It’s a Rough Day in the Market

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As I write this on March 9, 2020, market indexes across the board are down, some by as much as 9%. Coronavirus has made the market skittish enough over the last few weeks, to compound things Saudi Arabia announced massive cuts to the price of oil this morning, which actually seems kind of great (lower gas prices!), but markets have not reacted kindly. The response feels like panic. It’s certainly a bad day in the market, but I want to provide a little bit of context for all of this.

 

Here’s what you should know:

  • Unless you know the future or have inside information (unlikely, and illegal to trade on), you should be a long term investor. Short term market moves are pure gambles, and most often end up hurting investors. Don’t move money based on fear, which is all we hear in the news, especially on days like today.
  • Despite what pundits may be saying, no one knows what the market will do tomorrow. No one knows where the bottom of a downturn is, no one knows how long it will last or how quickly the market will come back. Don’t panic with your money, especially when the market is down.
  • Bad market days have happened before. On Black Monday (October 19, 1987) the Dow Jones Industrial Average dropped 22.61%, in one day! In order to crack the top 20 bad market days the Dow would have to lose 7%, but even if that does happen, we’ve seen the market bounce back from far worse.
  • The market bounces back quickly. When the S&P 500 loses 10% or more it recoups all losses within an average of about 4 months. The worst thing you can do is move money when the market is down and miss the bounce-back.
  • A limited number of great days in the market account for most of the great returns. A 20 year period between 1998 and 2018 included 5,040 trading days. If you missed the 30 best market days out of the total 5,040, you would have ended up with a slightly negative return over the 20 year period, $10,000 would have turned into less than $9,000. We don’t know when those great days will come (though we know they often follow bad days) but we definitely don’t want to miss them by being out of the market.
  • Markets move, but the general trajectory is up. If you’re invested for the long haul and you understand your risk tolerance, bad market days are no problem. They don’t even have to be stressful.

 

Here’s what you should do (or not do):

  • Don’t panic. This is not the first time we’ve had a bad day in the market and it won’t be the last. The worst thing you can do is move your money out of the market. In fact, bad days in the market are a great time to invest more.
  • Make sure you understand how and why you’re invested the way you are. The market will sustain losses, but an un-diversified portfolio stands to lose a lot more. On the flip side, a well-diversified portfolio can put your mind at ease.
  • Make sure your diversified portfolio has a systematic way of rebalancing. When the market is moving, a system for rebalancing will ensure that parts of the portfolio that are doing well are sold, and the parts that are down are bought. It’s an automatic ‘buy-high-sell-low’ feature.
  • Work with an investor coach. When things look bad, all the news and information surrounding you will only confirm your worst fears. An investor coach will keep you disciplined, make sure the accounts are rebalanced, and will ultimately guide you through turbulent markets to a successful outcome.

Book Takeaways – Atomic Habits

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This year I’m a part of a book club. Each month we read one book in the genre of self-improvement and meet to discuss our findings and takeaways. January’s book was Atomic Habits by James Clear. Along with the regular book club meeting, I’m going to highlight some key ideas and actionable items for you, my readers. Books may be the single best source of knowledge and wisdom available to humans. I love reading, and I love sharing ideas I’ve read so this exercise will tick a few boxes for me. Here goes. 

  1. Outcomes are a lagging measure of our habits, we get what we repeat. This is great news because it means we can work to change our habits and get different outcomes. 
  2. Goals are not correlated to results. Clear makes an impactful point that winners and losers have the same goals. Goals are helpful for providing direction but mostly worthless in obtaining a desired result. For that, we need systems/habits.
  3. Habits change identities. I consider this Clear’s most profound and important contribution to the discussion of habits. We fail to make lasting behavior changes routinely, regardless of our intention or passion, the size or specificity of our goals, or the breadth of our knowledge. Even when faced with an ultimatum, change or die, (ie, change your diet or your diabetes will kill you) people fail to change. The reason is that our actions are closely knit with our identities, and we fail to change who we are. The antidote is to start with a tiny action. Just do something good, however small. Each good action is undeniable proof that we have acted like (been) a different person, and that begins to mold our identities. The point of all this self-improvement effort is not to accomplish goals, it’s to become different people. I don’t need to lose 20 pounds, I need to become a healthy person. I don’t need to make $200k in five years, I need to become a valuable coach. The pounds and money are only byproducts.
  4. Make good actions easier and bad actions harder. In order to begin taking the small actions that will shape our identities, it’s helpful to set ourselves up for success. Humans drift toward the path of least resistance by default, so remove resistance from good actions and add resistance for bad actions. A few examples: 1) Set out your workout clothes before bed so it’s easy to wake up and get dressed for the gym. 2) Unplug the TV after each use so you have to plug it in if you want to watch something.
  5. An implementation intention is critical for habit building and behavior change in general. We tend to set goals and hope for some motivation to begin working on them. The problem is that motivation is scarce and inconsistent. An implementation intention solves that problem, it means we make a plan to implement our new habit by giving the habit a regular time and a regular place. In order to do something different, you must have a plan for it. If you intend to work out, choose a regular time (that fits into your schedule), and a regular location (whether it’s a space in your house or gym nearby). We make plans for all sorts of important things in our lives, habits call for the same attention.
  6. As a general rule, the more immediate pleasure you get from something, the more suspicious you should be of its long-term benefit. Not that we need to stop doing things that make us happy, just be aware that immediate pleasure and long-term benefits are almost never congruous.
  7. At some point, it comes down to who can handle the boredom of taking regular good action, day after day. You become healthy by eating good meals every day. You get strong by lifting the same weights over and over. You gain wealth by doing the same important function of your work time after time after time. Fall in love with the process, embrace the boredom.
  8. Success is not a goal to achieve, it’s a system of improvement, an endless process of refinement. It’s incredible what you can build if you just don’t stop.

Your new habit initiative is missing something

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Humans are bad at starting new habits and jettisoning old ones. It doesn’t seem to help if we know better (like, smoking will eventually cause you to suffocate to death). Our level of desire or commitment isn’t a useful indicator. We typically come up with a great idea, what could probably be classified as a goal, some change we’d like to initiate in our lives, and then we hope for some motivation to strike so we can implement the new behavior. Unfortunately, motivation is undependable and scarce, and your new habit, as well-intentioned as it may have been, never comes alive.

But there’s a solution to this. James Clear, in his book Atomic Habits, explains that while our usual understanding of how to cause behavioral change (knowledge, motivation, earnest desire, strict discipline) is mostly worthless, an implementation intention plan can make all the difference.

So what’s an implementation intention plan? Well, stated as simply as possible, it’s your plan for the time and place you’re going to execute your new behavior. Clear says, “Most people think they lack motivation when what they really lack is clarity (P71).” When we fail to make the changes we intend we start to think we lack discipline or maybe we don’t want it enough. That’s purely false. What’s lacking is most likely not discipline, but a plan of action. When we leave our behavior change initiative to the erratic realm of inspiration and motivation we’re begging to fail. But if we’re clear about a time and a place, about when and where we’re going to execute our new habit, the likelihood that we’ll execute skyrockets. This can be as simple as choosing which chair you’ll sit in at what time in the morning to start your reading habit. I have two seats in my living room (there are more seats, just two that I claim), one couch corner for TV and video games, and one couch corner for reading and writing. It makes a weird, incredible difference which one I’m sitting in. When I’m in my reading spot, I read, when I’m in my TV spot, I watch TV. That’s about as complicated as it has to be. I execute my reading habit because I chose my seat and I decided on a regular time (quick aside, reading in the morning is the best).

I think this implementation intention plan, while super simple, is one of the most important concepts in the study of habit formation. We select times and places for all sorts of important things in life, meetings, family time, workouts, church, etc. Why do we try to sidestep this necessary piece when we’re dealing with ourselves?

An implementation intention plan is not the be-all-end-all magic dust that will guarantee the success of your new habit, but it is a critical piece and one that few of us consider. So stop worrying about whether or not you’re disciplined or motivated, pick your time and your place, and execute.

The key to a good routine

Change is hard. As posted recently (here), it takes some attention to adjust our default behaviors. We don’t just change because we intend to. One helpful way to attack personal change is to address our routines.

Routine is defined as ‘a sequence of actions regularly followed; a fixed program,’ per Google. A routine is kind of like a large scale habit, like several habits stacked on top of each other. We’ve all got them, some are helpful, some not so much so, and most of them we probably fell into with little or no intention. But the great thing about routines is that you can mold them.

This month, my family and I embarked on a brand new routine. Routines can be very sticky, but including the whole family has made it significantly more so. Kids, especially young kids, will notoriously derail attempts at a new routine, so I’ve given up resisting and made them part of it. The routine revolves around their school schedule, which is great because school happens regardless of how my wife and I are feeling or how well or not well we slept (one of the primary derailing factors of children). The start of the school day is a cornerstone that we’ve built our new routine around. We’ve got a series of actions we take leading up to getting the kids ready and out the door, and a set of actions we take after the kids are dropped off. It happens every weekday, and we’ve settled into the regularity of it as a family. James Clear talks about habit stacking, using one of your existing habits as a cue for a new habit. The school bell is not a habit, but it functions in a similar way, it’s a regular thing that we can build additional habits around, an anchor.

This is the problem with debt consolidation

 

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It’s not a math problem. The numbers on debt consolidation actually sometimes make sense. Credit cards (for instance) offer high interest rates because they’re unsecured, personal lines of credit. The most popular consolidation loans are home equity loans which offer much lower interest rates because they’re secured against your home. If you stop paying a credit card, the debt goes to collections and the credit card company receives pennies on the dollars that you owe them, their risk is high and you pay for it. If you stop paying a home equity loan, the bank has a stake in your house and they can sell it to get their money back (foreclosure), their risk is much lower and you pay less for it. So that all makes sense, isn’t it an obviously beneficial move to slide the debt from unsecured credit cards with high interest rates into a secured home equity line with a low interest rate?

Like I said, the math may sometimes make sense on paper (may, although there are some serious issues with home equity loans which offset the juicy interest rates), but the math was never the issue. We need to consider the root of the problem. If the root of the problem is that you’ve got high interest rates on credit card debt then a consolidation loan solves the problem; done, easy. Unfortunately, that’s not the root problem. The root of the problem is that you’ve got a broken relationship with money and things. You buy things because you want them and you worry about where the money will come from later. You use credit cards because, points (obviously), and they make you feel like lots of little purchases are no big deal. Your financial life lacks intention, there’s a disconnect between your purpose/values, and your money/spending. A consolidation loan is appealing for the momentary relief it could provide, your monthly debt payments might be cut in half, but it’s only a bandaid. Without a more fundamental change to your relationship with money and your spending habits, the consolidation loan will actually only end up causing more debt and more pain in the future.

Home equity loans (again, the most common type of consolidation loan) are usually interest-only loans, which means if you make the minimum (interest-only) payment each month, the debt could continue on into eternity. The lower interest rate is not helpful if the debt isn’t going down. People often end up paying far more interest on a low-rate equity loan than they would have by aggressively paying off a credit card.

A debt consolidation loan will wipe out your credit card balances leaving lots more room to spend. Without a change in the deeper issue (your relationship to money), you’ll just end up with the old credit card debt in the consolidation loan and new credit card debt on the credit cards. It’s a wicked spiral.

So don’t play the debt games. Credit cards aren’t necessarily the enemy, but using them without having the cash to back your purchases, that’s a problem, a problem that the best consolidation program in the world can’t solve.