[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.

[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. And today, I want to tell you about a time not too long ago. It’s March 2020, and I’ve just bought a house. And we’re moving in and we’re deciding where everything goes. My wife and I are pretty much on cloud nine knowing that we’ve finally accomplished this goal that we’ve had for so long. We have the house with the yard where our kids play. And as the month ends and we’re starting to get into the COVID lockdowns, I open up my portfolio and realize that the market has dropped 30%. And my wife looks at that and she begins to panic that everything we had saved for and the risk we took in buying the home might suddenly just vaporize right before our eyes. And what was more was my phone started ringing. My coaching clients started calling me one by one saying, “Dylan, what do we do?” And I’m struggling because looking at that level of drop in the value of my portfolio is huge. 30% is not a small number. And I’m struggling with my emotions because the fear is starting to really grip my heart.

[00:01:32] Ladies and gentlemen, I tell that story because it really illustrates a couple of things about how human psychology looks at loss. In the case of my portfolio in March of 2020, yes, the S&P 500 dropped, and yes, I am primarily invested into index funds, which means the total value of my portfolio dropped right along with it. The thing, though, was is overall, I was still very positive in terms of my returns, even if for the year to date of 2020 I was very down. And so there is this idea here to understand like I’m panicking. But actually when I look at it, it’s not that I’ve even, you know, the value of my portfolio has lost value. It’s just it’s not as high as it used to be. And this can be gut-wrenching for some people, and this is panic-inducing for others. And this is one of the reasons that so many people do not actually invest when they’re in their savings phase of life because they’re afraid of this type of loss, and more to the point, they don’t even know what to do when they start experiencing it. So today we’re gonna talk about it.

[00:02:41] And I think it’s important to start off right at the beginning and ask ourselves, “What game is it that we are playing here?” because if you don’t know what game you’re playing and you don’t understand the rules of that game, it is impossible to play. And as I’ve talked about before on the show, there are three stages of life. There is the income stage where you are building income. You’re increasing that most important indicator of how wealthy you will end up being. Then, there’s the savings phase, where you’re sacking away as much of that income as you possibly can. And then, there’s the investing phase, which is the phase most people don’t get to. And investing is different from savings in that when you’re saving, yes, you might invest in the stock market, but the investing phase would theoretically be when your financial assets are producing more than your income, and therefore focusing on that portfolio of investments is becoming your full-time job if you haven’t hired it out. But in all these cases, these are long-term games. You don’t win, quote unquote, investing. You’re playing a long-term game. And it’s important to understand that just like your health, just like living a healthy life or developing a relationship with your kids, there is no defined point in which we hand you the gold star and say, “Congratulations! You won this game.” It is a lifelong, constantly evolving process. And when it comes to saving money and investing in things like the stock market so your money will make its own money, it is a long-term game — one that we don’t get to a point where we have won. And that means that we have to think differently than the short-term nature that we’ve been so diligently trained to think in society. We need to start understanding that the game that we played in school where you had a semester and you got a grade and the game that we played in college or the game we play at our job, the game that the corporations play with their earnings where it’s all short-term short-term short-term, our lives — turns out — is a long-term game, and our savings and our finances go right along with that.

[00:04:49] And if there’s any one guarantee once you are in the saving part of your life that you’re going to run into is that when you are investing in a market — and this is any market — you will be down at some point and likely many points over the stage of life that is your saving stage and even into your investing stage. No market is immune to drops. And this is one thing that people will seek of, like, I want a good rate of return with no risk whatsoever. That is not at all how this works. Such a market does not exist because risk correlates to the return in the market. And so the more risk you take on, the higher the potential upside. But risk is not a free thing. This is why when somebody says, “Well, this has a 20% chance of failure,” we’re like, “Well, yeah, but it has an 80% chance of success.” But that’s also one in five. If I’m betting your life on a one in five chance, chances are good you’re not gonna take it, but you would might take it with your money. And understanding that when we look at it, we have to ask ourselves, “What is our appetite for risk? How much risk do you want?” Me personally, I’m not exactly the most risk-seeking person. Like, I can do the math. I can figure this out. I could figure out how much risk I can take in a portfolio and how many bets I’d have to make and really risky things so that I’ll probably get one flyer that’s gonna just explode, but the other ones are gonna go into bankruptcy. This is why so much wealth creation when on an explosive level is created with startups because we all focus on the startups that were successful where the risk was sky high. But it worked, and we’re like, “Oh my God! That’s the thing I want. I need to get in that game.” What we don’t see are the hundred other companies that started and failed that looked just as good on the front side as the one that was successful.

[00:06:36] So it’s very important to understand that if we’re chasing really high outsized returns, we’re going to be taking on more risk. And understanding our appetite for that is critical to being able to save effectively. And understand this: volatility — that is, the ups and downs of the market — are the price of admission to play the game at all. And you might say to yourself, “That’s why I’m only sticking it in a savings account. It’s a really low interest rate, but at least it’s safe.” But no, it’s not because inflation is volatility. It’s just harder to see. We are playing volatile games, and that volatility is the price of admission for every game we play. It’s what we play with our health. It’s what we play with our relationships. It’s what we play in school and our job with our kids, with our neighbors, with our friends. This is real, and there’s no avoiding it. So understand the game you’re playing, and let’s learn how to play it really well.

[00:07:34] And in the savings stage of life, the best piece of advice that anyone can give you is if you can, just keep buying. Ignore the static, ignore the noise, ignore what’s going on in the market, and just keep buying. And you don’t have to take my word for it. There is a book where I first ran into this concept laid out in a way that is accessible to I think to everybody, but also far more elegant than I could ever put it. And the book is “Just Keep Buying” by Nick Maggiulli, and I’m certain that I’ve screwed up that last name, so I apologize for that. But he lays it out way better than I could ever say it. But this is not new. His observation isn’t, like, it’s just the brand new thing. We’ve had this observation. We’ve understood this for a long time. Warren Buffett talks about it all the time. Jack Bogle, the founder of Vanguard Financial, he talked about it all the time. When you’re in the saving stage of life, just keep buying. Ignore the volatility. Understand the price. Look at the risk. Understand that risk. Pick what you need to fit that risk profile, but just keep buying.

[00:08:39] And understand that the return — and this might be the most important part of today’s episode is to understand that the return you see when you open your brokerage account is not real. It’s the current state. It’s a snapshot of reality, but it’s not real until you sell. So like in 2008 when the market was going down and everyone was running for the hills, I’ve had people ask me, “Dylan, in 2008, how much money did you lose?” And the answer was, well, none. I didn’t lose a single thing. I didn’t lose one dime. And they say, “But that’s impossible. The market dropped X amount, and it was Armageddon for a while.” I was like, yeah, yeah, that’s true. “What did you do?” Nothing. I just kept buying. I just kept putting whatever money I could into the market and ignored all the noise because even though I was looking at my portfolio and I’m like, man, I’ve lost 50% of the value, that was a made-up number. It doesn’t exist until I sell. Once I sell, then I have what’s called a realized loss, and I’ve locked in my loss. This is where people will lose everything. If you have somebody who’s like, “Yeah, when 2008 happened, I lost all this money and it’s never come back.” The question that I always ask was, “Well, did you sell?” because if you sold, of course it didn’t come back. But if you rode it out, in terms of the stock market at least, you were made whole less than 12 months later because the market went way down, hit the bottom, and came right back up.

[00:10:07] And there are people who will say, “Well, I’m gonna sell when it’s high, and I’m gonna buy again at the bottom.” But nobody knows where that is. And that’s, of course, the problem. You’re trying to predict the future, and there are legions of investment bankers and analysts and companies and brokerages and financial advisors who will try to tell you that they and they alone can predict the top and the bottom of the market and they’re gonna help you out and they’re gonna do all this stuff and it’s just gonna cost you a whole heck of a lot of money. But the reality is they don’t know. So if you don’t sell, you don’t have the loss. And if we understand that something about things like the stock market is that individual stocks will go up, they’ll go down, they’ll go bankrupt, they’ll go boom. But the market in general over time is a weighing machine that weighs the value. And over time, they continue to go up into the right. And so that’s one of those things that, yes, past performance is not indicative of future performance. But there’s been plenty of times where people have said the sky is falling, but in reality it wasn’t.

[00:11:14] When you are in the saving part of life and you’re looking at a potential loss, you need to fight the fear and understand that you’re playing a game. Understand what game you’re playing, understand what your risk is, and understand that the volatility is the price of admission to the game. And let me give you a case study where I think that a lot of people will pull up charts and they’ll listen to people, you know, brokers online, and they’ll talk about all these things, but they don’t quite get it. So let me give you a case study. I want to tell you about a brand new IPO in 2003. It’s a company that we think might actually be this big thing. In fact, it’s taking on — it’s an upstart. It’s taking on a leader, and they have this idea of delivering DVDs through the mail to people, and everyone thinks we’re crazy because, you know, why would you want to get a DVD through the mail and have to, like, go on a website and pick it up and wait a couple of days when you could go down to Blockbuster right now and rent it from a physical store? It seems insane, but of course I’m talking about Netflix. So if we had invested in the Netflix IPO knowing what we know now — we know we’re gonna be very wealthy — and we just kept buying. We just said we’re gonna keep putting in $5,000 a year. Today, at the time of this recording, you would be sitting on $10 million. And during that time, on average, you would’ve enjoyed a rate of return on an annual basis that was double that of the boring S&P 500.

[00:12:48] Now, most people look at that chart and Netflix and go, “Yep, that’s it. I have to do that. That’ll make me really wealthy.” And we can do this with Amazon and we can do this with Apple and other companies that were, well, in Apple’s case, they had been around for a while, but it was, you know, in 2003, Apple was a laughing stock. The dominant smartphone company, the smartphone that had everybody’s idea of what a smartphone was going to be and how it could work and all of these different things was a company called Blackberry. And they had this idea that you could put email on a phone, and they were dominant in the market. If you would’ve said, “Hey, Apple is gonna be one of the most valuable companies in the world, and this bookstore Amazon, they’re gonna dominate the entire retail market — oh, and by the way, Blackberry is gonna go bust and Apple’s gonna come up with a better phone,” people would have laughed you out of the room. So the ones who got into Netflix were taking a gigantic risk. And as I just illustrated, if we had invested in the IPO and then continued to invest $5,000 a year, we’d be sitting on $10 million today, and everybody wants that story. The problem is you couldn’t have known it upfront and you would’ve had to have been absolutely stone cold during the ride, including right now. Because the question you have to ask yourself if you wanted to go on the Netflix ride, if I could put you back in 2003 and say, “I’m gonna wipe your memory, but I’m gonna give you this sheet of paper that says ‘Just keep buying Netflix,’ can you handle a drop of 75% of your total portfolio value when it’s a hundred percent Netflix?” Could you do it? Could you go in one day and look and see that your portfolio has lost 75% of its value in a few short months? And then, you click on all the finance shows and they’re saying, “It’s the end of Netflix. See? We told you Blockbuster was a better bet.” Could you have done it? Because Netflix has done it three times, including right now. Netflix is in a major downturn where their stock lost almost 80% of its value in the course of a couple of months.

[00:15:03] Go over to Yahoo Finance and take a look at the chart. And so if you look at that chart, and I’ve gone back. I’ve backtested this portfolio. From June to October of 2004 — so from the IPO, you would’ve had a 400% return. Amazing. And then, from June to October of the following year, your portfolio would have gone down a total of $53,000 or 74% over that period of time from June to October of 2004. And the portfolio value, even if you just kept buying, would not have returned to that previous high until March of 2006 over a year and a half later. Could you have handled that with ice water in your vein and just resisted the urge to sell everything to try to be safe? And if you did, could you have done it again? Because in July of 2011 to September of 2012, this portfolio would have lost $715,000 of value or an 80% drop from July 2011 to September 2012. Could you have stayed over a year watching your portfolio value just slide right off a cliff? You would’ve gone from $900,000 to under $200,000 over the course of those 14 months. Could you have handled it? And it took a year after it hit bottom in September of 2012 to regain its previous value. And then, of course, that brings us to right now. October of 2021, your portfolio would’ve been worth $17.5 million if you had been able to stay in buying $5,000 a year through those previous two downturns. But like I said, the portfolio value right now is only worth $10 million, which means you would’ve lost $7.5 million from October 2021 to right now. But that’s not even the worst part. It bottomed out at $4.4 million or a loss of $13.1 million or a 75% drop. And the portfolio that’s a hundred percent Netflix has yet as of this recording to regain its previous high.

[00:17:34] When I talk about volatility, ladies and gentlemen, this is what I’m talking about. Yes, a stock like Netflix has enjoyed amazing returns. And man, that ride, I don’t know if I could hold on because on an individual stock, you could have looked at it and said, “Well, I mean it still went up and to the right over time.” All stocks do that, but not all stocks do. The market does that, but not all stocks do. And so understanding that very critical difference between these two things is how you handle your loss. Because remember Blackberry? Blackberry’s stock went skyrocketing upward and hit a hundred dollars per share, and it’s currently trading just north of $5 a share, and it has yet to recover. And right now, no one expects it to. In fact, if somebody came to you and said, “Hey, Blackberry has a revolutionary AI messaging system that they’re putting into their phones and they’re gonna retake their market share,” well, ladies and gentlemen, we’ll be laughing ’em out of the room now, wouldn’t we? Because we would assume that Apple and Google with their Pixel and iPhone would be doing the same thing. But we don’t actually know that.

[00:18:44] So when I talk about, ladies and gentlemen, how to handle your losses, this is what I’m talking about because when you’re looking at this to understand that you’re going to have volatility and you have to decide how much you could hold onto because if you can’t hang with the losses from an index fund just because the market went up and down, then individual stocks are not worth the risk to you. If I’m telling you this Netflix story and you’re sitting there in a state that’s anything other than “Yeah, I could have hung out,” “Yeah, that sounds good. I’d like to let it ride,” which very few individuals do, then individual stocks are not for you. And you need to have a plan before you go.

[00:19:23] So how do you handle loss? Here’s five tips on how to do it. Number one: understand your risk tolerance and have a savings plan to match. So, like, for me, I’m not exactly risk-seeking. I don’t go pick individual stocks. I do index funds. But I’m not exactly risk-averse. So I’m a hundred percent into the market. I do nothing but equities. Now, people will say, “Well, you should have some bonds,” and maybe so, but I’m seeking more risk than having some bonds in my portfolio and I’m okay with that. I’m okay with just keep buying, and I’ve been doing it for decades at this point.

[00:19:57] Which brings us to number two: have a plan before you need it and are overly emotional. If you were to buy into Netflix and you wanna go on that type of ride, you can do it. But understand what your goals are. If you’re saying, as soon as I’ve doubled my money, I’m out, sell and be done and walk away. But write that down before you send one cent into the market. So like for me, when I’m sitting there March 2020 and I’m looking at my portfolio and saying, “Man, the S&P 500 just lost 30% of its value in a month. That’s a heck of a drop,” I pulled out my savings plan and went — and it says right at the top in big, bold letters — just keep buying. And then, right underneath it says, buy and hold. That’s my strategy. Buy and hold. Buy it; hold it. Don’t sell it. I will sell it when I’m into the investing phase. But in the savings phase, I buy and I hold. If I need to rebalance, I just buy differently. I don’t ever sell anything, and that means that I’m never locked in a loss.

[00:20:59] Which brings me to number three: time in the market always will beat timing the market for the vast majority of people. Yeah, some people get it right every once in a great while, but that’s a rare thing. It doesn’t happen a whole lot. And so if you are an average retail investor and you’re in the savings part of your life, it’s really, really important for you to just know. The longer I stay in, the more I tend towards really good returns because there is no 20-year period of time in the S&P 500 in which it’s returned a negative return to investors. There have been 10-year periods of time where it’s gone nowhere or been less like the 1970s, early 2000s. But if you put 10 years on either end of that, man, you are in the money and not by a little bit — by a lot. And so time in the market will always beat timing the market. Just leave things alone.

[00:21:58] Brings me to number four: diversified holdings. The easiest way — one of the best advantages of low-cost index funds is the fact that you are able to get market diversification. One of the things that Netflix and Amazon and Apple are all really vulnerable to is different types of risk. Market risk is the risk that something affects the entire stock market. They all have that risk. But Apple, well, it has political risk, right, especially when you’re looking at how reliant on telecoms they are and they’re reliant on regulations. And then, they have political risk from their relationships with their supply chain, which then brings in supply chain risk, which brings in labor risk, and on and on and on. Netflix has the same thing. Microsoft has the same thing. 3M has the same thing. But the market as a whole only has market risk. So by buying an index fund or the right index funds that are true to how you can handle risk, you get superior, diversified holdings that have diversified away all those other risks, and the only risk you’re taking on is market risk. It’s really hard to beat.

[00:23:08] And last but not least, number five: hire a professional. Lik,e one of the things that I’ve said is that do I believe that financial advisors are worth the cost? No if — and that’s the important thing — if. No, they’re not worth the cost if you can have enough ice water in your veins to not hit sell during a panic. If you don’t, then a financial professional is worth their weight in gold ’cause a big thing that they are going to do for you is going to talk you off the ledge before you hit the sell button because you have to call them to sell anything. That’s their entire job. Yeah, they can go through and they can educate and they can pick funds for you and all this other stuff. And most of the time, as I’ve laid out, unless they have the letter CFP after their name, they’re not a fiduciary, so they don’t have to pick funds in your interest. They can pick funds in their interest. I don’t think that’s a great deal. But if you can’t not hit sell during a panic, then it’s an absolutely good deal ’cause you’ll still make money in those funds. You just won’t make as much. So you can hire a professional.

[00:24:16] So just to go through that list real again real quick. Understand your risk tolerance and have a savings plan to match. That’s number one. Number two: have a plan before you need it, and I think a great plan is always buy and hold. Number three: time in the market always beats timing the market. Number four: diversified holdings. And number five: hire a professional, and one professional you can hire to give you some education and help talk you through it is me. I’m a financial coach. I’m not a financial advisor. I’m a financial coach, which means that I give you the education, the tips, and the tools that you need to make the best decision for you. And for that, yes, I’d charge a fee, but it’s not a percentage of your total assets under management.

[00:24:58] And because we’re talking about investments, ladies and gentlemen, it’s always important to understand that you as the investor are the one who always bears the risk. You’re the one who has to make the choices. Nothing in the show is financial advice. This is my opinion from my experience as a coach that I offer to you as a free service because I want to see you be successful. I want you to be able to have the conversations and the peace of mind that goes with having good, solid strategies that are building wealth so your money is making its own money. And you still have to make those choices. One of the many choices you could make would be hiring a professional to come help you with your education.

[00:25:35] And I know exactly how this goes because in 2020, I had to follow all that same advice to understand that I had chosen the path where a 30% drop, yeah, that happens about every 20 years or so, and this was expected. And when I looked at it, I started right at the top of my financial plan. It said, “Just keep buying,” and then underneath it said, “Buy and hold.” And then, right underneath that it said “In a down market, increase contributions.” And that’s what I did. I logged right into Vanguard where my 401(k) and my IRAs are, and I maxed out all my contributions. In fact, I opened up a taxable account and started throwing every available piece of cash I had into the taxable account buying into the down market because number four on my plan was when the market is down, stocks are on sale. Buy on sale. And I did. And I plowed every cent I could into it. And ladies and gentlemen, I’m here to tell you I am so happy I did because those dollars that I put into that down market, just like the dollars that I put into the down market of 2008, are the best performing savings that I have ever had. And it’s possible for each and every one of you, too.

[00:26:55] Outro: Thanks for listening. If you like what we do here, please hit that subscribe button. Leave us a rating and review. And share the content with somebody who would benefit from the message. You can follow us on Instagram, Facebook, and Twitter, all @fiscallysavage. And head over to fiscallysavage.com to get our free tools, suggested reading, and everything else you need to take control of your financial life and live free.