- In this video,
I'm gonna show you how to play
some Jedi mind tricks on yourself,
to help prevent you from doing really
dumb things with your money invested in the stock market
when things get really, really bad.
This is the way, no this is the way.
Ah, that sweet, sweet smell of the stock market nosediving
faster than a 21 year old on their 21st birthday.
Or me a couple of weekends ago
when I went out with my friends,
I have this bump on my head for a reason.
Awkward, so what goes through your mind
when your portfolio is in the red?
Do you jump for joy?
Or do you question every decision
that you've made up until this point?
Now, if you're a normal person and not a robot,
then you probably start to question
all of your past decisions.
Let's think about this logically,
now, I know that's banned on the internet
and the investing space nowadays,
but let's give it the old college try.
Why do you invest money in the first place?
Stupid question, I know,
it's of course to make money.
So when the stock market declines
and we start to see our portfolios decrease,
it immediately breaks our brain.
- What do you mean?
I have a $100.
- Not anymore you don't, poof.
- This isn't how it's supposed to happen,
stocks are only supposed to go up
so when I put money in that's what I expect to happen.
News flash, this isn't your savings account.
If you want a risk free rate of return,
then you should shove all of your money
into a savings account where you earn 0.5% interest.
You're not gonna get rich
and you'll definitely lose purchasing power
due to inflation, but at least the balance on paper
isn't gonna decrease.
This is not the way
if you are trying to create true wealth.
To make money investing,
you're going to have to accept some level of risk,
which means that when you put money into the stock market,
it has the potential to lose value
especially in the short term.
- Dah and it's gone.
- What's that gone?
- The money in your account.
It didn't do too well, it's gone.
- What you invest in in your portfolio allocation
will determine the level of risk
that you are going to take on as well.
If to a 100% of your money into one stock,
then your risk level is extremely high.
If that bet paid off,
then you'd be handsomely rewarded with outsized returns.
Tesla is a great example.
If all you had was $10,000 to invest,
and you put it all into Tesla, back in 2011,
then you would've turned that into a little over
$1.7 million, but you instead had invested that same $10,000
into General Electric stock because you really believed
in the turnaround of that company,
then over the same time period, it would've turned into,
wait for it, $8,800,
the same input in both scenarios, $10,000.
And you really believed in the growth
of both those companies,
but two completely different outcomes.
You can think of risk in the stock market
like a knob that can be adjusted,
turn the dial up to 90% and the upside could be huge,
but the downside could also be just as huge
except not in the direction that you'd like, of course.
The more stocks that you add to your portfolio
among different sectors and company sizes,
the more diversified you become,
which is going to reduce your own overall risk.
This is one of the reasons I'm a big fan
of investing in something like a total US stock market ETF,
with something like a VTI, you are investing
in over 4,000 stocks to spread out your risk.
No, the potential return isn't going to be as high
as if you bet on a couple individual stocks,
but if the stock market does crash,
then it most likely won't go down
as much as an individual stock would.
Adjusting your timeframe is an easy way to prevent yourself
from losing money by selling when your stocks are down.
Keep in mind that losing money on paper
is completely different from actually losing money
when you sell while the market is down.
I know it feels real because you're seeing a loss of 10s
of 1000s of dollars,
but it's basically just monopoly money until you sell.
If you are enjoying this video, please do my dog, Molly,
a huge favor and hit that thumbs up button,
the more likes I get on these videos,
the more hikes that I can take her on.
And she loves hiking.
When the market is tanking, the motto I find helpful
is when in doubt zoom out.
This motto isn't helpful for someone and investing
in individual stocks though.
So I wanna be very clear about that.
Stock picking is a whole nother animal,
and sometimes you just made a poor choice investing
in that stock.
When you realize that, it might make sense
to cut your losses and move on.
What I'm specifically referring to in regards to zooming out
is the overall market in general,
for the boomer passive index fund investors out there
like me, we can look at something like the S&P 500,
and take note of what is happening in the short term.
Then we can zoom out a little more,
and then, zoom out a little more.
Then even more, until we are reminded that although
the market might be tanking in the short term,
as long as publicly traded companies are continually trying
to grow, improve and make money,
our investments should continue to increase over time.
But to truly benefit from the rise in the stock market
over time, you need to be able to hang on
really, really tight, even when things get
very, very ugly out there.
Our boy John Bogle, well the founder of Vanguard
said the best.
- And the rule for most things in life
is don't just stand there, do something,
but in these kind of circumstances
and for the long term investor,
the rule should be don't do something just stand there.
- This is way easier said than done.
So don't get the idea that I'm trying to pretend
like it's easy to stand there while a 6,000 ton train
is coming straight for you.
I have a tip on how to hold steady,
which I'll talk about in just a minute.
The rule of don't just do something stand there
even applies to when times are good,
and you see people around you making money
off of very speculative investments.
The natural thought is that,
if they're making money that way, then you can too.
So you should sell some of those safe index funds
or veer from your investing process
to buy those spec stocks to hopefully make a quick buck.
Next thing you know, you've incorrectly timed things
and now you've lost 10s of 1000s of dollars,
when the market has a downturn.
I can name four people who I've talked to
over the past two months, who did this and ended up losing
around a combined $115,000.
All thanks to stock picking YouTube channels.
They make it look so easy.
Thanks guys, you sure are doing God's work
for the average investor out there.
Looking back, these people made very dumb decisions,
but at the time each of those four people
thought that what they were doing was very rational.
Stop acting like a five year old,
that just wants to touch every button,
flip every switch and turn every knob they see,
don't just do something stand there.
The stock market goes down, even when it goes up.
Over the 40 year period of 1980 to 2020,
the S&P 500 saw a double digit entry year drop
21 of those years.
To put it simply, the stock market seen a negative return
at least once, most likely multiple times per year
is completely normal.
If you think about it, home prices fluctuate
on a day to day basis, but no one ever freaks
out about those small price fluctuations
within that asset class throughout the year.
I suppose if our home prices were plastered
on the front page of most news websites,
Monday through Friday,
then we might be paying attention to it a lot more.
It also helps that it's not as easy to offload a home
as quickly as it is to offload a stock.
Log into your brokerage account,
click that little sell button and accept those losses.
This is one of reasons that I really like investing
through the M1 finance platform as a long-term investor.
They only allow you to buy and sell one time per day,
which prevents you from panic selling
in the middle of the day.
I know it prevents my little irrational brain
from doing extremely stupid things
with my investment account.
I think what freaks us out the most
is when there's high volatility in the stock market
within a short period of time,
this is why Benjamin Graham is famous for saying
that in the short run, the market is a voting machine,
but in the long run, it is a weighing machine.
It's like those really popular kids
that we went to high school with,
that everyone envied in the short term,
you look at them after high school
and they're nowhere near as cool as they used to be,
because they peaked during that short period of time.
I always knew those kids were losers.
It just took time to play out.
Paying attention to what the market is doing
within a one year period is the fastest way
to send yourself to the looney bin.
Long term investors always went out in regards
to short term volatility, and that shows in the data,
for one year holding periods from 1973 to 2021,
the S&P 500 was up 76% of the time.
For five year holding periods, the S&P 500 was up 90%
of the time.
For 10 year holding periods, the S&P 500 was up 97%
of the time.
So even if you just shift your outlook
from what's going to happen within the next one year,
out to five years, things will be a lot easier to accept.
The stock market crashing is one of the best case scenarios
for anyone in the accumulation phase of investing,
but terrifying for anyone just about to retire.
I know the general age of my audience,
and most of you are very, very far
from heading into retirement.
When the market is tanking, everything is on sale
and it's a quick way to scoop up some of those stocks
or index funds that you like for a lower price.
Telling you to buy when the market is tanking
is not easier said than done,
because there's usually a very solid, scary reason
that the market is declining at a rapid rate
at that point in time, a health crisis, financial crisis,
or whatever, the best advice that I can give here
is to stay as delusively optimistic as possible
during these strange times, humans are pretty stupid,
but we're very good at adapting.
So we'll eventually figure something out
to get through this.
And if we don't, then society and money will be the least
of our concerns, so might as well shove all of it
into the market when it's down.
Speaking of the stock market crashing,
if you were ever freaking out about seeing your investments
tank, then it might be time to review
how you are investing your money.
Great investing has less to do with your actions
when the market is going up and more to do
with how you react when the market is going down.
Look, we're all fricking geniuses
when the market is on the rise,
no one is getting an award for buying and holding
during the good times,
because of that, you're going to be better off
building in an investment portfolio around being able
to hang on during the good and bad times,
versus building a portfolio for maximum returns.
Investing for maximum returns comes with a cost,
that's a very, very, very rarely talked about,
especially in the YouTube space.
And that's the cost of being extremely stressed out
and a mental mess when your portfolio is cut in half
during down markets.
You cannot have the high potential upside
without the high potential downside as well.
That's not how this stock market thing works.
There's always a cost associated
with your investment choices,
the higher expected return,
the higher potential for failure.
It's all a matter of how much risk
you are willing to stomach,
and it's different for everyone.
Unfortunately, I don't think the majority of investors
investing for high returns
will be ready to see their portfolios get absolutely
wrecked when the next unpredictable event happens.
The perfect portfolio that can be excellent
during the good and bad times is a three fund portfolio.
You can check out that video to your left next.
Make sure to hit that thumbs up button,
and check out the description of this video
for a ton of free stocks.
I'll see you in the next one, friends, done.