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While on the phone Monday, a concerned client developed his own analogy during the steep market decline.

He’s in wealth accumulation and will likely save close to $100,000 this year, so his lens of a market decline is likely different than a retiree in draw down.  I’ll also later address the archetype of a retiree.

Nevertheless, I thought it was worth sharing.

After we discussed that market volatility is precisely what he and his family should desire for wealth accumulation (see chart below), he compared volatility to working out.  I’m paraphrasing, but “this is like working out.  I’m tearing down muscle mass, drinking a protein shake, and in recovery, will come back twice as strong.”

This is perfect.  Good on this investor.

The chart below shows an investor of $100,000 starting exactly 20 years ago, saving $10,000/month up to current day with two different returns.  The blue line represents a 6% year over year return with no volatility.  The orange is the investor receiving actual market return (S&P 500) with plenty of volatility and market crashes.  Over 20 years, the market investor who embraced volatility (who did his/her workouts and drank his/her protein), ends with approximately $1.5mm more!

My suspicion is that old time Wall Street lines like, “buy when there’s blood in the streets” and “buy low, sell high” have become just that – old.  And stale.  They aren’t particularly relevant anymore – at least in the spirit of Leonardo DiCaprio screaming for his brokers to pick up the phone and ‘smile and dial’ in The Wolf of Wall Street.

But, these old sayings are still wildly relevant to a wealth accumulator who reinvests dividends, contributes to their 401k, and saves a little extra each month.  If not obvious to you, the reason the orange line is so much higher is that the married couple who contributes the maximum to their 401k ($39,000 + employer match), who also saves a little extra per month, and who also reinvests dividends is likely investing well over $50,000 annually at times when the market is down, stock prices are lower, and it feels like crap to invest.  Just like working out.

Undoubtedly, the data shows us that we want these times of volatility for our long-term wealth creation.  So, whatever anxiety the red numbers cause us on TV, should first be embraced.  Resisting the emotion only feeds the animal (this goes for all negative emotions).  Second, we must redirect our concentration to how this volatility actually serves us.

These times of volatility favor the traditional accumulator.  However, those in distribution or retirement phase of life can adjust their lens, as well.  For those in distribution, being thoughtfully proactive is nearly always healthier than reacting.  Here are a few examples:

  • Cash on the sidelines.  Industry colleague, Ben Carlson, entertains this concept well in a recent blog post.  My favorite point Ben makes is that, “Every investor is told to buy low and sell high.  But most don’t realize that buy low typically works out to buy low, then buy lower, then buy even lower, and once you really hate yourself, buy lower than you thought was possible.”  I’ll add, one step further, that this requires a process.  Ahead of time, this requires you to articulate an objective to someone – what, specifically, do you hope happens, what dollar amount increments are you going to use, and what is the predetermined timeframes of investing.  Anything else is just having some fun and doesn’t truly impact your life as an investor.
  • Tighten the buckle and invest.  To some retired clients, I advise a dynamic draw down approach.  That is to say, we adjust income based upon market performance so that you aren’t selling principle (or as much as) year over year.  So, can you tighten the buckle for a couple of months?  During the volatility can you spare some extra money (no matter how large or small) and reinvest vs spend?  This has very little to do with creating additional wealth and more to do about taking some control during a time when we feel at the mercy of the market.  This is about developing a tiny habit that puts us in the driver seat.  This is about redirecting your concentration.  This is about ‘working out’.
  • Increase your income.  Follow my writing long enough and you’ll find I’m an advocate for always finding income.  No matter how rich or poor, the fear of running out of money never seems to truly subside.  Sure, the wealthy person may be more concerned about being sued or taken advantage of in a business deal, while a poor person might be concerned about their electricity bill.  The emotion is the same, though.  Believe it or not, research shows even the intensity of the emotion is the same.  For this reason, I advocate for part time work – or something that redirects concentration to positive action.  This could be anything and options are endless today.  Work at a golf course, help people balance their personal finances, proofread resumes.  There is no shortage with freelance sites like Upwork and Fiverr.  This concept doesn’t have to be as daunting as buying an investment property or trying to be a business consultant.

Whether in accumulation or distribution, so much of volatility is about its framing.  For those in accumulation, embrace these times and keep your eye on the prize.  Stay focused on the fact that volatility is precisely when we earn our stripes.  While it might not feel like the needle is moved this year, we’re undoubtedly planting and watering seeds that will make our worlds that much more abundant later.

Retirees have a taller order.  They have the benefit of this not being their first rodeo.  They’ve watched severe volatility come and go.  But now, they lack the ability to do as much.  We must look for the tiny habits that form a process and redirect concentration.  The golfer in me brings it back to this simple analogy: the target must never be about what you don’t want to happen.  Our focus must be on what we hope to happen.  No matter how small or large, proactive and thoughtful steps can frame volatility in such a way that its negativity eludes us.

Stay calm.  Stay invested.

Thanks for reading,

Mitch

See disclaimers.

Mitch

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