The Optometry Money Podcast Ep 112: Actions to Take During (Routine) Market Declines

What should we do during stock market declines? Even though the ups and downs are a normal (and expected) part of investing, what beneficial actions can you take?

Evon dives into rebalancing, tax-loss harvesting, and other actions optometrists should consider during market declines.

Have questions on anything discussed or want to have topics or questions featured on the show? Send Evon an email at podcast@optometrywealth.com.

Check out www.optometrywealth.com to get to know more about Evon, his financial planning firm Optometry Wealth Advisors, and how he helps optometrists nationwide. From there, you can schedule a short Intro call to share what’s on your mind and learn how Evon helps ODs master their cash flow and debt, build their net worth, and plan purposefully around their money and their practices.

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The Optometry Money Podcast is dedicated to helping optometrists make better decisions around their money, careers, and practices. The show is hosted by Evon Mendrin, CFP®, CSLP®, owner of Optometry Wealth Advisors, a financial planning firm just for optometrists nationwide.

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Episode Transcript

Episode 112 Transcript What to Do During (Typical) Market Declines

[00:00:00] Hey, everybody. Welcome back to The Optometry Money Podcast, where we’re helping ODs all over the country, make better and better decisions around their money, their careers, and their practices. I am your host, Evon Mendrin, Certified Financial Planner(TM) practitioner, and owner of Optometry Wealth Advisors an independent financial planning firm just for optometrists nationwide.

[00:00:26] And thank you so much for listening. On today’s episode we’re going to dive into, what actions you should consider taking when we see a stock market decline. And we had a little bit of excitement this week. So I’m recording. this is Friday morning, August the ninth, a little bit later in the week than usual for our podcast episodes. But we had a little bit of excitement this week.

[00:00:49] Earlier in the week on Monday, we saw, the, both the global and us stock market fall, roughly 3%.and if you allowed yourself to pay any attention at all to the news media, you would have expected the whole world to be falling apart. And ending because you would have seen headlines showing blood bath and plummeting and crashing and all of that really dramatic and crazy stuff.

[00:01:11] Historical Data of Market Declines

[00:01:11] So we saw about a 3% decline in price. in what was, in my opinion, a pretty typical experience of stock investing. And when I say that, I mean us as financial advisors, we talk and we wonder whether we should say anything at all, because this is a pretty typical normal experience of investing. I mean, even if we talk about like peak to the bottom of where Monday ended up. Depending on which peak of the year you use. We would have seen stocks decline around 6% or 8% from the very peak down to the bottom on Monday. Right. So it wasn’t even a bear market, so to speak. I mean, this feels like just sort of a normal, typical experience of stock markets moving up and down for various reasons. And already here on Friday, August the ninth. We’re pretty much back to where we started before Monday.

[00:02:08] So. We had a bit of excitement. It definitely seen the news media hopped on top of it, like crazy throughout the day. But this is a normal, typical part of the investing experience.

[00:02:19] When you are investing in the broad collection of businesses, both in the United States. And all over the world. In fact, when we look back historically around stock declines, like this is typical, this is a normal experience. So some of the data points we can look at for example, is,with the S&P 500.

[00:02:37] So we can use that as sort of, as a proxy for the US stock market. And we can go all the way back from 1928, for example, through 2023. And we can see that, although the majority of years, so about 73% of years were positive. We saw that 94% of the years from 28 through 2023. 94% of the years had a draw down of 5% of worse. 94% of years had a drawdown of 5% or worse at some point throughout the year, 64% of those years had a draw down of 10% or worse, 40% how to draw down a 15% or worse. 26% of those years had a drawdown of 20% or worse. So we’re talking about five, 10%. Like these are normal experiences of investing.

[00:03:29] And the looking throughout that whole time period. The average draw down within a given year. Right? So the average intra year draw down. The average drawdown within any given year. Was about 16%. So it is a normal part of the investing experience. It should be expected if you’re investing in a healthy percentage in the stock market, U S as well as globally, that you’re going to see these fluctuations, right. But we need to keep in mind that if we are long-term investors, meaning if we are investing for longterm financial independence for retirement. We need to be thinking about how our investments will behave over decades.

[00:04:13] Not days, decades. We are thinking in terms of 10 and 20 and 30 and 40 years and beyond. Not in terms of hours. So these fluctuations really, again, as we advisors talk about it. This isn’t really something we even want to draw attention to because it is such a typical part of investing. That being said, right.

[00:04:36] That sort of context being said, I do want to go into what are some things that you should be thinking about? As you experience, draw downs, declines in the future. What are some actions that you should be considering? Right? Because there are some things that we can do to improve our portfolios during those times.

[00:04:57] 1. Stick to Your Long-Term Investment Plan

[00:04:57] What are some things that we should be considering? Well, the first thing you should do is to simply stick to your long-term investment plan. Meaning that we should. We should. Have a broadly diversified mix of investments. Meaning a broadly diversified mix of stocks in bonds in real estate. You have a broadly globally diversified mix of investments that’s appropriate for your investment goal as many of your time horizon between now and when you’re going to need the funds. Your other assets that you have on the balance sheet. The needs of withdrawals.

[00:05:34] So having appropriate amount of bonds and cash for near term withdrawals. So you should have an appropriately diversified mix of investments. That fits your situation where you’re at in your career and your withdrawal needs and the other assets on your balance sheet. And so drawdowns, like these should not be a reason for you to change it in and of itself.

[00:05:55] In fact, this might be one of the worst time to make big permanent investment changes, because this is at the height of emotion, right? Usually at the height of fear. And if you are going to make a major change, You know, dramatically less stocks, more bonds and whatever that change may be, you really need to ask yourself, has your time horizon changed?

[00:06:14] Are you at a different stage in life that would require, or would suggest that change?

[00:06:20] Has your tolerance for risk or need for risk permanently changed or change for the longterm? you do need to put as much thought into making changes as you did setting up your original mix.

[00:06:33] Don’t let market ups and downs be the sole driving factor of why you make big, important investment decisions like that.

[00:06:39] You should be just simply sticking to your long-term investment plan. , based on the goals for these investments.

[00:06:46] So number one, stick to the longterm investment plan that you’ve set that’s appropriate for where you’re at in your stage of life.

[00:06:53] 2. Continue Regular Contributions

[00:06:53] Secondly. Continue your regular ongoing investments. Continue your 401k contributions. Continue your other automated contributions or deposits into your investment accounts. Don’t interrupt that compounding continue to invest even through these times of declines. And what’s fascinating is that if you are a longterm investor and you are continuing to invest. You’re able to now purchase. All of the shares of stuff that you would normally want to buy and hold for decades at cheaper valuations, cheaper prices. Which is a benefit to you as a long-term investor.

[00:07:29] So continue to invest the dollars that you have. And you do hear some people say like, I’m glad I have cash on the sidelines. I can, I can put it to work. Yes, it’s good. If you have cash set aside. That you don’t have any near term goal with, and you are comfortable investing for 10 years and beyond. Great.

[00:07:46] Let’s get it invested. Right. There’s no better time than now. to invest it during a decline in prices. But we shouldn’t necessarily just be having cash on the sideline. We should be invested at all time. We should be allocating our dollars at all time. To be fully invested for the dollars that need to be invested for the longterm. And any cash that we have on hand should be specifically for nearer term goals. Or Fort nearer term expected opportunities. So I don’t think it necessarily makes sense to, to hold a bunch of cash. Simply to wait for opportunities of stock declines. We are statistically better off being fully invested. Because we don’t know when declines will come, but we do know that most years have historically been positive. So from a statistical perspective, right?

[00:08:36] Just purely from a probability perspective, we want to be invested at all times based on that investment mix that makes sense for our investment goals. So number two, continue your regular ongoing contributions and investments.

[00:08:50] 3. Consider Rebalancing Your Portfolio

[00:08:50] Number three consider rebalancing your portfolio. So this is something that we watch as advisors? If there is a major swing in different categories we might consider rebalancing. So, what is rebalancing? What we’re bouncing is simply trimming the categories that are much higher than your targeting. And adding to the categories that are much lower than your targeting, so that if we agreed, for example, on a portfolio of X percent to stocks, X percent to bonds, And then within those categories, X percent is us versus international and X percent is large versus small or whatever characteristics. During huge market swings in either direction. You’re going to find that certain of those categories are much higher than you’re targeting.

[00:09:33] And certainly those categories are much lower. And so you want to trim those categories. For example, if stocks declined in a major way, You may want to trim bonds and add to stocks. Which is usually the opposite of what people want to do during that time. Most people want to sell or not buy more. But really that’s what we should be considering doing.

[00:09:56] It’s a systematic unemotional way to sell what’s gone up and buy what’s dramatically gone down. And primarily it’s about risk management. We’ve agreed when, as we put these portfolio together, To be within a range of stocks and within a range of bonds because that’s the risk and return trade off that makes sense for where we’re at. So if we see that balance dramatically change. We want to bring that into balance so that we’re not taking on more risk longterm than we’re comfortable with, or that makes sense. And we’re also not taking on too little investment risk .

[00:10:32] So we just want to bring that back into balance and there’s some studies, if you look. there’s some studies that see that if you do this rebalancing. if you rebalance within certain ways, it could add to the performance of the, of the portfolio. Primarily though, what I want you to take away from that is rebalancing is about bringing it back into the appropriate trade-off long-term of risk and return that, I mean, it’s really what you want to bring it back to. So as advisors, when we’re doing this, we usually will look at rebalancing, either on a set timeframe – so once a year, twice a year, not too often, maybe once a year, it could be appropriate. Or within certain ranges, meaning that if one category goes 20% too high or 20% too low, that will be a trigger for us to rebalance. Right. So that’s the one way to think about it. And if we see a major stock decline, maybe that’s something you want to consider as rebalancing.

[00:11:27] 4. Consider Tax-Loss Harvesting

[00:11:28] the next thing you consider after rebalancing is tax loss harvesting.

[00:11:31] And that’s something we’ll look at in taxable investment accounts. This doesn’t matter for retirement accounts. This is only about taxable investment accounts. So what is tax loss harvesting? Well, tax loss harvesting is, is all about selling a fund or an investment that’s currently at a loss and immediately replacing it with another investment. Right.

[00:11:53] So this isn’t about timing, the markets, this isn’t about selling it and then waiting to get back in at another time. No, we’re selling something that’s at a loss and then buying something else right away. We’re immediately being reinvested. And the purpose of that is you simply want to book that loss for tax purposes. and that those losses are helpful for a few reasons.

[00:12:15] Number one. Is it helps to offset other gains. So if you need to sell things in that taxable account to create cash, That’s a way to offset those gains, or if you need to readjust a portfolio, let’s say you have positions that you don’t want to keep, or you need to rebalance because it’s gone up way too high.

[00:12:34] Well, you can use those losses to offset those gains. I have some clients right now that have come in with. with, with pretty large taxable investment accounts. But with a ton of investments that don’t make sense for that type of account they’re tax inefficient or that we simply don’t want to hold.

[00:12:49] So normally we’ll have to sort of stage those sales and reinvestments over time because we don’t want to create too many capital gains. However, when we have opportunities to harvest those losses. That creates more space for us to sell those things. We don’t want into reinvest it into something that we do.

[00:13:08] The other thing that can happen is that if you have. Extra gains left over at the end of the year, meaning that your losses weren’t offset by capital gains and you still have extra. You can use up to $3,000. Of those losses to offset your other income on your tax return in that year. So, which is great.

[00:13:28] You can use the, you can use up to $3,000 of losses to offset your salary or business profit, real estate profit, whatever it may be. if you’re filing taxes separately. for example, for student loan purposes, that’s cut in half to 1500. So tax loss, harvesting is important. And remember, it’s not about timing the markets, it’s not about staying out of the markets.

[00:13:48] You are immediately reinvesting that fund into something else. So what do you buy? When you are reinvesting it. Well, that’s the important part.

[00:13:56] And that’s gonna depend on your, on the needs of your portfolio. So if you have another fund that needs the cash, well, that’s an opportune time to sort of rebalance . But what if you want to buy the exact same category? Well, that’s where I want to bring your attention to something called the wash sale rule, and this is something you really want to watch out for.

[00:14:13] What the wash sale rule says is that if you sell an investment for loss within 30 calendar days, within 30 days of having purchased it. You are not able to use that loss for tax purposes. It’s called a wash sale you wash away that ability to take that loss and use it onto your tax return. And in the same way, if you sell an investment for a loss and then repurchase that same investment within 30 days after it’s the same thing.

[00:14:42] It’s a wash sale.

[00:14:42] There’s a 60 day window around the day you sell that investment at a loss. So that’s 30 days before you sell it. And 30 days after that, you need to keep an eye on.

[00:14:53] And so what the IRS says specifically is that you cannot repurchase a substantially identical security. Right. So what does that mean? Well, it’s, it’s ambiguous. There’s no clear definition of that. You sort of have to use your best judgment.

[00:15:08] Obviously, if you are selling a individual stock for a loss. You can’t buy the same individual stock if you’re selling an in. If you’re selling an ETF or a mutual fund, you can’t buy that exact same ETF or mutual fund.

[00:15:22] for my firm using primarily ETFs or mutual funds, if we have mutual funds transferred in. What we usually do is, is sell a fund at a loss and then purchase something that we feel from an investment standpoint is, is an equivalent something we would be comfortable owning instead of, but not an identical fund.

[00:15:42] Something that’s sort of a gray area is like index funds, for example, because you can sell one index fund. That covers the S&P 500, for example. Well, can you purchase another index fund from a different fund company that also covers the S&P 500.

[00:15:56] Well, it’s a gray area, right. You kind of have to use your best judgment. about whether that is, you know, perhaps you need to look at a different US stock market index or maybe look at international stocks or something like that.

[00:16:09] So keep an eye on this wash sale. And one important thing to keep in mind is that the wash sale comes into play even if you have purchased that same investment or will purchase that same investment in any other account own, including retirement accounts, IRAs, things like that. So, if you are selling a fund for a loss in a taxable brokerage account, you cannot repurchase it in your IRA.

[00:16:34] That is still a wash sale. This is something that can trip people up. They don’t, they don’t realize that the other thing that can trip you up is reinvested dividends. That can cause a bit, but. It’s only going to cause a wash sale up to those dividend amounts.

[00:16:47] Tax loss harvesting is something to consider. It’s really just for the tax loss.

[00:16:51] It’s not for everybody. It doesn’t make sense in all cases, you shouldn’t be tinkering again, tinkering with the funds to collect like small losses. But if you have an opportunity during a big decline to take advantage of a meaningful loss and use it strategically. Then this is sort of a silver lining during a time of decline.

[00:17:10] 5. Roth Conversions

[00:17:10] Something else that you can consider a Roth conversions. If you are planning to do Roth conversions already. So if in the tax year you knew it was going to make sense to convert dollars from a Traditional IRA over to a Roth IRA. A decline is an opportunity to do that more favorably.

[00:17:29] And the reason that’s the case is because you can convert. More shares. But the same number of dollars. So for example, if you are able, if you are already planning to convert. $10,000 from your Traditional IRA over to your Roth IRA.

[00:17:46] After a decline in the stock market, you can convert the same $10,000. But you can convert. More shares of the fund. You were going to be selling because the price per share has come down. Which allows more shares to then grow in that Roth account, into the future. Right. So. If you were already doing some tax planning and already projected out and knew that it was going to make sense in that year to do Roth conversions. Well, that’s certainly an opportunity to do that a little bit more favorably.

[00:18:15] 6. Focus on What’s In Your Control

[00:18:15] And the next thing, which is probably the most important in reality, focus on really what’s in your control. The ups and downs of the stock market in any given time, any given year. Is completely out of our control. It’s out of our hands and we simply don’t know what the future looks like.

[00:18:30] We don’t know what will, what it will do tomorrow. We don’t know what it will do next week or through the rest of the year. But there are things directly within your control. For example, focusing on improving your optometry practice, if you own to practice or improving your production or patient care if you’re an associate doctor. Working on improving those things that directly impact your income and your ability to build assets into the future.

[00:18:54] That is way more important than trying to tinker with your portfolio, right as these things are happening.

[00:19:00] Focus on the amounts that you’re investing your savings rate, the percentage of your income, your household income, that’s going towards. investing.

[00:19:08] Your behavior. How you respond to these sometimes stress inducing events, your behavior during these times, they’re going to be one of the most important factors of how your wealth will build, how your investments will build over time.

[00:19:23] It’s your discipline. It’s your patience. It’s your ability to stay invested, even when it’s uncomfortable, and your ability to avoid making big mistakes Right at these worst times, that’s going to have such an important impact on your investments growing into the future.

[00:19:39] 7. Some Variation of Nothing

[00:19:39] And then lastly, if there’s no opportunities above. Meaning that maybe there’s no opportunities to do major rebalancing because your ongoing contributions already do that. They fill in the gaps. Maybe there’s no major opportunities for tax loss, harvesting, which is okay. You don’t need to have that.

[00:19:56] Maybe you don’t have major opportunities for Roth conversions. The last thing that you should consider is some variation of nothing. Right. It’s okay to do nothing and just continue, again, with the investment plan with the ongoing contributions. That were already in place.

[00:20:15] You know, go outside for a walk, go for a bike ride, go for a hike. Spend time with your family, play with your kids, eat ice cream, you know, focus on anything else, but the daily up and downs of these investments.

[00:20:29] That is going to be much more impactful to your mental health rather than constantly watching the ups and downs, constantly consuming news media, which is simply trying to get you to have an emotional reaction. It’s going to have a much greater impact on your life. Then tinkering with your investments during these times. So, hopefully those are some things you can, you can consider or talk to your financial planner about, you know, cause I’m just a guy on a podcast. I don’t know what makes sense for your life. But those are some actions to consider taking that can positively impact your portfolio in some way during major stock events, right? During major declines.

[00:21:04] So hopefully those are helpful. Reach out to me if you have any questions or topics for future episodes. at podcast@optometrywealth.Com. you can check out the show notes. and some of the data points that I mentioned in this episode in the links, in the show notes, which you can find at the education hub on my website, www.optometrywealth.Com.

[00:21:25] And while you’re there, Hey, if you are wondering what it’s like to work with an optometry focused financial advisor to talk about investing prudently or wondering what to do with cashflow or to talk about tax planning or any other financial topic on your mind? Let’s have a conversation. you can schedule a no commitment introductory call by clicking on the links at my website, and we can. go from there. So again, appreciate you listening. We will catch you on the next episode, in the meantime, take care.

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