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DO you know what money mistakes to avoid in a bear market?

We have an inflationary environment in a rising interest rate environment. First talking specifically about the stock market, and investing philosophy. One of the biggest mistakes to avoid is not to panic sell. Now a couple of ways to look at it and panic selling is “wow the markets are down. I can’t take it anymore. I’m liquidating everything. Going to cash. Timing the market.” There’s a difference between that and analyzing an investment that happens to be down and there actually is a problem with it. That’s not panic selling. If there’s a problem with an investment, you should sell it and I’ll put this caveat in there too. If it’s down to a level and you’re really uncomfortable with it, and you can’t understand it, don’t understand it. You don’t know how to understand what it is. That’s a problem. Why did
do you own it in the first place?

Were you invested properly in the first place, to begin with? Did you understand what it was? Were you invested in a way that fits to your situation and your goals? So that’s a biggie. We’ve done a couple of shows where we’ve talked about the idea of trying to time the market and the issues with doing that because you have to be right on both sides. When you sell and when you buy back… nearly impossible to do. It’s what you pay an advisor for what our clients pay us for, which is not for good markets. In a good market, you can almost throw a dart and make money.What they pay. This could be a
good market  we’re in because,
well, stuff that’s cheap. What they pay us for is to be disciplined. They pay us for bad markets so that we can hopefully calm nerves, calm emotions, and take a long-term view on things. We try to take advantage of the situation and buy good companies at good prices. So bad markets can present opportunities, but they also show weaknesses in your portfolio. If your portfolio has just been on autopilot and you were naturally overweight in a particular sector well- a bad market calls attention to that- especially if that sector is done poorly. And that’s the importance of constantly monitoring your investments, constantly going back and reassessing what you own and why you own it. That’s a big one- one of the most important things.

What do you think of people that we see -the biggest problem people have with the whole investment process?

The biggest problem they have is
constant concentration being overly concentrated in a particular area. And always chasing performance. You’re always behind the curve when you’re chasing performance. If there’s a hot area, they put money to that hot area, six months to a year after it has been hot. They’re chasing that performance. And then when it goes down, they sell it. And so you’re always behind the curve. You’re always behind the curve, rather than having a stated plan being prepared for UPS… downs… volatility. You’re always chasing things.

You have the psychology of the market and then you have the psychology of the individual investor.

The individual investor or the institutional investor is going to do well has to at least try to understand this kind of thinking in the market. Now, he or she may not agree with it. But in order to position oneself in a contrarian way to the psychology of that market.  You have to at least understand what the market is thinking.
That is very difficult because psychologically, it’s much easier to be a part of the herd than it is to think independently. It’s very easy to get caught up in trends and become victims of recency bias. Just about a few months ago the consensus was that money has to be in electric vehicles and cybersecurity. There were all these fields and that’s where everyone was investing- green technologies. It turned out that the best investment over the last year and a half really was oil and gas, which was the last thing on anyone’s mind. It was actually one of the best contrarian investments ever seen where no one was thinking about the consensus was that oil and gas is done. In order to think

That’s why markets are difficult. Perhaps they become even more difficult because movements are even quicker. In the past, it would have taken maybe two months for a move of this magnitude. Now something just moves 10% or 20% in a matter of a week. So it’s important to when you create your portfolio or when you make investments, the first thing that everyone needs to do is to be honest with themselves and admit that they are prone to becoming victims of groupthink or of herd psychology. Your investment process has to have some sort of almost a systematic element to it where people who had investments in technology, they saw that it kept going up and it became a very large portion of their portfolios. All of a sudden we’ve seen that when things reverse now it is hurting them proportionally even more because they were too concentrated in that area. You have to have a plan. You have to know your timeframe. Whether you’re a trader or a long-term investor, you have to be clear on that. And you have to have a plan for how you will treat your investments if there are outside outsized moves, or if returns have deviated significantly.

We’ve seen several portfolios recently where the person is getting ready or was planning to retire. And it had been on autopilot and some of the large mutual funds out there that are in a lot of 401k’s which were tech heavy, especially the fang stocks heavy. It had done extremely well for several years. And it kind of got to a point where hey “I have hit my level.” And then this year happens. And some of those funds are down 30% which is about what the NASDAQ is down. And so, again, it was on autopilot, and there was no review. You just
selected the box that said aggressive growth. They rode that for
years. There was no rebalancing. They didn’t change the allocation as they’re getting closer to retirement- anything like that. And then bam this hits a year before retirement and it changes the number trajectory.

That was panic selling, which is the number one. It’s number one for the three Money Mistakes To Avoid a Bear Market. Number two, is using up emergency savings to pay down debts.

Not to pay down debt but just to buy stuff.
So here’s the biggest takeaway from debt. You know, we’re talking about a rising rate environment. If you have any form of variable interest rates, floating rate…could be credit cards could be home equity line of credit. You need to be very careful because the rates are going up on that debt. And that is a good use of money. In the context of the overall plan, how much cash do you have? Where do you have to take something out of pre-tax to do that? Then that’s another discussion. But in general, paying down a variable rate is a good thing to do. Now if you’ve got a fixed mortgage at three and a half percent that’s not bad debt. Again, it all has to be taken in the context of your whole overall situation. Depending upon how much it’ll float up to right and it’s gonna be on a case-by-case thing.

Here’s the thing that we haven’t really seen… we’ve talked about fear in the past. Now, we don’t know whether Americans and investors, in general, are just feared out. They don’t respond to fear like they maybe once did. You had the pandemic, you’ve had all these things. One of the things that you said was that you didn’t see that fear-driven capitulation in these markets. We don’t know if people are kind of in that mode of really being completely motivated by fear these days. They’ve seen so much going on in our country that’s a lot worse- some of it- than the stock market being down. The point is… it’s been orderly.

 

Now a couple of ways to look at it and panic selling is “wow the markets down. I can’t take it anymore. I’m liquidating everything.” One of the biggest mistakes to avoid is not to panic sell. Going to cash. Timing the market.” There’s a difference between that and analyzing an investment that happens to be down and there actually is a problem with it. That’s not panic selling. If there’s a problem with an investment, you should sell it and I’ll put this caveat in there too. If it’s down to a level and you’re really uncomfortable with it, and you can’t understand it, don’t understand it. You don’t know how to understand what it is. That’s a problem. Why did you own it in the first place?

Were you invested properly in the first place to begin with? Did you understand what it was? Were you invested in a way that that fits to your situation and your goals? So that’s a biggie. We’ve done a couple shows where we’ve talked about the idea of trying to time the market and the issues with doing that because you have to be right on both sides. When you sell and when you buy back… nearly impossible to do. It’s what you pay an advisor for what our clients pay us for, is not for good markets. I mean, in a good market, you can almost throw a dart and make money.  We think this
is a good market we’re in because
well, stuff is  cheap. What they pay us for is to be disciplined. They pay us for bad markets, so that we we can hopefully calm nerves, calm emotions, take a long term view on things and exactly what you just said. Try to take advantage of the situation and buy good companies at good prices. So bad markets can present opportunities, but they also show weaknesses in your portfolio.

If you have if your portfolio just been on autopilot and you were naturally overweight in a particular sector, well, a bad market calls attention to that, especially if that sector is done poorly. And that’s the importance of constantly monitoring your investments, constantly going back and reassessing what you own and why you own it. That’s a big one- one of the most important things.

What do you think of people that we see the biggest problem people have with the whole investment process?
The biggest problem they have is
constant concentration being overly concentrated in a particular area. And always chasing performance. You’re always behind the curve when you’re chasing performance. What I mean is if there’s a hot area, an investor puts money to that hot area, six months to a year after it has been hot. They’re chasing that performance. And then when it goes down, they sell it. And so you’re always behind the curve. You’re always behind the curve, rather than having a stated plan being prepared for UPS… downs… volatility. You’re always chasing things.

You have the psychology of the market and then you have the psychology of the individual investor.
And the individual investor or the institutional investor is going to do well has to at least try to understand kind of the thinking in the market. Now, he or she may not agree with it. But in order to position oneself in a contrarian way to the psychology of the market, I would argue initially, you have to at least understand what the market is thinking.
That is very difficult, because I think psychologically, it’s much easier to be a part of the herd than it is to think independently. It’s very easy to get caught up in trends and become victims to recency bias, which is when something’s been going up. This is where I remember just about a few months ago talking to people, I think the consensus was that money has to be in electric vehicles and cybersecurity. There were all these fields and that’s where everyone was investing- green technologies. It turned out that the best investment over the last year and a half really was oil and gas, which was the last thing on anyone’s mind. It was actually one of the best contrarian investments ever seen where no one was thinking about the consensus was that oil and gas is done. In order to think

That’s why markets are difficult. Perhaps they become even more difficult because movements are even quicker. In the past, it would have taken maybe two months for a move of this magnitude. Now something just moves 10% or 20% in a matter of a week. So it’s important to when you create your portfolio or when you make investments, the first thing that everyone needs to do is to be honest with themselves and admit that they are prone to becoming victims of groupthink or of herd psychology. Your investment process has to have some sort of almost a systematic element to it where- And as a result- people who had investments in technology, they saw that it kept going up and it became a very large portion of their portfolios and all of a sudden we’ve seen that when things reverse now it’s.  It’s hurting them proportionally even more because they were too concentrated in that area. You have to have a plan. You have to know your timeframe. First of all, whether you’re a trader or a long term investor, you have to be clear on that. And you have to have a plan for how you will treat your investments if there are outside outsized moves, or if returns have deviated significantly

We’ve seen several portfolios recently where the person is getting ready or was planning to retire. And it had been on autopilot and some of the large mutual funds out there that are in a lot of 401k’s which were tech heavy, especially the fang stocks heavy. It had done extremely well for several years. And it kind of got to a point where hey “I have hit my level.” And then this year happens. And some of those funds are down 30% which is about what the NASDAQ is down. And so, again, it was on autopilot, and there was no review. You just
selected the box that said aggressive growth. They rode that for
years. There was no rebalancing. They didn’t change the allocation as they’re getting closer to retirement- anything like that. And then bam this hits a year before retirement and it changes the number trajectory.
That was panic selling, which is the number one. It’s number one for the three money mistakes. To avoid in a bear market.

Number two, is using up emergency savings to pay down debts.
Not to pay down debt but just to buy stuff.
So here’s here’s the biggest takeaway from debt. You know, we’re talking about a rising rate environment. If you have any form of variable interest rates, floating rate…could be credit cards could be home equity line of credit. Those you need to be very careful because the rates are going up on those on that debt. And that is a good use of money. In the context of the overall plan, how much cash do you have? Where do you have to take something out of pre tax to do that? Then that’s another discussion. But in general, paying down variable rate is a good thing to do. Now if you’ve got a fixed mortgage at three and a half percent that’s not bad debt. Again, it all has to be taken in the context of your whole overall situation.
Depending upon how much it’ll float up to right and it’s gonna be on a case by case thing.

For the third of the Three Money Mistakes To Avoid a Bear Market and more listen to the full episode of The Tom Dupree Show.