114 – When the stock market crashes, we need to stay sane and invest with a strategy, but that’s easier said than done.
In this episode, Jeremy Keil speaks with Joseph Hogue about why keeping your cool is essential when the stock market dips and some investment strategies to help you do so. Joseph explains who you’re up against when you invest in the stock market and how changing your perspective about investing can help prevent irrational decision-making. Jeremy and Joseph also discuss investment strategies to approach investing in the stock market when retirement is around the corner.
- The difference between a CFP® professional and CFA® charterholder, and what a CFA® charterholder does
- Who you’re gambling against when you invest in the stock market
- How to stay sane when the market is crashing
- How you should approach investing in the stock market if you’re close to retirement
- And more
Let’s Talk Money!
The difference between a CFP® professional and CFA® charterholder
Many people mistake CFA for CFP. CFAs are analysts, whereas CFPs are planners.
Those in the analyst role often work with some of the Wall Street banks and research firms and are seen on CNBC talking about specific stocks and the stock market. So, it’s much more of an analysis and research side of financial services than it is long-term planning, but CFPs can also have a CFA certification and offer both services.
Based on their expert knowledge, equity analysts advise investors, brokers, and investment consultants on stocks and bonds. They gather and assess data on stocks and bonds, create financial models, and develop forecasts leading to informed investment opportunity decisions.
Joseph Hogue talks about two different types of equity analysts, buy-side and sell-side analysts.
Sell-side is an equity analyst that works for a bank. A sell-side analyst and sell-side department give information for free, creating reports and research for investors to interest them in a particular investment or working with them to generate a commission.
Buy-side analysts work internally, for their company. They privately manage investments and create the same kind of research, but keep it to themselves and their company.
The Stock Market As A Gamble
Some people talk about the stock market as a gamble.
But you’re not gambling against the market as you would against the house at a casino. You’re gambling against other investors, usually backed by billions or trillions of dollars, with more than one CFA advising them.
The stock market is a bit of a gamble, so it’s important to know who you’re gambling against to make better investment decisions.
Another person investors gamble against is themselves. Most of the time, an investor’s worst enemy is themselves. You might have heard that recently on one of our recent episodes, The Biggest Risk To Your Retirement (Part 3) is You! With Dr. Daniel Crosby (Ep. 105). All the decisions you make adversely against yourself result from wanting to have a sense of control and feel like you can control your investment decisions, but you can’t control a stock market.
Staying Sane During A Crash
One of Joseph’s goals is to help people stay calm during a stock market crash. His top recommendation is to change your perspective on investing.
Many people invest more when the market is rising and then want to sell and stop investing as soon as their investments start to fall out of fear.
You should do the opposite.
When stock prices start to fall, they’re essentially going on sale. It’s better to buy them when they’re low because we know that most of them will go back up again, possibly higher than before.
So keeping a diversified portfolio and buying more stock when they’re down will earn you more money in the long run.
Investing In The Stock Market When Retirement Is Around The Corner
It’s important to keep saving and investing your money whether you’re close to retirement or not.
All of your money doesn’t have to go into stocks or investments as soon as it hits your account, but keep saving because one of the most common problems with so many investors is the loss of motivation to invest when they see stocks fall.
Whenever you don’t save or invest that money, you will spend it on higher bills and expenses, making it harder to earn additional income if your stocks go up again in the future.
For those who are closer to retirement, now is not the time to sell out your stocks with a sense of capitulation because stocks are falling. When you’re faced with losses in the market you have to start from a perspective of how much you need, how much you can lose if stocks do continue to go down, what your goals are, and how you plan to reach those goals.
One thing Joseph likes to suggest to people who are very near retirement is the bucket investment approach.
The bucket approach is where one part of your portfolio covers between 18 to 24 months of expenses, invested in savings type accounts like securities, money market funds, and I bonds that are guaranteed safe investments.
Your next bucket contains another 18 months’ worth of cash-flow investments, such as bonds, safer dividend funds, and dividend stocks. These offer more opportunity for growth, but should still be more conservative, so you can refill that first bucket of income needs.
Then the third bucket is filled with whatever remains. It allows you to spend out of the first bucket when the stock market falls. It allows the two years of cash flow from the first bucket to cover your expenses without having to sell those stocks at exactly the wrong moment when stocks are reaching the bottom and gives them the chance to rebuild to those prior peaks.
Avoid Arbitrary Goals And Look At The Bigger Picture
When investing, avoid setting arbitrary goals like saving 1 or 2 million dollars for retirement or waiting until the economy turns around before investing in the stock market.
The stock market is not the economy. Although they are still closely linked together, there are still time lags between the two that can make a fool of investors.
What Joseph tells people to do is to look at the bigger picture. Go back to your goals and set a mental picture around them. Arbitrary goals result in the loss of motivation to invest when the market becomes tough with a recession or lower stock prices.
If you can go back and revisit your goals when the economy takes a tumble, you can use that mental picture you’ve built around your goals about what you’re going to be doing daily when you retire, who’s going to be around you, and where you’re going to live. The minuteness of details and the visualization of these goals can help you keep your motivation through even the most difficult times with the market.
Caution: Getting Income From Dividend Stocks
Some people invest all of their money into one stock or one type of stock that they believe will give them a high return, and that’s a bad idea, even for dividends. You really need at least 10-15 stocks to be well diversified.
Many dividend investors also reach for high yields, but it’s important to understand that it’s a trade-off.
Those dividends come from the earnings of companies, so a lot of the high-yield stocks that pay over 8% are not reinvesting into the company, resulting in gradually destroying the shareholder value because the stock price may go down over the long term.
Another reason that dividend rates may be so high is because the ‘dividend yield’ is really the last 12 months’ dividends divided by today’s price. Today’s price may be really low because investors expect future dividends to be cut. This artificially high yield is a mirage that might sucker you into a stock that won’t be paying that high of a dividend soon.
Diversify, Diversify, Diversify! Balance Is Key
When investing, we caution people and recommend that you aim for a balance, regardless of what type of stocks you’re investing in.
Joseph recommends a balance of a dividend yield in the range of 3-7%, depending on the stocks. If you invest in dividends higher than that, you’re likely sacrificing your future returns because the company might not have enough cash to reinvest and grow its future profits.
Joseph recently did a video on how many stocks you should own on his YouTube channel where he talks about the market risk and specific company risk in a portfolio and measures at what point the company risk goes away and investors are left with only the market risk.
With the idea of diversification and having anywhere between 10 to 15 stocks in your portfolio, you’re essentially left with only the market risk. But if you only have 1 or 2 stocks, then you have market risk plus that specific company risk.
Bad things can happen to good companies, so even if you invest in good companies, without a diversified portfolio, your investment has a higher risk.
To learn more about Let’s Talk Money!, check out the resources below!
If you have any questions, feel free to contact us or our guest, Joseph Hogue using the contact information provided below!
- Let’s Talk Money! With Joseph Hogue, CFA
- The Biggest Risk To Your Retirement (Part 3) is You! With Dr. Daniel Crosby (Ep. 105)
- How Many Stocks Should I Own? With Joseph Hogue
- Free Retirement Planning Video Course: 5stepretirementplan.com
- 3 Things You Should Know Before Choosing A Financial Advisor
- 7 Questions That Could Make or Break Your Retirement
- Subscribe to Retirement Revealed on Google Podcasts
- Subscribe to Retirement Revealed on Apple Podcasts
Connect With Joseph Hogue:
- YouTube: Let’s Talk Money!
- Facebook: Let’s Talk Money with Joseph Hogue
- LinkedIn: Joseph Hogue
- Email: firstname.lastname@example.org
Connect With Jeremy Keil:
- Keil Financial Partners
- LinkedIn: Jeremy Keil
- Facebook: Jeremy Keil
- LinkedIn: Keil Financial Partners
- Book a call with Jeremy
About Our Guest:
Joseph Hogue is an online influencer on YouTube with a channel called Let’s Talk Money and four blogs where he reaches over a million people monthly about topics such as investing, making money, and personal finance.
Joseph graduated from Iowa State University after serving in the Marine Corps and worked in corporate finance and real estate before starting a career in investment analysis. He holds a master’s degree in business and is a designated CFA®.
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