When the markets are in turmoil, investors feel they'd better do something. More often than not, they are better served by doing nothing.
I stepped in from the covered patio to my basement office overlooking the river. It would be at least a few minutesbefore the maple sap that had been boiling all day on the patio would become syrup at the critical temperature of 219 degrees Fahrenheit, so I thought I’d finish reading an article I had started earlier.
“It’ll be fine,” I said. “I’ll just be a minute” I said.
“PoF!!!” my wife hollered at the top of her lungs. [she actually yelled my given name]
I got up from the distracting computer. The syrup had clearly met and exceeded the target temperature and boiled over. How did I know? The first subtle indication was the two feet of thick smoke from the patio ceiling down, and more of the pitch black stuff billowing up from the boil kettle. I couldn’t even see the ceiling; this was going to get worse before it got better.
I froze. Then I thought, "Don't just stand there. Do something!" My wife had similar thoughts and there may or may not have been profanities involved.
So I did something.I took a deep breath, stepped out into the patio, turned off the natural gas, grabbed the handy hot pads, grabbed the smokestack of a boil kettle, and headed for the exit.
Once outside, I took a few more deep breaths, went back into the patio, and opened all the windows. The black smoke dissipated, and I was grateful to see the ceiling again. I half expected to see a layer of black soot, but thankfully, there was none.
Boiled kettle and ceiling survive!
I ruined over a gallon of pure, sweet maple syrup, and I’m still working on getting that boil kettle clean, but the house didn’t burn down, and I learned a valuable lesson. NEVER walk away from nearly finished syrup.
Reader:“Hey, PoF, that’s a really great story about your stupidity and all, but I came here to read about money and retiring, not your carelessness.”
PoF:“Be patient, dear reader, I promise I’m going somewhere with this…”
In the sticky messI was in, action was required. I couldn’t just stand there and watch the situation get worse. I had to take action to rectify the situation. I had to do something!
There are times when our investments appear to be going down in flames. Twice in the last nine months, the S&P 500 dropped about 10% in a matter of weeks. "This is it, the beginning of the bear market," said the doomsayers. They could have been proven right, but both times the markets bounced right back. Eventually they will be right, and then they’ll say, “I told you so.” Of course you did, but how many times?
There have been bigger drops in my investment lifetime. The stock market has lost about half its value twice since the year 2000. When this happens, its hard not to panic. You log intoPersonal Capital and see the numbers going down, down, and down. You werefinancially independenta month ago, and now you’re not. You need to stop the hemorrhaging.You need to do something!
, he recommends advising clients to “Don’t do something. Just stand there!”
This phrase, or the one I prefer, "Don't just do something. Stand there!", which more closely resembles the original phrase from which it transmogrifed, has been around for awhile. I won’t go into all the details (this site does), but one of the more notable utterances of it came from theWhite Rabbit in Disney’s 1951 animated classic,Alice In Wonderland.
Is this good investing advice? Absolutely!
Stay the course. Read yourIPSand follow it.Selling in a down market is a great way to lock in your losses. Don't do it. The average investor underperforms the market by 4% to 7% according to Jason Zweig’s article in The Wall Street Journal, “Just How Dumb Are Investors?. Don’t be a dumb investor. Ride the wave down and back up. Don’t just do something. Stand there. Be a rock.
Be a rock. Like these guys.
Is this good investing advice? No way!
Reader:“whoa, whoa, whoa, you just said…”
PoF:“Just hear me out.”
When the stock market drops, andit drops at least 10% at some point most years, standing there, i.e. doing nothing, may not be the best strategy.
There are at least two or three moves that could have a positive impact on your finances:
Yes, this is market timing. No I don't condone it.
The first two bullet items will each get a more complete treatment in future posts. The third is self-explanatory. It’s not uncommon for people to "wait for a dip," particularly when investing a lump sum.But if you’ve been waiting for the “right time” to get in, do so when the market is down. It may drop further, but you know you’re getting a discount compared to the recent past, and the market has always bounced back.
Tax loss harvestingis a seemingly simple strategy of selling low, and buying back in, taking a “paper loss” while maintain your position in the market. It becomes less simple when you start to read about 30-day clauses, substantially identical investments, and the lack of clarity from the IRS in regards to what constitutes a “wash sale.”
It is a useful maneuver, and not difficult to employ once you understand the concept. In January of this year, I took a nearly $40,000 paper loss , which will allow me to deduct $3,000 a year from my taxable income every year for the next 13 years.
Rebalancingwas Step 17 of the 20 Steps to Effective DIY investing. When your asset allocation gets out of whack as it tends to do in down markets, you can sell recent winners to buy recent losers, restoring your desired asset allocation. In essence, rebalancing encourages you to buy low and sell high. These are good things.
What are the take-home messages today?
“Don’t just do something. Stand there!” is pretty good advice, but you can do better than just stand there. A better phrase might be “Don’t just do something stupid. Stand there and make a few calculated, shrewd moves.” That’s not nearly as catchy, is it?
Also, if you fail to give your nearly-finished maple syrup the attention it deserves, your entire basement will smell like burnt marshmallows for 10 days.You don’t want that, trust me.