Scary markets – March 2025 edition
We are receiving several questions about the stock market, and whether we should get out of the way of an impending fall. This is a normal question to have. Any meaningful response should be personal, based on you, your situation, and your financial plan. Nevertheless, there is a similarity to how we talk to our clients about the question. If you are feeling apprehensive about the stock market, this post may give you some food for thought, and perhaps some comfort. I structured this post as a short response to a question, followed by a longer one for those who like the details!
The Question
I will frame this post as though responding to the following question:
“The market is tanking! Should we sell?”
A short, and personal, response
Before addressing the question of the markets, I always like to start with you and your life. Has your vision for your life and finances changed? If so, we should talk. If not, then remember that we have planned for down markets. They are part of the regular rhythms of finance. A rather elegant way to encapsulate your vision would be to have a “Statement of Financial Purpose,” kind of like a mission statement for your life and money. Here is my personal version:
I want to spend time with loved ones, in nature and unique environments. Financially, I want to live for today, AND care for my family’s future health.
When I check in with this statement, it still feels true. My family finances are aligned with this purpose. I have pockets of money to support my current life (cash flows, emergency funds, college savings). The money in those pockets is not invested in the stock market. Then, I have money for my family’s future. That money is invested in the markets. History suggests that the best way to manage long-term money is to keep it invested.
Since my vision for my life and finances is unchanged, I am sticking with the plan. Our plan includes the risk of short-term market declines. Our current life won’t be affected by short-term market ups and downs.
Does that mean I won’t be emotionally impacted? No! Read on for my thoughts on that matter…
A Longer Response
First of all, good question. I can feel the concern. We know that the stock market has had, and will have, periods of decline. Remember 2022 or 2008? I do. For context, I went back and re-read some of my thoughts from the middle of the 2022 bear market. In reading, I noted a similar emotional tone to today. And yet, my investments, and my long-term financial picture are stronger today than they were in 2022. Here is the link:
Sigh. Evaluate. Do? A guide to investing in a down market
If now is the beginning of another such down market, it would be lovely to avoid the pain by selling. I can taste that desire. It feels as visceral and compelling as the smell of freshly baked bread. Sprinkle on the salt of a tumultuous world and the heated rhetoric from our leadership, and that warm loaf of market timing is indeed tantalizing.
Emotions, Investors and the Markets
We should be aware that such desires are the products of emotions. And emotions are incredibly powerful. Oftentimes, the emotional labels that are attached to investment-decision making are fear and greed. I dislike those words because they sound so extreme. I think better words for us, and for our clients are “worry and want.” Sometimes, like right now for many of us, the worry is louder than the want. That is not an irrational emotional state.
The stock market is not immune to the emotions of worry and want. One way to gauge the emotional state of the market is to look at the market valuation. Valuation is a comparison between stock prices in comparison to some underlying measure of worth. After two plus years of steady stock market gains, the US stock market is at a historically high valuation. In other words, the US stock market is currently feeling want most loudly.
What to do about it
This is the million dollar question. The problem with taking action based on emotional mind-spaces is that the math is not in our favor. Predicting the near-term movements of the market is easy. Getting it right is a coin flip. In other words, there is a 50% chance that such an action will work out in your favor (in the short-term). Then there is the problem of when to buy back into the market. Presumably your financial plan, like almost all of our financial plans, needs some investment growth to care for your future life. Thus, when will you decide to buy back in? Again, the buy decision ends up being a coin flip. The chances of getting two predictions correct in a row on a coin flip is 25%. One in four people will get it right. How much of your financial life do you want to expose to a 25% chance of success?
How DO we deal with market risk and scary markets at Trail Financial Planning?
For us at Trail Financial Planning, we are not market timers. We seek to align your finances with your life and your life vision. There are three primary legs to the “investment component” of our planning – your time-frames, your financial planning, and your appetite for returns and risk (AKA Risk tolerance).
Time-frames
This is a projection for when you will need your money. Our general rule is, “If you need money in the next year, it absolutely should not be in the market. If you need money in the next 2 – 5 years, it probably should not be in the market. For money you don’t need for 5+ years, investing in the markets may make sense. For our clients, if you want to view our tabulation for your “time-frames,” ask your advisor to point you to it.
Your Financial Planning
We use financial planning tools to analyze how different investment plans will support you and your future life. Most people need a certain about of investment return, and are able to withstand a certain level of risk, in order to live their best life. This is a very long-term projection. It does not help assuage any short-term feelings of pain when the markets are down. For our clients, If you want to re-visit our most recent exploration of your financial planning projection, ask your advisor to point you towards your most recent assessment.
Your Appetite for Planning (AKA your Risk Tolerance)
This is a much more subjective measure. It encapsulates your emotional state, and how you feel about your investments. Your risk tolerance may change over time. If you are feeling the worry creep up, your risk tolerance may be changing. It may change so much that you are losing sleep. If so, it would make sense to schedule some time with your advisor. They can advise you on how your financial planning (future life) might be impacted by making strategic changes to your investment strategy.
The Bottom Line
Investing is a long-term game. The fundamental reason for investing today is no different than it was 1, 3, 5, 10 or 20 years ago. We know that life will cost more in the future, and stock and bond-market investments, tied to the economics of those business and government operations will likely deliver better results 5, 10 or 20 years into the future. Notice that I dropped the 1 and 3 from the future projections. That is intentional!
Have a purpose. Have a plan. Live your best life today while still planning for the future. That is financial planning!
Investment Disclosure
Investments involve risk. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee that investment strategies presented herein will be successful.
