Reactions To Market Crashes

Whenever we experience any kind of downward volatility in the stock market, we see people making drastic decisions and changes to their accounts based on emotional reactions. So this week, we’ll take a look into what kind of reactions people make and we’ll discuss some ways to avoid the potential consequences of overreacting.


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John Stillman: Welcome once again to Wright Money Tips with Isaac Wright, chartered financial consultant, and the president of Financial Dynamics and Associates. If you'd like to get in touch, the number is 804-777-9999. 777-9999. Issac, you've never overreacted to anything in your life, have you? You're a very even keel, calm fellow. Have you ever had any sort of overreaction to anything?

Isaac Wright: Cool as the other side of the pillow, my man.

John: Yeah, that's what I thought. Would your wife be able to corroborate this?

Isaac: Absolutely not.

John: Yeah, so maybe we should have her on the show one day for a little more honesty and self-reflection.

Isaac: Everybody's like, man, listen, you have a great voice, you do a great job on your program and you just sound like somebody that has it all together and let's put it this way, I feel like I try hard to keep it all together, but we all have moments where we maybe overreact and I think it's going to be a good conversation today relative to people when it comes to their finances, because that sometimes can put you off the deep end pretty quickly.

John: Well, so anytime we'd have turbulence in the stock market, which obviously we've had a lot of recently, we've had a few good months, we've had some turbulent volatile months.

Anytime we see the market though moving downward for a long period of time, that's when we really start to see people reacting and maybe overreacting in certain ways. So I wanted to talk about some of the common behaviors that we see people have when it comes to reacting to market corrections. And you can kind of tell us what advice you'd give the folks who are exhibiting those behaviors. One of those behaviors being overtrading.

Isaac: Well, this is the area that I see happen more than I used to because people can so much now today just jump on the computer and place trades on various investments that they're trying to outsmart the market by constantly moving money around from one investment to another. Not knowing that, again, the more money you're moving around during a very volatile point in the market, you really are spinning the bottle because you've got to be right with money going in, money going out, you've got to be right twice as what I call it.

So just keep in mind that typically overtrading during a correction simply means maybe you didn't have things balanced when things were a little less stressful and you shouldn't have to worry about overly trading. Now I'm not talking about day trading or anything like that. I'm talking about people that have money in retirement accounts that they know that this is money they are going to have to live on. If you're a day trader and you got to a home run account or something that you want to trade on, by all means have at it. But this is for those that have money that they can't really either A, afford to lose or B, don't want to sit there and figure out how long or how many years it's going to take for it to come back.

John: Yeah. So be sure you like guilty of the overtrading. Isaac, what are the other common reactions we see to market corrections or market downturns is not necessarily something that results in people manipulating their accounts, but it's just their state of mind. And for some people it's just a constant case of sheer panic.

Isaac: Yeah, I understand where you're coming from, John. I think constantly worrying that market losses are going to lead to financial ruin and some people are willing to take on more risk than others. But when you've had a market that's done well for so many years in a row, and sometimes you get the ... and everybody knows what FOMO is, fear of missing out, you get people that take more risks than they may want to take in the first place.

And so all of a sudden, either that is occurred or they have more money now than they ever had in their life. And that's most of us today in our 401ks. Maybe when you had 50,000 in a 401k in the market was down 20% hey, you can deal with the $10,000 loss, but now maybe you have 500,000 in your 401k and now you'd be dealing with $100,000 loss at a 20% level. That's a different number, isn't it? And sometimes people as the larger their money grows, that sense of panic can set in because that exact reason. So just keep this in mind as your money's continuing to grow, you know, gains become more magnified, losses become more magnified. And maybe having somebody that knows who you are could be the right answer leading into a transition such as retirement.

John: Now some people don't panic at all when the market is going through a tailspin. They just stick their head in the sand and it doesn't bother them one bit. Now this is obviously swinging the pendulum too far the other direction. We don't want to do that either.

Isaac: Well, and I think some people have the head in the sand approach. If you think about what happened in 2008 and nine, at that time we were doing a series of presentations and I was going around and having conversations with hundreds of people. How many people, it blew me away, how many people never open their statements from let's say December of 2008 to February of '09. If you want to go Google those three months of the market, have at it. And so people just didn't want to deal with it. And I'm not saying, you know, having your head in the sand to a certain degree, I don't know, in some weird way, it may not be a bad thing, but you should never feel where your money has control of you that much where you can't even fathom looking at your statement.

That's, we're talking significant amount of losses. So if you don't have an answer to whether or not you can even stomach something like that, again, let us know. I mean, I'm not here, I don't want to sit here and go on a long rant, but just we're here to help you financially have some of these ducks in a row so you're not nervous about or let's call it, not even nervous, but dreading opening up that next financial statement.

John: Another thing, Isaac, that some people do is not panic, not head in the sand. They are supremely confident in what's going on with their market based accounts. They show no signs of worry about the market because they know it always comes back eventually, which is a good mindset to have during some stages of your life. When might that be a problem though?

Isaac: Yeah, and that's why I was going to say. Again, I don't know, that reaction in and of itself may not be bad depending on the amount of money you have in the market, but also your time horizon of when you may need this money. So that confidence level, maybe when you're 30 to 40 years old, hey, listen, go at it. You may have another 10, 20, 30 years before you need the money. But you know, 50 and older, that's a tougher one. I mean it's tougher to be down 30 or 40%. It may take you five years, maybe even take you longer to get that money back to where it was. And I just don't think people today when it comes down to it managing a lifestyle plan, if you have enough money to maintain your lifestyle then the real question is how much risk do you need to take in the first place?

And I think that's the question sometimes that's not really asked a lot. So extreme confidence to me, just what I would think is where you want to apply that is to your lifestyle, not the amount of money you have. How confident do you feel towards that lifestyle? And if you're not really sure whether or not you can withstand a large sum of money going away on your accounts and therefore that lifestyle may change. That's why people come in and speak to us or have a conversation with us over the phone to learn more about us. But I would say just don't be overly confident if you don't know that answer.

John: Another behavior we should mention the last one we'll talk about today in terms of reactions to market corrections, Isaac is timing the market. Trying to figure out exactly when the pullout and sitting cash and then trying to figure out when to get back in and exactly the right time and ride it back up.

Isaac: Yeah, and in some respects almost say this is like number one at the top of our podcast today. It has a very similar trait to overtrading. What you're trying to do is figure out how to reshuffle around your money. So pulling money out, putting it in cash. I've seen people that did that in 2008 and nine and, oh, I'll get back in the market when things settled down and by the time they got back in the market, it moved up 20, 30, 40% some people never got back in. Now I'm not saying that's you, but that's an example of having to be right twice. No different than if you're sitting there trying to buy sell a lot of stock, you have to be right going in and coming out. And that's really hard to do. I think a better plan is to have a plan to begin with and have a plan to withstand some of the corrections that ultimately are going to come in any market cycle over a period of time.

So stop playing these games and get your investments in a place that give you the level of stability you need and define what that stability is. How much money are you willing to lose, what does that uncle point? And then from there build up to a rate of return that's more realistic relative to your risk. And don't worry about what your next door neighbors and your friends doing. Worry about what you're doing, worrying about having a plan that's going to take care of yourself and your loved ones. So John, I think this has been kind of a good podcast to cover some of these corrections with all the volatility that we've seen. And hopefully this is helpful for all of you today. And you know we're always here, Wright Money Tips. You can go to our website, many ways to reach us online. Again, you can also call us at 777-9999 locally right here in Richmond, area code 804-777-9999. But John, good reactions and trying to keep my reaction stable when it comes to some of these that I see here because I want people to be in a good place.

John: 804-777-9999 is that number to call if you maybe in listening to this conversation if said, "You know what, I've been guilty of that at some point in my past." Or, "Oh, I just did that yesterday." Now it would be a good time to reach out to the team at Financial Dynamics and Associates. 804-777-9999, and of course more information is available online at Isaac, thanks as always for your wisdom. We'll talk with you again soon.

Isaac: Awesome. Thanks John.

John: Have a great week.

Speaker 3: Information is for illustrative purposes only and does not constitute tax, investment or legal advice. Always consult with a qualified investment, legal or tax professional before taking any action.

Speaker 4: Advisory Services offered through JW Cole Advisors, Inc. JWCA. Financial Dynamics and Associates Inc and JWCA are unaffiliated entities.

John: So, what do we mean when we say tax rate risk, and how does that factor into our plan?

Isaac: I think this is a good one to wrap up on, John. Because, right now, historically speaking, we're seeing some of the lowest tax rates proportionately speaking that we've ever seen for families and individuals. Sometimes, in a way, I try to tell people this as mindset shift, it's sometimes good to go ahead and pay the known tax today, versus the unknown tax of tomorrow.

Isaac: We all know that with Social Security, Medicare, Medicaid, interest on our National Debt, and it's not really getting any better, the likelihood of increasing taxes at some point in the future, is very high.

Isaac: We're lucky enough to have a pretty favorable tax code right now. The tax rate risk, simply is, whether or not you may want to take some of your money and convert it to a Roth IRA, or some other vehicles where you go ahead and pay the tax now, and forfeit, let's call it the unknown, of whether or not you'll have to pay the tax in the future, to whatever degree that may be.

Isaac: All of these things, John, I think it's good to have this conservation about five areas of risk, so when people hear me talk about risk tolerance, and risk evaluations, and anything related to risk, hopefully this gives them a little bit more understanding and depth behind how we view it.

John: That's types of risk you need to be thinking about in your retirement planning. We'll cover bungee jumping and sky diving and all of those things in a separate podcast, that's a whole different category of risk that we'll get to another day.

John: Isaac, always a pleasure. Thanks for your wisdom, as always. If you'd like to reach out to the team at Financial Dynamics and Associates, that number to call is 804-777-9999. That's 804-777-9999.

John: Hope you have a great day, we'll talk to you again soon, right here on Wright Money Tips.

Announcer: Information is for illustrative purposes only, and does not constitute tax, investment, or legal advice. Always consult with a qualified investment, legal or tax professional, before taking any action.

Announcer: Investment advice [inaudible 00:09:30] services, offer through Global Financial, Private Capital LLC.