Latest / The Chiro Money Show / 040 | Stop Waiting for the Crash: How to Invest Through Uncertainty
Transcript
- Chris: Welcome back to the Cairo Money Show, where we're helping chiropractors make better financial decisions so they can build stability in their finances and a lifestyle that they love. We're your hosts Chris Scheel and Scott Campbell, financial planners with Align Wealth. Scott: Christopher. Chris: How are you? Full names today. Okay. Scott: Today's a Christopher Day. I've decided. Chris: Those happen. More summertime. Celebrated Canada Day. That was last week when this comes out I guess. Scott: What's going on today, Christopher? Mm-hmm. What would you celebrate? Chris: nice little community event and backyard im impromptu backyard party with some friends and soccer for the kids. Yep. Scott: Right on. Speaking of soccer, we're also in when this when this episode comes out, I think we're like midst of like, well I've known whether or not Canada moves on from the s round what's the proper terminology for the last sixteen? I feel like there's a fancy name for it, but the final sixteen. Go Canada. Let's put it that way. Up against Morocco. Up against Morocco. Yeah, should be should be fun to see see how they do. Chris: Round of sixteen. Yeah, yeah, go canada. Yeah. Yep, absolutely. It's been it's been fun to watch. Cool. Well, today, anything else before we jump in? All right. All right. Ready to rock. All right. So the idea for today Scott: No, Christopher. We're ready, rock. Chris: Is basically that markets have crashed, corrected, and terrified investors for many dozens of times over the last hundred or fifty years. And every single time, pretty well, the people that stay invested have come out ahead. Yet, so many Canadians are still bailing when things get ugly. And that's kind of the premise of what we're gonna discuss today is like Markets markets are gonna crash. It's kind of inevitable. There's gonna be downturns, there's gonna be you know, scary times ahead. And we're not gonna sit here and predict when those might be coming or how severe they might be, but by looking at The statistics, we can see that, like for instance, since since 1929, looking at the S P 500, for instance, it's entered what's referred to as a bear market or a 20% or worse decline about once every six to seven years. So you know, inevitably every six to seven years, on average, we're gonna see a a crash. Essentially. A lot of times when people hear bear market they they call that a crash. And the median decline of like since nineteen twenty nine has been roughly thirty four percent. Like markets down about thirty four percent on median throughout all those crashes in the last hundred almost hundred years. Scott: What's interesting about these stats is that you're referring to averages and medians. Average crash happens every six or seven years. So people are expecting the average to happen. Well, there's a whole lot of unknown in terms of what's actually going to happen any given year, which is interesting where we're at right now, as if you're not aware, the markets are at all-time highs. Chris: Mm-hmm. Scott: And what's interesting, I think we have some stats around this in terms of how often I think it goes back to around that I think there's a study around kind of how often the market's at an all time high. I believe it's Chris: Mm-hmm. Scott: one in every twenty days going back to like nineteen nineteen I believe. About five percent of the time. It's around that mark that five percent of the time we're at an all-time high. Doesn't sound like a whole lot, but and obviously that ebbs and flows over the decades in terms of the given decade that we're in. But at the moment we're at an all-time high and There's this thing called essentially the gambler's fallacy that some people expect that because of averages, if they're thinking, all right, if the average crash happens every six or seven years and we're at a at and we're at a market all-time high and there hasn't been one in a while, then surely we're due for a big crash. This must be the time to, you know, maybe sell out of the market because a crash is going to come. the markets aren't a coin that owes you tails. Like just because it's been drawing heads and markets have been h all t at all time highs doesn't mean that tomorrow is going to automatically give you tails for a downturn. Chris: Yeah, for sure. I think it's the same like logic or what we assume to be logic, which actually doesn't play out this way, where, you know, everybody likes to share stats about what your average return can be by investing in the S P five hundred. It's like, hey, just just go put your money in an SP five hundred fund, you'll you'll get ten percent per year, whatever the number is. But we know from looking at the evidence, out of the last nearly hundred years, the SP five hundred has only delivered close to the average annual return. seven times. So every other year is either way higher or way lower than that average. And that same kind of result is showing up in what we anticipate to be market crashes or corrections that are coming. You know, just because the average is every six or seven years doesn't mean that it has to happen that way. Just like the average return is nine percent or ten percent for the S<unk>P 500 doesn't mean you're gonna get it this year. it means you're gonna get it over your lifetime of investing. Scott: even if we factor in these averages and what a how often a major market crash happens, or that's what typically referred to as a bear market, what do our clients and our listeners what do we have to prepare them? How do we prepare them, essentially, to think about this from a big per big picture perspective of all right, they're they're going to happen. So how do we prepare ourselves for if for when they happen? Not if, but when they happen. How do we do that? Chris: Yeah. Yeah, I think I think there's there's two parts of that. It's like the portfolio side of things and then there's the the emotional side of things or you just mindset or approach to investing from from a behavioral standpoint. So I think that that one is is probably the harder one and the more important one is is actually the behavioral side. It's like I think Personally, I think the the the best thing to do is just change your mindset. It's like crashes should not surprise you. They're they're part of life. They they're it's almost like they're scheduled. They're bound to happen. And When you see them as natural, like it's it's part of a healthy market just to see that happening. It's like we plan for them, we expect them, and when they come, they don't scare us as much because we're we were expecting it anyway. It's where we live under a rock and think that, you know, I'm gonna invest and it's always gonna be ro sunshine and and roses, everything's gonna go up forever. Well yeah, it's probably gonna catch you off guard if you aren't expecting it. So personally I think the first step is to start expecting them. Scott: I think it's time to bring back good friend of the show, Morgan Housel, a few things that he often says about market downturns. I'll mention a few things. One thing that it that he says often is that all past declines in hindsight, they look like an opportunity, a missed opportunity in a lot of cases, right? And all future declines that we're maybe expecting or yeah, expecting to happen here in the short term, they look like a a risk, Another thing that Morgan says that I think is such a great thing in terms of what you're mentioning, Chris, of ro around changing our mindset is that he talks about volatility in the markets being there's a difference between a fee and a fine. Some people assume that because if they're say in a equity portfolio and their portfolio has gone down by 20 or 30 percent, that that's some sort of penalty. Like they've done something wrong, which would be more so like a fine. Like they've you've done something incorrect. And people assume that because their portfolio is down or twenty or thirty percent that they're being fined, and that maybe they need to take action and do something because they're being penalized for making a poor decision. But in reality, it's the price of admission. It's the fee that you need to pay to have higher expected returns by being invested in the global equity markets. And that's the that's the the reward you get from that. There's a fee that you have to pay to get that reward versus taking that volatility down and say being more conservative being in cash and bonds and those type of investments. Chris: Yeah, so once we've you know, changed our mindset a bit and expect the volatility, expect the downturns and are not as surprised by them, hopefully that lets us allows us to make better decisions when when those times inevitably come. The other part of this and directly correlated to the volatility is like there's ways we can we can have less volatility in your portfolio. And there's two main levers we can pull here. One is diversification, so in our eyes, global diversification being invested in many different companies across the world, not just in Canada, not just in the US, for exit for example. and then the other part of that is adding in some fixed income or bonds. So less volatile, less you know, traditionally l you're rewarded l with with lower returns, but you also have a s a smoother ride. There's less volatility along the way when you add in that fixed income component to the portfolio. And That all comes back to designing the proper portfolio based on your needs and your risk tolerance, your capacity for risk, which we always go through with with every client that's we start investing with. So those are the main ways we can kind of address or I I think we we should start addressing the the reality that market downturns are coming. next I think we gotta talk about the cost of bailing out. Like if we make an emo an emotional decision, a rash decision, however whatever we wanna call it, when things are down, what what is that costing us over the long term? I've got a study here from JP Morgan that was done from July 2004 to July 2024, looking at annualized rates of return. So in the SP 500 index. So if you stay fully invested throughout this full 20-year period, you would have seen a 10.5% annualized rate of return. Pretty good, right? If you missed only the 10 best days out of these 20 years, you saw that return drop to 6.2%. Was it a 40% drop? Close to that's crazy, right? And then if we miss the 20 best days, that return is down to 3.6%. And if we bet miss the best month in this 20-year period, or best 30 days, the return drops down to 1.4%. Scott: Yep, close to it. Significant. Yeah. It's small amount small number of days, even on the high end there, Chris, of like if you miss those days, your overall return over a very long period of time is significantly brought down. And the result and the re like the reason why you're in that position was because of of fear and trying to time the market essentially to say. I can't I can't I'm gonna try and gamify this. I'm gonna try and get out when it's bad and get back in when things are feeling when the water's warm again, I'll get I'll get back into the market. But I'm not sure if you have any supporting data on this on this handy, Chris. But what we know to be true is that so often those best days in the market over a longer period of time are usually coming off the heels of a major market downturn. You just don't know when those days are going to be. But some of those days following a big crash are some of the best days that you need to be fully invested in the market, which goes back to what we've said in in probably Chris: That's right. Scott: number of times on the podcast that timing the market is a very challenging thing to do. Time in the market is what we need to stay stay disciplined and focused on. Chris: Mm-hmm. Yeah. Yeah. It's Like like we've always said with with time in the market, like you have to get you have to make two decisions right to to to win, really. Like if you if you sell at the right time, that's great. But then if you miss buying, rebuying at the right time, well, you're you're missed out, And as we just looked at, like five, ten, twenty, thirty days can make all the difference in an annualized return over twenty year a twenty year period. So how do we know we're w we're we're invested during those right days the easiest way is to stay invested and to your point Scott the I do have a I do have a couple of quick stats here so this one does exclude it excludes the Great Depression back in the 1920s 30s but since then looking at the S P 500 the average bear market or crash was down about 40 percent and then in the following the like the the market low which we don't know until we have hindsight to to go back and look at right in that moment you never know if you're in a market low or like the all-time low or not but on average after one year after each market low each bear market the total return was up 55% So the first year immediately following that that all-time low. Over the next three years after each market crash, the average is up 83%. And over five years, the average is 153% positive. So how? Like if we if we're missing that year or part of that year, and it's even more like Looking at those those short tr time frames, like the one that we that we have mo most recent history with is is the global financial crisis, two thousand eight, nine. The the the days and months that immediately followed the low point in that crash, were some of the best days ever to be an investor. And those are the days that are probably quoted or or referenced in a lot of these stats, Scott: Yep. It's interesting, I think. From if you think about the two thousand eight financial crisis, I wasn't I didn't I didn't have a whole lot of money in the market at that time. I don't know how old I was, but not old enough to have a significant portfolio in the equity markets. But there that was a very significant downturn in the global market. And I know it took a l some time for some investors to get back into the market. I wouldn't be surprised if there's still investors out there who say that that rocked my world so so negatively, it shook me to my core that I don't think I can ever be an investor again. Like I'm still just gonna stay in cash or in GICs and that's and that's because of the 2008 global financial crisis. So the thing I think it's important to understand here when it comes to volatility and Going back to your point on portfolio design is back in 2008, there was varying levels of volatility. You often heard about people who like, I lost I lost absolutely everything, or I lost the shirt off my back, basically. I don't I'm always curious. Obviously there's different varying degrees of how much you would have seen your portfolio go down, but that comes down to what what was your portfolio made up of at that time? Like were you in 100% tech stocks and your portfolio went down by 80 or 90%? Like that's a possibility. Or were you in a 100% globally diversified portfolio, maybe you're down forty, forty-five percent. If you're in a s say a sixty percent equity portfolio, forty percent fixed income portfolio, and you're close to retirement at that time. Maybe your portfolio still went down a fair bit, but maybe only down 20%. But that's not as bad as someone who is in a 100% tech portfolio. So there's all these varying degrees of what volatility could look like depending on how your portfolio is made up and designed. And that has to go back to your goals, your tolerance for volatility. what stage of life you're in from a career standpoint in your time horizon between now and retirement and then how long you expect to potentially live for and need though need your essentially your pot of money to serve you for. So all these factors need to be taken into place when it comes to designing the right portfolio to factor in major volatility so that you don't miss those best days in the market when they do happen. Chris: Mm. It's not the time to rethink your portfolio when markets crash. Right? We and I think this is a such an important thing to to touch on. It's like we should be reviewing these portfolio like asset allocations annually and saying, do we need to do we need to change the the composure, like the makeup of the portfolio? Has something changed with your tolerance for risk, your capacity to take on risk. In your something changed in your life with your goals or what you're investing for like the purpose, the reason, the timeline behind it. We have to review those ahead of market crashes because if we if we make it a portfolio adjustment when things got s have got already got scary, we're we're we're selling at an all-time low and potentially out of the market for a period of time. So ideally We've done our job. Our inve if our listeners here, if you're working with an advisor or investing on your own, ideally you've already built the portfolio. You have the balance diversified, like that's table stakes. That's that must happen in our opinion. But the whole point of having that correct portfolio is that we need to be able to stay in our seat and stay invested. That is single-handedly the most important thing you can do during a downturn. Ideally that's made easier by A quick adjustment to our mindset about how we invest. Ideally we make that mindset adjustment before there's a market crash, right? We we change the way we're investing now, thinking today in July of 2026, when things are at all times high all-time highs. We're we're thinking, okay, well, that's great. It's cool. If we get another 20% year like we had last year, or whatever the rate of return was, like that's great. If we also have a 20% crash this year, well, let's not It's nothing crazy, like probably probably inevitable, that might be coming. So if we if we can adjust our mindset now, it'll make it easier to handle when it inevitably happens. Scott: We're thinking about younger investors that are in their twenties, thirties, forties. I'd even say fifties, but let's just say young the younger generation that's that are that are currently invested. If you can really get the mindset piece, the behavioral side of understanding volatility and that these market crashes are a normal piece of market cycles. you should be thrilled when the market goes down by 20%. Market all-time highs like seeing like I always reference the I think there's a website which basically shows it's just the SP 500, but it's a nice little diagram of like essentially in either in green or in red when various companies are up or down on a given day. And you Naturally, I think that all green means good. if things keep on being green every single day, that's good. But if you are dollar cost averaging and buying little pieces of the market on a say a monthly or semi-weekly basis, and you're kind of dollar cost averaging in, if it's green every single day, you're just continuously buying at all-time highs, which you can't time that. Like you'd want to keep buying, but it's actually better if you're a younger investor and have that time horizon where it's like. Like if it goes all red and all red for a while and you continue the process of dollar cost averaging in, you're buying into the global market at a nice discount. That's what you want. Like theoretically, that's what you want, but you don't it's it's diff it's weird. It's one of those things where I know I want that, but can I handle that and not make a rash decision to say it's actual dollars that I'm seeing go down? I'm seeing my portfolio go down significantly, but I'm still buying little pieces into the portfolio at a lower cost. Like it's a hard thing to manage from a an emo an emotional behavior standpoint. Chris: Yeah. Yep, for sure. For sure it is, but it's possible. Like I I know we think that way. I know others that think that way, that think a crash is coming great. It's a good buying opportunity. not that we're sitting in cash waiting to buy, but when if and when a crash does come, I know we will do whatever we can to take advantage of that. And if that's your mindset, the longer the longer that's your mindset for the better, like I just gotta share I was thinking about this on the weekend, talking with a a family member and just like how hard it is for for younger people starting out and and to buy a house these days. It's never been more unaffordable and like all parents just wanna help their kids get into their first house. And I was kind of reflecting on my my youth and and like early adult years and I think Personally, the most impactful thing my parents ever did for me f from a financial perspective was teach me and help me to start investing at a young age. And that happened to fall right into the global financial crisis years. And so I happened to have a good job, I was able to save a little bit of money, invest in RSPs, and getting 10,000, 20,000, whatever it was invested at that time, that has had such a profound impact on my investment journey. And I I yeah, I think that's been for me way more impactful than if my parents would have given me $20,000 for a down payment and said, here, buy your first house. Scott: Right. So you first hand had that experience of seeing your portfolio go down. I'm assuming you were in mostly equities at that time, or no? Chris: No. I was I saw it go up 'cause I bought it at the low. That's just when I started investing. Scott: okay. All right. You got to experience the the aftermath of the of the crisis. Okay. Chris: Yeah. Yeah. Scott: Could so could it could have been it could you that was a great story in terms of like the benefit of that. It almost could have been even better if they maybe gave you that ten or twenty thousand or whatever to invest before the crisis. So you got to first hand experience well, the stakes are low and you're and you have that time horizon on your side to experience a maybe a major market downturn in your earlier is to say, Wow, that was like how did I handle that emotionally? Well, the stakes are relatively low. Chris: Mm-hmm. Yeah. Totally. Scott: And you still would have captured the upside of that of course, but also it could have been a great learning lesson that time. Yeah. Chris: Yep. Yeah. And that is that's a great example, great point for like any parents that wanna teach their kids about about money. give them the opportunity to fail when the stakes are low. Right? Like giving them five, ten dollars to spend and and blow, you know, at a young age. And, you know, obviously that's gonna increase as they get older. having the having those experiences and then having conversations with them, encouraging them to reflect on that. Was that a good choice? Would you do it again? If not, why? You know, so powerful. And yeah. Scott: Sure. Both in the markets and just spending in general, make some mistakes now when you're young, all the stakes you're low, for sure. Chris: Totally. Yep. So last point I wanna make Scott is you know obviously we can we can do what do what we can to prepare. We can prepare with the portfolio, we can prepare with our mindset and approach to investing. I think the last thing we can add into here is we can anchor on a written financial plan or written investment mandate that says how and why we invest the way we do. And to to have those elements of your financial plan built in that you can reflect upon with your professionals, that that can make all the difference. When things get s get scary and we're uncertain about the future, reflecting back on that and saying, hey, let's go look at, let's go look at the long-term projections. Okay, so the market's crashed 30% and you're three ways three years away away from retirement. Are we gonna be okay? Well, let's look at what let's look at what the charts show. Look at what the numbers show. Like, yes, you can still start drawing down on your assets in three years, whether they recover fully or not, by then, no problem. it's all there's so much we can do with looking, you know, building these detailed analysis and and projections to to bring comfort. And then the financial the in investor profile like investor mandate pardon me document. I think is so important for for everyone. clearly stated how and why you are invested the way you are and what you are going to do if and when things happen. Scott: Yeah, I'll d I'll double down on your point in particular around on both. They're both important pieces to have in place. A a mandate that you can reflect on when when markets get scary to kind of go back to a point in time when you were level headed and making a rational decision about choosing how you're going to invest. I think that's of a lot of value to reference that when markets are scary, or at least have someone bring it to your attention to say, Hey, at one point when when you're level headed, you made this decision. markets have gone down by say forty percent. It's okay not to have a level head and make it it's hard to make a rational decision when you've seen your personal dollars that you worked hard to save and invest and grow come down by a a some cases a large dollar amount. It's hard to keep level headed and make a rational decision. Again, sometimes I know we're biased, but sometimes the the benefit of having a third party who's not emotionally attached to that that money help you stay in your seat, stay in the roller coaster. you know, it it's it's gonna have its ups and downs, we're gonna keep you there. But I wanna hit even more so on your point of a financial plan in terms of the The projections that we're doing factor in those crashes. Like we're not we're not making a plan assuming that it's going to be this perfect ride up to the up and to the right for the next 30 years. There's going to be these years where it's going to be down significantly, and years where it's going to be up significantly, just like how we've experienced here over the last three, five years, or even more so in the markets, where it's like like your point earlier that you made, Chris, the markets have been delivering us 20% plus returns in the global equity market. markets here in the last couple of years, that's not what we're expecting to happen year over year. That's not the average that we're using in your financial plan. It's nice to see it, but we're not assuming that's going to carry forward. So if if and when, like to your example, you're three or four years out to retirement and the markets do crash without that financial plan, you might say, you might worry to say, hey, like am I going to be able to retire? Am I going to be okay? We say that all the time. Like that's really the question that we're trying to answer in the back of the head in the back of our head. Am I going to be okay? And if you don't have a plan, you don't have a an investment mandate, you don't have a third party that's gonna pull you off that ledge, you might say, I don't think I'm gonna be okay. So it's time to sell the cash. And that's a rational decision because that's gonna make you feel like you're going to be okay. But when you do have that plan in place to say, nope, we we we we're factoring in that crashes are normal. I am going to be okay despite the fact that the markets are down. By a significant amount. Stay in your seat. It's all going to work out as hard as it is to manage that. You probably just need a hug. Chris: Yeah, for sure. we love to bring that up. Sometimes sometimes we just need hugs. That's okay. It's okay. Call us if you need a hug. We'll come meet ya. Scott: Yeah, that's right. Yeah, that's right. Any other any other points that you wanted to make here before we wrap things up, Chris? Chris: No, I think that's good great place to wrap it up. I think in in kind of closing, we need to understand that market crashes are certain. They are inevitable. What's also inevitable is that is the recoveries that will follow them. so the question isn't you know, if and when there's gonna be a market crash or recovery. It's are you prepared? Have you done what you can to prepare for when the next crash is coming? And just to quickly recap on what you can do to prepare, it's have a financial plan, have an investment policy statement, ensure that your portfolio is built for you with respect to your tolerance and capacity to take on risk and your preference for volatility. And then lastly, prep prepare yourself emotionally on your outlook of how you how you how you tackle investing as a person. We can't unfortunately we can't remove all emotion from our financial decisions. So we need to understand it and build that into how we how we approach things. So you can do those four things now in preparation for the crash that's coming. Don't know when it is, but it's coming. Scott: I was gonna jump in there Chris, but we don't know when. We just don't know when. Yeah. Chris: No. No. Don't know when. You might have time. You might have time to prepare. But if you if you don't have some of these things done, the time the time to do them is probably now. Scott: Don't fall under the fallacy that just because we're at these all-time highs, that later this year or sometime in the near future that market's gonna see a significant downturn. They might, who knows? We don't know. And to your point earlier, Chris, real quick that you made on like we're not sitting on cash waiting for a downturn to buy in at a discount, there's people that have been doing that for the last probably three, four, five years on repeat of like, this is the year, we haven't seen a crash in a while, we're at all-time highs, I have some cash on the sidelines. Yet the market keeps plowing on and delivering us these really great returns that we're fortunate to have, but there's also people that are missing out because they're waiting for that downturn, right? Chris: Yep. Really poor time to miss out on the market in the last few years here. Yep. Scott: Cool. Well, good conversation. Hopefully that was helpful. Chris: Thanks for listening, as always. We'll catch you guys next week. Scott: Thank you.