Should You Stay Invested During a Market Crash (and what NOT to do)

Let’s talk about whether investors should stay the course or pull back when markets take a sharp downturn. It highlights the emotional challenges of seeing portfolios drop in value and the risks of making panic-driven decisions. You’ll learn how long-term investing strategies compare to short-term reactions during market crashes. The video also discusses historical examples of recoveries and what investors can take away from them. By the end, you’ll have a clearer framework for making level-headed choices when volatility strikes.

Resources:

- Alliance of Comprehensive Planners: https://www.acplanners.org

- John's firm website: https://www.trinfin.com

- Find us on Facebook: https://www.facebook.com/friendstalkfinancialplanning

Video mentioned in this episode: https://www.youtube.com/watch?v=Ve1-_L0UETM

TRANSCRIPT:

John: Think about this. The market starts tanking over a period of three or four or five days. It goes down and down and down and down. And you take the advice saying, “Hey, get out early,” and then shoot, it comes back. And you missed it. You think, “I made a mistake. I should have stayed in the market.”

Bridget: Hi, I'm Bridget Sullivan Mermel. I own a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I own a fee-only financial planning practice in Middleton, Wisconsin. And before we start talking about holding through a bear market or not, I want to remind everybody to hit that subscribe button. Give us a thumbs up and help other people find this information on YouTube. And with that, Bridget, I just wanted to talk about a comment that we got a few episodes ago.

And the person said, “Holding through a bear market is going to ruin your retirement. It's terrible advice. You should get out as early as possible.” And I really appreciated that comment. I'll hear that from people. And it certainly sounds like good advice. But as we've talked about on previous episodes, that's not what we do in practice. But I'm just curious, when you read, “Why not get out as early as possible?” what was your reaction to that? How do you think about that? And then we can talk about how we talk about it with clients and what it looks like.

Bridget: Yeah, I've got a few different levels of reaction. My first reaction is that I don't agree with that. But if I were to put on my financial planner hat and think about it a little bit more, I'd say, “What are your goals?” because that could be the perfect device for one person. And then they probably don't believe in investing in the market in the first place.

So if you don't want to handle the market going down and you have enough money so that you don't need to make higher returns, it's probably a true statement. I don't like taking risk. I have plenty of money. This is ruining my retirement. I did have one client who signed up because in 2008 her portfolio went down by 10%. Now most advisors would consider that a success in that situation.

John: When the market's down 40%.

Bridget: Yeah, but she didn't want to lose any money, and she had plenty of money. She wasn't spending it all. She was a super saver and really just didn't like either spending money on taxes or losing money in the stock market. Those were tied in her brain. Fine. You have enough money. What are your goals? You've got enough money. You don't need it. You don't need the aggravation. 99.9% of people do want to make money in the stock market.

John: Or need to.  

Bridget: Right. Or need to. They don't want to cut their spending to a level where they don't need to. In that case, I wouldn't go for that advice. Tell me what you think.

John: If it's okay, I'll circle back to the client you described. And it is like the 1%. For most people, no, but for this person, yes. But should that person have been in the stock market in the first place?

Bridget: No.

John: Right, so then I would argue that it wouldn't apply. Get out early. No, get out before it goes down. In fact, don't even be in. And that’s not the right answer for most people, but I think that it’s legitimate. On the other side, people still say, “When things go bad, get out early.” First of all, I appreciate the sentiment. Yeah, that'd be awesome if we had a crystal ball and could figure out what to do in advance of it actually happening. As soon as it starts going down, get out, then get back in before it comes back up.

That sounds a lot better. It feels like that should be the thing to do, but in reality, the enactment of that is so difficult. And it reminded me of something that I'll pull up on the screen. We’ve had some ups and downs this year in the stock market. Perhaps you've read about that a little bit. There was an article in it, and it had a really neat graphic that said, listen, what happened if you got out when the market went down. On April 9^th or 10^th, the market was up, 9.5% or something ridiculous. And that was back when the whole thing with tariffs were first coming in and there was a lot of market movement.

And the point for me is not, “See what happens if you miss the best day in the market.” Everybody's probably seen those. If you miss the best 10 days, you're underperforming. And the black line, what if you got out and missed that day? So you think about this. Hey, the market starts tanking. In a period of three or four or five days, it goes down and down and down and down. And you take the advice, saying, “Hey, get out early.” And then shoot, it comes back. And you missed it. You think, “I made a mistake. I should have stayed in the market.”

Look at that difference. In a short time period, how fast and how far do we get behind? It’s something like 8% in less than six months. How do you ever make that up? And does the market go up 9% or 10% on a regular basis? Of course not. But it's that sort of thing that we've actually seen this happen here in the first half of the year. And to me, when you take a look at that, it’s not like saying, “Oh, I got out, and I made a colossal month or years long mistake of being out of the market.” It’s just that things turn so quickly. The things that we think, the things that we can predict, everybody else that's in the market knows this stuff.

Think about how much money is spent on Wall Street and the really smart people, the PhDs who spend their lives studying this. As financial planners or anybody else who reads the Wall Street Journal, do we think we know more than what those folks know as far as what's going on behind the scenes? And it's the unexpected things, not the expected things that hurt us. It's those unexpected things that we just don't know. And that graphic really speaks to the idea, oh yeah, you can get ahead, but you can get ahead by playing blackjack as well. The problem is when you get behind it's impossible to catch up. So why would you take that risk?

Bridget: Yeah. And I would just say that it has been proven to be random, so you can't predict a random event. After the fact we'll put a story on it, like “Oh, tariffs weren’t going to be as bad as they we thought they were.”

John: Right. And we'll explain it. It all makes sense based on what we should have known.

Bridget: Yeah, in retrospect, there's some story in it. As you're going along, you don't know; it's random. No one can predict it. But we can predict that the market is volatile and there are random ups and downs. So if your emotional system is not set up for it and you can't handle it, then you should have less in the stock market. Most people have a lot of their money in bonds or interest earning investments. Some people have all their money in the stock market. And so, then that's going to be a wild ride.

And you sometimes, you don't even know you want to get off the ride until you're at the top of the roller coaster or at the bottom. And I didn't know this. So what we really recommend is a mixed approach and to look at the other stuff that hasn't gone down 10% in one day or that isn't having those big changes. My stock portfolio is down today, but the rest of the stuff is growing, and I didn't even notice it, and I'm certainly not hearing about it on the news in some sort of alarming fashion. Let me just change my focus a little bit.

John: Yeah, I'm glad you brought that idea up. You probably shouldn’t have all of your money in stocks. Again, your mileage may vary. But typically, we'll have clients, I'm sure you do as well, who have half in stocks and half in bonds, or 40% and 60% one way or another. And you go, “Oh my gosh, the market is going down.” And when we have these conversations, I say, “Oh, do you mean the bond market?” “Well, no, no, the S&P 500. What's on the news all the time.” Ok, hang on a second. And sometimes it can be that we get kind of freaked out. I mean this is your life savings.

But you go, wait a minute, I got half of it in things that aren't going, they're not going up too much, but they're not going down too much. They're kind of holding steady. Take a breath and remember that side of things. It’s not easy to do that. And so, part of it is to take a look at that side of it. And the other thing that you made me think about as you're describing those things is that it's not if the market goes down, what do we do? It's when the market goes down. The market is going to go down. It's going to go down 10% or 15% or 20% or 30% at some point.

What are we going to do? It’s a matter of being proactive, rather than saying, “Oh now what do we do?” When it goes down 20%, here's how it's going to look. And looking at it now. As we're recording this, the market's doing pretty well. All right, but what happens when it goes down 25%? How do you feel about that? Oh, wait a minute. No, no, I don't like my million dollars being worth $750,000. But just in passing, if the market’s down 25%, I don't care. Let's think about that in advance. By waiting until it goes down and then reacting, you just put yourself behind the eight ball.

Bridget: And if you're thinking my million dollars is now $750,000. If your million dollars is really 50/50, half stocks and half bonds, it's not going to be $750,000.

John: It'll be whatever, $825,000, or whatever the math is on it.

Bridget: It's not happy. That's not necessarily your happy space, but it's not as dire as being at $750,000.

John: Yep, that's great. Hey, I think that's a great place to wrap things up. Again, I'm John Scherer. I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. John and I are both taking clients. But if you live in a different area of the country and find an advisor in your area that thinks like we do, you can check out acplanners.org, which is a non-profit organization of planners who think a lot like us. And don't forget to subscribe.

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.