Preparing for The Moment

By Ben Dolan, CFP®

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I love taking my kids to Carowinds! With arcades, carnival games, and rides for kids of all ages (and pretty clean bathrooms, which is a requirement if I want my wife to come) there is much fun to be had for all.  

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My twins, Ben and Anna (12 as of last November) are turning into little thrill-seekers. Each time we go to Carowinds they want to try a bigger, faster roller coaster. Waiting in line, with the screams of fear and joy coming from the current passengers in the background, I can see anxiety building as they eye the first big hill. They are doing the best they can to mentally prepare themselves for the moment when they will crest the hill and go down down down at a dizzying speed (Anna with her hands high and a smile, Ben with a tight grip on the bar in front of him and his eyes shut).

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When it comes to investing, I believe most investors (and advisors for that matter), are woefully unprepared for a similar, but much more consequential event: the moment when markets move down so fast that investors see a good chunk of their life savings vanish before their eyes. Below is a record of such dark days.  

With many Americans preparing for a 30-year retirement, sometimes longer than their working careers, it is not unusual for retirees to have a large percentage of their savings in stocks subject to such dramatic volatility. Therefore, when dark days hit, investors need to be prepared with a plan of action.  

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Here are some tips for doing so:

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1. Keep your head out of the sand - Dark days will happen and are unpredictable. For a historical understanding of markets and how they function, consider reading Malkiel’s classic “A Random Walk Down Wall Street.”  
2. Consider your allocation – A strong portfolio will be allocated such that, when dark days occur, your safe assets will be there to support you while your risk assets recover.  
3. Use spending guardrails – Learn how to adjust your spending in good times and bad to ensure your portfolio lasts for the long-term.  
4. Make lemonade – Harvest your losses to help keep the tax collectors at bay. Smart investors know how take advantage of paper losses while remaining invested in the market.  
5. Time to buy – If you have cash on the sidelines, when irrationality has set in on the downside, it’s time to buy!

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In his 2020 book The Psychology of Money, Morgan Housel provides some guidance on dealing with dark days: “Napoleon’s definition of a military genius was, “The man who can do the average thing when all those around him are going crazy.” It’s the same in investing. Most financial advice is about today. What should you do right now, and what stocks look like good buys today?

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But most of the time today is not that important. Over the course of your lifetime as an investor the decisions that you make today or tomorrow or next week will not matter nearly as much as what you do during the small number of days-like the 1% of the time or less-when everyone else around you is going crazy” (pg 76).

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