Below is a copy of the Smart Money Mamas newsletter, sent March 12, 2020. We usually reserve our newsletters JUST for those on the email list, but with all the uncertainty in the markets, I've decided to share it more broadly.
For those of you who don't know me, my background is in investing (I was a hedge fund investment manager) but I am not a financial advisor and can't provide you with financial advice unique to your situation. This letter is intended for educational purposes.
Mamas, I’m writing this email to you from a Starbucks in our town. And, really, I wrote an email for you last night – all about multiple streams of income and letting money flow to you from as many places as possible. But sometimes life throws us curveballs.
As I sat down with my laptop after dropping H off at preschool, I got a notification on my phone with a headline like, “The Stock Market Suspends Trading for the Second Time in a Week Amid Sell-Off.”
And while I usually prefer to just let these things go by – remind y’all that we invest for the long-term, especially at times like this – I know many of you are scared.
Scared seeing your investments fall. Scared to get started investing with all this turmoil. Wondering what in the world is going on.
So, I think it’s important we talk about it.
The stock market is volatile – mostly due to human emotions. These big swings are a reality of investing and it’s why we invest for the long-term, at least 5 years – but ideally 10, 20, or even 30 years. Over time, the swings level out to what we see as a smoother curve. (Seriously, go into your investment app on your phone and click on the S&P 500. Look first at the 30-day chart, then the 1-year chart, then the 5-year chart, and so forth. See how much less severe the spikes look as you zoom out.)
But like I said, knowing that consistency wins the game and actually sticking to your plan through these drops are two different things. It’s still scary to watch your investments fall 20% in a week. I think – in these and almost all cases – knowledge is power.
Here’s what’s going on…
- Coronavirus: There are economic impacts to having to cancel lots of events, travel, and limit time in public. Businesses that don’t see the sales they expected and, in some cases, getting stuck with costs that they now will have to take as losses.
It’s still early days on what the full impact will be in the U.S. But as investors get nervous, they want to move towards more cash (selling their investments) and that causes stock prices to go down.
- Oil prices: The majority of oil production in the world is controlled by OPEC – a collaboration between oil-rich countries. Typically, they control production to keep prices stable and only produce what is needed. But last week, major OPEC countries disagreed on how much to cut – causing people to worry about a glut of extra oil and dropping prices significantly.
In some ways, lower oil prices can be better for the market – lower travel prices increase travel and spending, lower production costs for manufacturers, etc. But a shark spike makes people worry about instability and with coronavirus, it’s unlikely we’ll see a spike in travel. Not to mention the U.S.’s growing oil production over the past few years, which means lower prices could lead to layoffs in the oil & gas market if they continue.
- Presidential election: We’re not going to get into politics here, but the market is almost always more volatile in an election year. This is minor compared to the last two things, but still matters – especially as the Democrats get closer to choosing a candidate
- Concerning commentary from the U.S. President last night: Last night, the President gave a speech that made it seem like, due to coronavirus, he was (1) banning all travel from Europe to the U.S. and (2) stopping all trade coming from Europe. This is not what’s happening – at least not yet. Travel is stopped from specific countries as of Saturday (but U.S. citizens and other exempt persons will still be able to come home) and so far impact on trade as limited. But those are big statements that could have major impact on revenue and profitability for U.S. businesses, so – once again – people are scared and selling their investments.
As you can see in all these moving pieces in the economy right now, the main consistent factor is that people are scared and the uncertainty is causing them to sell investments. THAT is what pushes the market down as severely as it’s down.
So what should you do?
First off, don’t deny how you feel.
It’s ok to be worried. Uncertain times do that to all of us. Give those feelings space. But then remind yourself of what you know about investing – Namely, that selling your investments only guarantees your loss. As of right now, you still own the same amount of the market as you did before – when you sell, you have cash, and there is no way for that money to go back up.
Look at it like this, mama (these are hypothetical numbers):
– You buy 100 shares of the S&P at $10 each for $1,000.
– The price falls to $7, you sell and get $700 back.
– The price goes back up to $10, things feel more secure, so you reinvest your $700. Except now you only have 70 shares – not 100. You locked in that $300 loss when you sold.
And those locked in losses, even if you get back in the market, have long-term impacts. If the price then increased to $12 you would have 70 shares and your total investment value would be $840, instead of 100 shares at $1,200. A gap greater than your original $300 loss.
The only way you guarantee an investment loss is if you panic-sell during a downturn. This sell-off could last a month or a year or two. Just remember that your goal is retirement – years from now – and this might be one of the few financial cases where sticking your head in the sand and letting the scare-tactic news go in one ear and out the other.*
*If you’re retired now, you’re only taking out what you need on a monthly basis. You don’t need to sell large amounts. Consistency as you sell, just like consistency as you invested all those years will let your money keep working for you – even through retirement – making it last longer.
Second, you can take this as an opportunity to revisit your general financial health and why it’s important to shore up your financial security.
Check-in your emergency fund. Are there ways you can bolster it a bit?
Review your budget. Are there areas you can cut back a bit for a little while to save more of a cushion, in case you need additional help if your child’s school gets shut down for coronavirus or you have to work less?
Look for ways to diversify your sources of income. This week on the Smart Money Mamsa podcast, we talked about the benefits of passive income and Tiffany Aliche joined me today to share how and why you should have multiple streams of income.
We’re hearing so many unfortunate stories of small business owners with events that represented all of their income and now those events are getting canceled. Or employees that depend on overtime at their jobs seeing it fall away during coronavirus.
Multiple streams of income provide financial security in difficult times and provide a big boost to wealth growth when things are good. You may be wishing you invested time in developing these things a year ago, but the best time to start is now.
All this uncertainty will pass. We just need to ride out the rollercoaster in the meantime.
Mamas, I hope this was helpful. If you have any questions, please ask. And please be wary of posts/comments in Facebook groups or forums with investment advice where you aren’t very clear on the person’s credentials. There is a lot of misinformation out there right now.
Peace & love,
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