• Bridget Sullivan Mermel CFP(R) CPA

How are Bonds Like Pickles?

Updated: Feb 23

Stock market up or down—should I sell?

Financial planners are often are asked, “The stock market is at an all time high. Should I sell?” Or conversely, “The market is down, should I sell?”

John Scherer CFP® and Bridget Sullivan Mermel CFP® CPA have different approaches on how they talk through this with clients and other people.

John—uses a metaphor of farmer. John explains how thinking like a farmer with crops in the field and food in the pantry can help you with dealing with the ups and downs of the stock and bond market. It helps people understand How are stocks like crops in the field—what does that How are bonds like pickles?

Bridget talks about the financial lifecycle —what time in your life matters to what you do with your stocks and market. Next, she shows her list of what factors matter in how much clients should be in stocks and bonds. Although they come at it from different angles, both John and Bridget’s approaches are based on the pioneering work of Bert Whitehead and , or the Alliance of Comprehensive Planners.


How Are Bonds Like Pickles? Stocks Like Crops? Handling Market Ups and Downs

John: The stock market is at all-time highs again. What move should we make now? Come and find out in this episode of Friends Talk Financial Planning!

Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I’m Bridget Sullivan Mermel, and I’ve got a fee-only financial planning practice in Chicago, Illinois.

John, when the stock market is up or, for that matter, down, a lot of times people are asking us, “Should I make adjustments, should I sell?” And this is a major issue that people think about and that advisors deal with, so I'm wondering how you handle it.

John: Yeah, it’s interesting. I get questioned, like this is what’s on people’s mind, or at least you hear a news story, right? And you feel like, “Oh, what should I do about this?” And how I explain it to people, trying to help people think about their investments and their financial life in a certain way that's useful for them, I use an analogy of being a farmer. And where does a farmer make their money if they’re growing crops? They plant corn and beans, and that's where they make their money. That's how I look at our stocks of the portfolio. That's where we're making our money, investing in businesses. And so that's great, we make our money out there.

But then what happens when there's a flood or a drought? That's where we’ve got losses on our farm fields. Similar thing with our stocks is, “Hey, there are times that we have recessions and different things and drops in the stock market, and then on the flip side, if you're growing a big garden and you're growing things to take the farmers' market, you don't just sell all those crops every year when you have a bumper year. You take some of those and you can them and you put them in your pantry, so that when we have those floods and droughts, you've got some pickles and applesauce and food to eat there, right?

Bridget: Pickles!

John: Right! And the purpose of that pantry is not for growth. The purpose of that pantry is to have food there when you need it, and that's what our bonds are like, our bonds, cash, and fixed-income in our portfolios. That's not there to drive growth, that's there to be there so we can use it when we've got the floods and droughts out in the crops that are our stocks.

Bridget: Right.

John: And it’s interesting. When you look at it from that perspective, even within our investments, we’ve got two very different purposes. And so I ask people to take a look. If you've got a 50-50 mix of stocks and bonds, if the market is high and if it's going to take a downturn, you've still got that pantry of, you know, half your money sitting there, and it's not going anyplace. It's going to be there for you to help ride out that drought in the stock market, if you will. And then the other things that I talk about with people, or think about, if you're a farmer and there’s a flood predicted or we’re supposed to have a dry year, do you not plant your beans or your corn that year? Well, no! Of course not!

Bridget: Right.

John: You know that if you plant your crops, and you rotate them through, and every year you plant them, 7 or 8 or 9 years out of 10, we're going to have good years and we’re going to make money. And there's going to be 1 or 2 or 3 years where we have a flood or a drought or fill in the blank. And so it's that long-term viewpoint on things that people… Often times we feel like, because of what we hear, things like, “Oh, well if this is going to happen, how do we avoid that?”

But if you put yourself in a farmer's shoes, then you wouldn't ever say, “Oh, what happens if there’s a flood?” or “What happens if there's a drought?” No! There's going to be a drought at some point! It's a given. It's a part of what we do, and we plan for that. And so that's how I really ask people look at it. We do what we call “lifeboat drills” now, where we talk about, “It's not if the markets going to go down, if the stocks are going to have a problem, it’s when.” It’s going to happen. Are we positioned to do that, so we don't have to guess what's going on in the future? That's how I approach it, but when clients ask you about that, how do you approach that and help people think about it?

Bridget: Well, first of all, I just want to say that I appreciate your approach. I like the way that you talk it through, and I really like the metaphor, both the lifeboat approach – we can have a lifeboat drill every year, like, what if the market goes down? – but also just the analogy, or the metaphor of the farm I really like, and it works great! But on this one I take a little bit of a different approach than you, probably with similar results.

So I say to people, “Okay, when you want to sell because the market’s up or down, it’s based on [the fact that] you’re hearing news and you are having feelings. And the reason you hired me is so that we make sure that… Your feelings make you want to act, which is generally neutral. Obviously, a lot of times that works for you; sometimes it doesn't work for you. And so we want to have some thought in between our feelings and our actions. And so what I say is, “Let's go back to the basics and say ‘What does this really mean for you?’ ” And so let me just share my screen really quickly.

So the first thing I do is I say, “I want to look at: where are you in your life?” And to illustrate this, we use what’s called the Financial Life Cycle. And the biggest thing with this is to say that at different times in your life, what you're trying to do with money is different, and your major objectives are different, and how much you should have in the stock market vs. in the bonds is different. It just changes during your life. So I look at this and say, “Where are you in your life?” Now sometimes the question is precipitated because people have changed. So if you go from earning a lot of money and stocking it away to “Oh, I’ve got retirement in my sights. I want to retire soon, and I know it.” That's a good reason to make an adjustment.

So we use first the life cycle as our baseline, and then we ask some more questions, and that's in the risk profile. And the questions here on the left. So we look at a bunch of questions to say, “Have any of these changed?” More than what's happened in the stock market, have any of these changed? And the couple of questions that I want to highlight are, first, the last question here is your emotional tolerance.

If people are calling me because of the stock market and wanting to adjust, it means usually they have a low risk tolerance. And that's jargon – risk means something different to clients than it means to me as an advisor. For me, it's just a jargon-y term, like take a little bit of this or a little bit of that. For other people, it's like, “I lose it all.” People are afraid of losing it all. So the more afraid of that you are, the lower your risk tolerance. So if I'm having this conversation with someone I want to make sure that I take a look at the risk tolerance.

The other thing that's big is job / income / stability. If people are getting laid off at your job, if you were laid off, if you have – another one here is “other risk taken,” so if you have your own business. So when you have more risk that is baked into your life because of this risky job, that gives us a little bit of a tweak on a little less risky portfolio. So when I'm talking to clients, I want to [say], “Okay, you're having this question. This makes us say, ‘Let's have a larger conversation. Let's take a look, and let's step back.’ ” This is great time to step back and look at it all, so that's how –

John: One of the things I love about this – can you pop that back up for just one second, Bridget?

Bridget: We’ll try!

John: That, I think, was so fantastic, that when people talk about risk tolerance, it’s feelings, right?

Bridget: Yeah.

John: I just want to really highlight that. I think there's 10 different things I counted on here that impact what a reasonable place [is] for somebody to be, to have their investments, where their mixture should be. And your feelings are just one of those.

Bridget: Right.

John: This is great about some factual things. And you talk about separating feelings from actions, and that's a fantastic piece. And I've seen that before, and I need to get back and start bringing that up and having that. That's just, as we talk about takeaways on our show all the time, it’s only one factor. And that idea of looking at the big picture, and I think of it more in terms of your investment big picture, and it's not all stocks, but your life big picture. And it's not just about your investments, even! That's a huge takeaway that I hope viewers will leave this episode with. That's really awesome stuff.

Bridget: Great! So as we wrap up there's two things I want to mention. First, John and I are both members of ACP, or the Alliance of Comprehensive Planners, and, actually, the material that we went over today, coincidentally, is both from ACP and was developed by Bert Whitehead, who was the founder of ACP over 25 years ago, and the organization lives on helping advisors. But also, subscribe! Help us out. Subscribe. It helps other people find our channel. So with that I’ll wrap up! Have a great weekend, John!

John: All right. Thanks! You, too, Bridget.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.

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