Let’s be honest, we save money in order to spend it. Whether we plan to spend it on our wants or our needs, the goal of saving—even for retirement—is to eventually spend. With investing, you’re saving with the hope that your money will multiply and work for you. Its job is to make more money until you’re ready to spend it, and that growth is what makes investing so satisfying. However, investing with rumors of a recession looming changes some things. There’s nothing that puts a damper on the excitement of investing quite like investments losing money.
Abigail wrote into the You Need a Budget podcast with the following question about what to do with her investments right now:
Dear Jesse,
I’m watching my retirement account decline each week. It is painful contributing almost the same amount that I seem to be losing each month. Ouch! What can I do during this time of inflation? Should I shift from contributing to my 403b to something else?
After the routine disclaimer that he’s not a financial advisor, and that you should do your own research before making any investment decisions, Jesse Mecham (founder of YNAB and host of the You Need a Budget podcast) had some advice about what to do (or not to do) with investments right now. Here’s what he had to say:
Would you rather listen than read? Click here for Ask Jesse: What Should I Do with My Investments Now?
Should I invest in something other than my 403b or 401k?
Whether you’re investing in a 403b or a 401k, you’re actually investing in stocks or bonds or something like that and the 403b or 401k is simply the investment vehicle—the investments just sit inside that vehicle and you enjoy the tax advantages. So, should you invest in something else? If you mean outside of the 403b/401k, I’d say no, unless you’ve already maxed it out or you’re already getting the match or whatever the benefit associated with that is. In that case, you would invest in addition to it, but not in lieu of it. But the bigger question is this:
What should you do when investments are losing money?
That’s a tougher question to answer, and a harder reality to face. In times like this, I will tell you what I’ve done.
First, we haven’t seen a lot of times like this. If you’re 40, you probably haven’t experienced a big dip where you were really in it for a lot of money. People remember ‘08. At that time, I was in my late 20s and I remember it being referred to as the Great Recession. I remember a big dip in the stock market, but I was building my business and wasn’t heavily invested because I didn’t have a lot of money; it was all going to the business. So, I didn’t have a big portfolio that was dropping—there was a little bit, but it wasn’t concerning.
Fast forward to now and we’ve had this massive run-up in stocks. I think the average has been like 17% over the last decade or something—that is huge. That’s way above the norm, which was more like 10 or 11 or 12%. Anyway, we’ve enjoyed that and if you got your investing experience when the market basically just went up a lot, then this could be a little scary. Here are two things you can do that may help:
Write an investment plan (and review it as needed)
First, you should have a written investment plan so that you’re very clear on why and how you’re investing. Then when things like this happen where the market is dipping consistently, you can go back and review that investment plan. Ask yourself, has my plan really changed? Most of the time it hasn’t, based on some dips.
So, write down your investment plan in a moment of emotional stability so that you can check it during those moments of emotional instability. Mine is in the form of a spreadsheet that has the percentage of allocations in different investments that I would like to be in. I follow that spreadsheet and I only change those allocations very, very rarely—I’ve done it twice in eight years, and only by small amounts. So, that’s step one: get an investment plan in place.
Change the way you look at your investments
The second thing I’ve done that’s helped in times like this is that instead of looking at the value of my holdings in some broad index fund, I look at the amount of shares I own instead. This way it becomes more like a game for me. I pick a number in the future and think, “I’m going to own this many shares by then.” So when there’s a market downturn, I get to buy more shares for that same amount of money—which is really what’s happening with your 403b or 401k right now. You’re contributing the same amount each month; the value may be going down but the number of shares you’re purchasing is increasing.
Remember that you’re buying shares in future earnings; sometimes those shares are valued a little less by the market, sometimes a little more. So, it’s like you’re purchasing at a little bit of a deal—you’re getting a discount, which is always a good thing. The bottom line is this: don’t look at the value, look at the number of shares.
Remember this about investment advice
While it’s possible to be “right” about guessing which direction the market is going to go, no one can really predict the timing of an economic cycle. All you can really do is ask yourself how long you’re going to be invested, how long until you need that money, and which direction do you think the economy will have gone over that period of time, on the whole.
Since I can’t time the market, I don’t know where else I would put money right now so I’m not doing anything different. I have heavily invested in my business, and by heavy, I mean not a lot of diversification. What I do have separate from the business is in pretty conservative investments like bonds and real estate and a little bit of stock. I guess the bonds went down like crazy the other day, so, hey, the safe haven wasn’t so safe. I’m no stranger to the experience of investments losing money. But what can you do? They’re still more conservative than equities and it’s a long-term investment for me, so I’ll stick with it.
If I had to guess, I’d say this decline in the market shouldn’t change your plan. But that’s just a guess! If you’re two years from retirement and invested in 90% equities, I would have you revisit your allocation to become more conservative. If you need some resources to figure out what mix of assets you should invest in, I recommend The Bogleheads’ Guide to Investing, The Little Book of Common Sense Investing, The Four Pillars of Investing, and The Intelligent Asset Allocator.
Markets are cyclical; they go down, then they correct, and then they’ll just go back up but it can take a long time and no one can really guess when that will happen. Let’s face it, if we could guess, I wouldn’t be doing this podcast and I wouldn’t be selling software—I’d be playing golf, building things out of wood, and jumping in and out of the market with perfect timing.
In the meantime, build some emotional footing on the number of shares that you’re purchasing, and feel good about that. And don’t forget to budget!
Have your own question for Jesse? Send it to askjesse@ynab.com for a chance to be featured on the podcast. Also, if you haven’t started a budget yet, enjoy less financial stress by signing up for a free trial of YNAB.
