This Today’s Classic post is republished from Physician on Fire. The original post can be found here. Many of you are waiting for the big bear market to rear its ugly head. Well, it's not a matter of if but when. Reading posts like this will hopefully help you prepare for that time and put your mindset in the right place when it does arrive. Feel free to find your way back to this post whenever you need the reminder. Enjoy!
I stepped In from the covered patio to my basement office overlooking the river. It would be at least a few minutes before the maple sap that had been boiling all day on the patio would become syrup at the critical temperature of 219 degrees Fahrenheit, so I thought I’d finish reading some article I had started earlier.
“It’ll be fine,” I said. “I’ll just be a minute” I said.
“PoF!!!” my wife hollered at the top of her lungs. [she actually yelled my given name]
I got up from the distracting computer. The syrup had clearly met and exceeded the target temperature and boiled over. How did I know? The first subtle indication was the two feet of thick smoke from the patio ceiling down, and more of the pitch black stuff billowing up from the boil kettle. I couldn’t even see the ceiling, and this was going to get worse before it got better.
I froze. Then I thought, “Don’t just stand there. Do something!” My wife had similar thoughts and there may or may not have been profanities involved.
So I did something. I took a deep breath, stepped out into the patio, turned off the natural gas, grabbed the handy hot pads, grabbed the smokestack of a boil kettle, and headed for the exit.
Once outside, I took a few more deep breaths, went back into the patio, and opened all the windows. The black smoke dissipated, and I was grateful to see the ceiling again. I half expected to see a layer of black soot, but thankfully, there was none.
I ruined over a gallon of pure, sweet maple syrup, and I’m still working on getting that boil kettle clean, but the house didn’t burn down, and I learned a valuable lesson. NEVER walk away from nearly finished syrup.
Reader: “Hey, PoF, that’s a really great story about your stupidity and all, but I came here to read about money and retiring, not your carelessness.”
PoF: “Be patient, dear Reader, I promise I’m going somewhere with this…”
In the sticky mess I was in, action was required. I couldn’t just stand there and watch the situation get worse. I had to take action to rectify the situation. I had to do something!
Don’t just do something. Stand there!
There are times when our investments appear to be going down in flames. Twice in the last 9 months, the S&P 500 dropped about 10 percent in a matter of weeks. “This is it. The beginning of the bear market” said the doomsayers. They could have been proven right, but both times the markets bounced right back. Eventually, they will be right, and then they’ll say “I told you so.” Of course you told us so, but how many times?
There have been bigger drops in my investment lifetime. The stock market has lost about half its value twice since the year 2000. When this happens, it’s hard not to panic. You log into Personal Capital and see the numbers going down, down, down. You were financially independent a month ago, and now you’re not. You need to stop the hemorrhaging. You need to do something!
John Bogle, Vanguard founder advises investors to resist their urges to make changes amidst a tanking market. In his Little Book of Common Sense Investing, he recommends advising clients to “Don’t do something. Just stand there!”
This phrase, or the one I prefer, “Don’t just do something. Stand there!“, which more closely resembles the original phrase from which it transmogrified, has been around for awhile. I won’t go into all the details (this site does), but one of the more notable utterances of it came from the White Rabbit in Disney’s 1951 animated classic, Alice In Wonderland.
Is “Don’t just do something. Stand there!” good investing advice? Absolutely!
Stay the course. Read your IPS and follow it. Selling in a down market is a great way to lock in your losses. Don’t do it. Ride the wave down and back up. Don’t just do something. Stand there. Be a rock.
Is “Don’t just do something. Stand there!” good investing advice? No Way!
Reader: “whoa, whoa, whoa, you just said…”
PoF: “Just hear me out.”
When the stock market drops, and it drops at least 10% at some point most years, standing there, i.e. doing nothing, may not be the best strategy.
There are at least two or three moves that could have a positive impact on your finances:
It’s not uncommon for people to “wait for a dip,” particularly when investing a lump sum. Yes, this is market timing. No, I don’t condone it. But if you’ve been waiting for the “right time” to get in, do so when the market is down. It may drop further, but you know you’re getting a discount compared to the recent past, and the market has always bounced back.
It is a useful maneuver, and not difficult to employ once you understand the concept. In January of 2016, I took a nearly $40,000 paper loss, which will allow me to deduct $3,000 a year from my taxable income every year for 13 years.
Rebalancing was Step 17 of my 20 Steps to Effective DIY investing. When your asset allocation gets out of whack as it tends to do in down markets, you can sell recent winners to buy recent losers, restoring your desired asset allocation. In essence, rebalancing encourages you to buy low and sell high. These are good things.
What are the take-home messages today? “Don’t just do something. Stand there!” is pretty good advice, but you can do better than just stand there. A better phrase might be “Don’t just do something stupid. Stand there and make a few calculated, shrewd moves.” That’s not nearly as catchy, is it?
Also, if you fail to give your nearly-finished maple syrup the attention it deserves, your entire basement will smell like burnt marshmallows for 10 days. You don’t want that, trust me.