One thing is certain about the stock market: no matter what it does, somebody tosses the panic flag and screams fire in a crowded place.
Before you throw your movie theater popcorn into the air and chase the frenzied herd out the window, read the following advice before making investment decisions.
You hear it all the time. Stocks soar to staggering highs and naysayers warn the next apocalyptic crash is nigh. When the market crashes, some powdered cheek squawker on Youtube predicts destruction and doom for the financial system as we know it.
Are these people charlatans or prophets?
They might be prophets for the majority of Americans who live paycheck to paycheck and can’t afford to lose a penny. But for the rest of us, ignore these charlatans.
For those who walk the financially responsible and righteous path: you have two basic options. One, take advantage of the down market and buy, or two, utilize every trick in the finance book to ride the storm out (something like welfare for the affluent).
Which path you follow will depend on whether you are still earning an income or not. Below, let’s breakdown the two strategies for workers and retirees.
Still working and accumulating Wealth? Time to buy
This one is simple. If you are still working and saving aggressively, congratulations! The stock market crash means stocks are on sale. It’s not time to pull back – it’s time to buy.
While a high yield savings account is fine for short term needs (upcoming house down payment for example), your primary focus should instead be to invest aggressively.
How should you invest? The same as you always have (max tax advantaged first followed by brokerage in low cost index funds as described here). The only difference is you should consider being more aggressive (perhaps put off the deck upgrade until next year and invest more).
“Wait, Mr. FI.,” you might be asking, “isn’t this market timing and isn’t that bad?”
Yes, I admit it: this is somewhere on that spectrum. But it is not irresponsible; it’s smart. Many early retirees and those well on their way invest in just this way.
In fact some of the most popular FIRE blogger personalities freely admit that their early retirement was fueled by investing during the 2008 recession.
With stable jobs (especially a two earner household living below their means), super savers have the luxury to and should invest. The risk is exceedingly low that a two earner family will both lose their jobs simultaneously, and both exhaust unemployment benefits in full before finding other work.
The risk here is lower than an Oklahoma home getting destroyed by a tornado. A bigger risk is parking your money in the bank and letting inflation eat away its spending power, which will happen with 100% certainty.
You can read more particulars on the high potential of investing in a down market here.
Already retired? Time to access the welfare system for the affluent
In 2022, if you checked your 401K online, you undoubtedly saw a steep slope downward into the blackened abyss. Where did all your money go?
Some dear recently retired friends of mine experienced this shock during the 2022 bear market. “I lost a half a million,” they groaned. I gently reminded them they’d only lose $0.5M if they sold all of their investments immediately. They nodded their agreement but confessed their minds couldn’t ignore what their eyes saw.
The psychology behind this is complicated and understandable. But the actual truth is simple: the daily stock price is meaningless paper value. The value becomes real only when you sell.
So how can the retiree minimize or perhaps eliminate selling in a down market? It’s going to take savvy, some number crunching, perhaps paperwork shuffling, and certainly the shameless harvesting of rewards that the financial system gives to those that already have.
Some call it playing the shell game. Some call it legal money laundering. I call it the welfare system for the affluent. You can call it whatever you want, as long as it works for you.
Either way, if you already have money, the rules are in your favor to keep those dollars in your pocket. You have tons of options to access cash that is cheaper than selling your stocks.
Without further ado, below are your options:
- Play the credit card game
You can access more than 6 figures in 0% APR money through credit cards that lasts ~18 months. You could extend this even longer by transferring the balance from one 0% APR card to another, potentially for a nominal fee.
As a bonus, you’ll even profit in the form of points. Here is a great case study of a retiree who borrowed up to $250K at 0% APR to finance a home. A married couple can even double up by applying for multiple 0% APR credit cards separately. These are free loans people! This is welfare for the affluent at its finest.
- Borrow
Several loan options can get you cash for a nominal % that is far lower than the double digit % loss of selling your stocks. FI people use loans all the time, even in up markets, to minimize or eliminate capital gains taxes. The same principles apply to avoiding selling at a loss, so why not give it a try? Borrow the money. Live. Pay the loan back when stocks are back up.
Common loan options are personal loans, HELOC, home equity, 401K, and even Brokerage margin loans. Banks will loan it to you because you have so many assets to pay it back. This money is not as free as 0% credit cards, but you should be able to secure a great rate, ride out the downturn, and come out ahead in the end.
- Tax Loss Harvest
This trick is one of the most common tools in the affluent’s welfare toolbox – one that can be used pre or post retirement to offset taxes. Basically take the loss, and gain some tax write-offs in return. Note: It is only available if you have a brokerage, but it can be very powerful.
Here is how it works. You intentionally sell at a loss. Sell shares from a fund in your brokerage that has a much higher basis than the sell price. At year end, you’ll get a form reporting your loss that you can use to offset taxes on your capital gains and regular income. If you have any loss left over, you can carry it over for as many years as you have losses unclaimed against taxes.
On top of writing off regular income taxes, you can also tax loss harvesting to create more room in your budget to to convert more IRA tax free to Roth as described here. That tax free growth could result in far more return long term than you took as a loss in that single year.
Don’t forget to dust off your frugality skills
I’d be an irresponsible FI blogger if I didn’t remind you that one of the reasons you became FI in the first place is because you resisted lifestyle inflation, lived below your means, and were in complete control of your spending. Mindful money management is one of your top skills. Consider dusting off those skills.
I’m all for playing the welfare affluenza game, but is it worth the effort and anxiety?
That is a question only you can answer for yourself. But if the answer is no, why not try to control your expenses rather than your source of income? Doing so will give you more to invest if you are still earning, or it will reduce your spending and asset loss exposure if you are retired.
Here are a few ideas:
- Practice frugality
Simple, right? You were a pro at this once. You can do it again. Just cut out all the non-essentials that don’t add value to your life and whose expenses are causing you anxiety about selling stock: massages, Starbucks, landscaping service, your 6 streaming subscriptions, botox injections, dining out – you get the picture.
You shouldn’t cut to the point of sufferance. Life is too short to be miserable over $50. You earned this retirement after all, so enjoy it! But chances are, you could make some low or no impact sacrifices here without sacrificing your happiness.
- Delay Major Purchases
This applies to everybody when money is tight. Even more so for retirees who no longer earn a worked income. You might hold off on that home upgrade, new deck, car trade-in, or other project until stocks rebound.
- Delay or change vacation plans
Maybe that trip to Barbados can be shelved for a year, and instead you can replace it with a route 66 trip to see several national parks. Is the savings worth it to you? Maybe. If its a once in a lifetime opportunity though, (perhaps traveling to Japan to attend a family wedding), stop reading this blog and spend the money you worked so hard to accumulate.
Final Thoughts
It’s natural to panic when you see your accounts take a nosedive. Its hard, but train yourself to disbelieve what your eyes see.
These are the facts: the market has endlessly gone up an average of 10% a year for the last century. Its survived world wars, terrorist attacks, rampant inflation, bank system collapse, embargos, natural disasters, and deadly pandemics.
It will never move up in a straight line, but rest assured, it will survive whatever the world throws at it. Its healthy for the market to correct itself and move down periodically. It keeps all of us honest and forces us to evaluate our lives and whether unchained money growth buys real happiness (news flash, it doesn’t).
My advice is to embrace the inevitable downs and use this time to reset some of your own habits and privileges, just like the market itself. If you play it smart, you’ll be stronger and richer on the other side of the valley.
After all, the market is not some mutant inhuman creature from beyond that is divorced from human civilization. We are the stock market. All of us, whether we invest or not.
What we buy, what we drive, where we live, what we watch, what we eat, what we read on our phones – all of this human activity is what requires companies to build, grow, broadcast, produce, ship, and sell the stuff that humans need and want. And just like the market, all people go through ups and downs and time relentlessly marches forward just the same as it always does and humanity thrives.
Next time the market crashes, take a deep breath. Relax. While everyone is racing for the exits screaming fire, stay seated and bide your team until the “all clear” sounds over the intercom. Play your cards right, and you’ll be richer than all of your panic-stricken peers.