from an investing perspective, we consider anything up to two, maybe three years short term. A year or eight months feels like a really long time, when every month you open your statement or if you go online every day and look at your account. It feels like a long time. This is still short term from an investment perspective. So, the thing you can control here is if you are continuing to invest, keep going. If you have the means to increase what you’re regularly contributing to an investment plan, increase it. If you aren’t investing at this point in time, now is a great time to start. That’s what you can control.
Allison Dubreuil, Wealthway Financial Advisors: Now on the other side of that equation are those that are not still earning income, that are not still saving that might be withdrawing from their investment portfolio. And this can be certainly can be very scary or unsettling to go through.
Kevin Zywna, Wealthway Financial Advisors: Yes, that’s a different equation. People who are fully in retirement, living off social security, maybe pension, maybe not. And then their life savings, their nest egg, their investments, their portfolio, if they’re living off their investments at this point, which many of our clients in our practice are, then that’s a different equation. Because as you are withdrawing your money from your portfolio on a regular basis, as the market is declining as a portfolio value is declining, now you’re taking out bigger chunks of your portfolio with each declining month. And if the market goes down or portfolio value goes down too far, or stays down too long, then you can really start eating away at that principle in your portfolio. When the ultimate recovery comes, you aren’t going to have as much to recover.
Now, that’s where the magic of ongoing analytical financial planning comes in. You can put your mind to ease. All we get out of Investment Management is a rate of return. And overwhelmingly the people who invest in the United States, I’m going to pick it around 90%, all they do is just invest. And most of that 90% who do invest, don’t even know what their rate of return is because they don’t get it properly calculated by their broker or their advisor, or their online Robinhood account or, you know, they don’t even know what the rate of return is. But that’s all you get out of Investment Management anyways, rate of return. But the rate of return doesn’t tell you what you need to do. Ongoing analytical financial planning advice tells you what you need to do, if anything. And so for our clients who are going into retirement or in retirement, that’s why we are always monitoring, managing, recommending a withdrawal distribution, income plan for them through for their portfolio that is largely sustainable through these inevitable market downturns. This is what we would consider at this point so far, average bread and butter bear market that should have been planned for before you went into retirement. And if it wasn’t, that’s when you’re liable to panic.
Allison Dubreuil, Wealthway Financial Advisors: Yes, I recently heard this analogy and I really like it. Investors should prepare for bear markets like skydivers prepare for jumping out of an airplane. I like this because my husband used to be a skydiver. Skydivers, when they jump out of a plane, they plan, they prepare for that parachute not to open, they always have a backup plan. So you should always have a plan for this eventuality. It’s an eventuality. And it happens every five to six years.
Kevin Zywna, Wealthway Financial Advisors: Anyone who calls themself a financial advisor, should coach their clients that this is expected. Unfortunately, most don’t. And what most do for their clients is lull them into a false sense of security, that that advisor is going to avoid the market downturn. They’re not. They’re going to tell you that and you’re going to feel good about hearing that. But when it eventually happens, you’re going to see that no, that’s not the case. And you’re going to be disappointed. So just know that timing these types of market downturns is virtually impossible to do while it is impossible to do with any consistency. It’s virtually impossible to do any like one time you just avoiding the downturn is one decision then you have to decide when it’s time to get back in. You know, that’s two decision points and the odds right there are stacked against virtually everybody. We’re going to hear from Bob who’s in Norfolk. Good evening, Bob you’re on Dollars & Common Sense.
Caller: Yes. Hi, Kevin and Allison. I want to call and comment. I really respect and admire the way you guys tutor people like Chris who sounded like he’s kind of scared. Most of these young people are pretty scared. I guess I’m an old guy. I’m not worried about it. I’m going to be okay. But what does scare me is I’m in variable annuities. Some people hate them. Some people love them. Over 40 years, they’ve done pretty well for me, actually. Probably paid a little bit more than I should have in commissions. I don’t know.
But one thing is, I don’t know the business. So I let him do it. But I’ve come up from about, I guess 75,000 to 1.1 billion now. Maybe one. I don’t know. But if the market has done well it’s about when you get older. Depending on your financial situation, it can be pretty scary. I don’t know if I would go this heavily in stocks. If I continue with it. I’m not going to take everything out. But there are very few options that are completely safe. And I think you’ve mentioned those, and there’s absolutely no way to get around the taxman. What does scare me is how the world situation can affect the stock market. I didn’t realize that politics and what’s going on now could have such an effect. And it’s pretty scary. But you definitely don’t want to bail out, do you?
Kevin Zywna, Wealthway Financial Advisors: Well, I think we would probably disagree with a little bit of that there, Bob. I mean, politics can have some short run influence on the markets. But it doesn’t have very much long run influence on the market. And despite anyone’s politics, there is no statistical correlation between the party of the sitting president and the performance of the stock market, or the predominant party in Congress and the stock market. There is no correlation, you cannot say that one party is better than the other when it comes to stock performance.
And I think one more other thing we would add in there, just because you’re getting retire. That’s not the end, right? So, you don’t have to get overly conservative when you go into retirement. Retirement is just a transition phase. And for most people a reasonable health, they probably have another third of their life ahead of them 25 to 30 years, that’s still long term. That still argues from our point of view, for remaining still largely invested in equities, because that’s where you’re going to get your best long term performance.
Caller: Maybe I didn’t state that correctly. I didn’t meet current political party. Although I think it has some effect on maybe the world situation in general. What’s happening and in the effects of overseas and just everything in general, it’s kind of a rough time. But we’re going to pull out of it. But right now, this inflation, that’s hurting a lot of stuff. Housing, purchasing, you name it, you know, but I don’t know, I’ll tell you. On the other hand, I’ve got way too much money in a credit union making 1.8%. But it’s not going anywhere. And that’s pretty reassuring just to have that pretty sizable amount. But I’m not going to put everything in the market at this point. But I’m not going to take everything out of either. I’ll take this off the air if you want to elaborate but, at this point would you recommend for new newbies coming into investing to get into annuities, mutual funds, whatever? But anyway, thanks a lot. I am an old listener from Dan Bunting and I think you worked a little bit with Dan.
Kevin Zywna, Wealthway Financial Advisors: Alright, alright. Yes. Thanks for saying that Bob. Yes, Dan Bunting, the predecessor to Wealthway Financial Advisors, Bunting Capital Management. And then before that, you probably don’t remember this, but Dan was with Fritz Freeze and Freeze and Associates. They were probably one of the first financial radio shows on WNIS in the late 80s. And then Dan broke away in the mid-90s. And then he retired in 2015. And then we renamed the company in 2018. But yes, thanks for bringing that up.
Yes, well, if you like, if you heard the first half of the show, Bob, I mean, now’s as good a time to get started for anyone investing. This is one of the best times to start adding money into a depressed market. This is what buying low feels like.
Now you’re in a different stage of life. You’re in a different economic situation than people were starting out. So what’s important for them is not what’s important for you, necessarily. Completely different decision sets, and different decisions would be made.
But there is always a crisis of the day, we will never get away from a period of time where there will be perfect certainty. And always, there’s so much uncertainty in the market these days, there is never a time when there is not uncertainty. There is always uncertainty. But despite it all, we persevere, and you’ve got to remember the stock market is not some magic crystal ball. It’s a Black Hole. It is made up of real American companies that produce legitimate goods and services that they sell for a profit. And that profit is what investors are buying the current and future profits of those companies. And yes, from time to time, for a variety of economic reasons, those profits can decline. That’s normal and natural, doesn’t go straight up.
But over the long run, the incentives built into the capitalistic economic forces of the US economy and most of the world’s economy are such that companies are able to grow their profits on average year over year, about seven to 9% on average, in the aggregate. That’s why the stock market performs similarly. So occasional temporary market pullbacks, like we’re experiencing right now is the price that we have to pay to enjoy long run rates of return that can be 8, 9, 10%, even higher in some other asset classes over certain periods of time. So, I just want to make sure that we all understand that this is normal, natural, what’s right for you is not right for everyone else, hopefully, we’ve been able to give some general guidance on what to do to this bear market, and how to take advantage of it where appropriate.
Allison Dubreuil, Wealthway Financial Advisors: Right. Hopefully you have a plan in place that is customized to you and your financial situation. And you can continue to operate your plan and not react emotionally to what’s going on in the markets.
Kevin J. Zywna, CFP®