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What Not to Do When the Market Is Down with Peter Mallouk

By Money News Network

In this episode of Money Rehab with Nicole Lapin, Peter Mallouk offers insights on navigating volatile markets. He explains that regular market downturns, like the current situation, are a normal part of investing. Mallouk emphasizes the importance of maintaining a long-term perspective, avoiding behavioral pitfalls driven by panic, and rebalancing portfolios during downturns.

He also shares strategies for seizing opportunities amidst market turbulence, such as tax-loss harvesting and exploring affordable private investments. Mallouk highlights the role of financial advisors in guiding clients through emotional challenges, providing reassurance, and aligning portfolios to suit individual risk profiles and goals during market swings.

What Not to Do When the Market Is Down with Peter Mallouk

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What Not to Do When the Market Is Down with Peter Mallouk

1-Page Summary

Understanding Bear Markets and Recessions

Peter Mallouk explains that bear markets occurring on average every four to five years with around a 20% downturn are a predictable part of investing. He describes the current situation as a "garden variety" market correction, milder than the 2008 global economic crisis.

Investor Psychology and Avoiding Behavioral Pitfalls

Mallouk notes that panic often prompts investors to exit and re-enter markets at inopportune times, locking in losses. He argues for maintaining a long-term perspective and sticking to a plan to avoid these psychological traps. Advisors play a key role in assessing risk tolerance and ensuring suitable portfolios for clients' goals.

Investment Strategies For Downturns

Mallouk recommends rebalancing, which forces buying "on sale" stocks, and tax-loss harvesting to offset capital gains taxes. He suggests exploring private investments, which can be more affordable during recessions, and maintaining a bond allocation for pre-retiree cash flow.

The Value of Financial Advisors in Volatile Markets

According to Mallouk, advisors guide clients through emotional challenges, providing reassurance and perspective amid rapid market changes. They leverage opportunities like rebalancing and tax-loss harvesting during downturns. A diversified portfolio aligned with the client's risk profile can deter emotional decisions.

1-Page Summary

Additional Materials

Clarifications

  • The 2008 global economic crisis was a severe financial downturn characterized by a housing market collapse, banking failures, and a deep recession. It led to a global financial meltdown, with significant impacts on economies worldwide, triggering a prolonged period of economic hardship. Comparatively, the current market correction, as described in the text, is considered less severe and is being likened to a "garden variety" correction, implying it is not as extreme as the 2008 crisis.
  • Rebalancing involves adjusting the proportions of assets in an investment portfolio to maintain the desired level of risk and return. When certain assets decrease in value, selling some of the appreciated assets and buying more of the underperforming assets can help maintain the portfolio's target allocation. Tax-loss harvesting is a strategy used to sell investments that have experienced a loss to offset capital gains taxes, thereby reducing the investor's tax liability. This can be particularly beneficial during market downturns when there may be more opportunities to realize losses.
  • Private investments can become more affordable during recessions because economic downturns can lead to lower valuations and pricing in the private market. This can present opportunities for investors to acquire stakes in private companies at a potentially discounted rate compared to when the market is thriving. Additionally, during recessions, some private companies may seek additional capital infusion, offering investment opportunities to interested parties. Overall, the economic environment during a recession can create conditions where private investments are more accessible or attractively priced for investors looking to diversify their portfolios.

Counterarguments

  • While bear markets may occur on average every four to five years, predicting their timing and impact with precision is challenging, and past patterns do not guarantee future occurrences.
  • Describing the current market correction as milder than the 2008 crisis may not account for the unique economic factors and potential long-term effects of the current situation.
  • While maintaining a long-term perspective is generally sound advice, it may not be suitable for all investors, especially those close to retirement or with changing financial circumstances.
  • The effectiveness of financial advisors can vary, and some investors may achieve better results through self-management or using automated investment platforms.
  • Rebalancing and buying "on sale" stocks during downturns assumes that the market will recover and that the chosen stocks will rebound, which may not always be the case.
  • Tax-loss harvesting can be beneficial, but it also requires careful consideration to avoid wash-sale rule violations and to ensure it aligns with the investor's overall tax strategy.
  • Private investments often come with higher risks and lower liquidity, which may not be suitable for all investors, especially during economic uncertainty.
  • While bonds are traditionally considered a safer investment, especially for pre-retirees, low interest rates and inflation can erode their value, making them less attractive in certain market conditions.
  • The value of a diversified portfolio is widely acknowledged, but diversification alone does not eliminate risk and cannot protect against market losses in a widespread downturn.
  • Emotional decision-making in investing is a complex issue, and while advisors can provide support, investors' emotions and biases can still influence their decisions despite professional guidance.

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What Not to Do When the Market Is Down with Peter Mallouk

Understanding Bear Markets and Recessions

Amid financial fluctuations, Peter Mallouk and Nicole Lapin provide insight into bear markets and how they differ from the 2008 global economic crisis.

Bear Markets Are a Predictable Part Of Investing

Peter Mallouk explains that bear markets occur, on average, every four or five years with a typical downturn of around 20%. He notes that these are events that experienced professionals expect as part of the investment cycle.

Bear Markets Occur Every 4-5 Years, Averaging a 20% Drop

Mallouk mentions that this is the third time in five years that we’ve experienced a bear market with a drop of 20% or more. This pattern reiterates the cyclical nature of bear markets as a predictable occurrence within the investing landscape.

Market Downturn: A "Garden Variety" Correction, Not Unprecedented or Existential

Nicole Lapin describes the current market situation not as a catastrophe like the 2008 "Armageddon," but more as a standard "garden variety" market correction. Mallouk agrees, stating that the current bear market, while significant, would be on the "lower end of drama" compared to past bear markets.

Downturn Milder Than 2008 Global Economic Crisis

Mallouk comments on the mildness of the current economic state, suggesting that if we are in a recession, it's a mild one with unemployment under 5% and strong corporate earnings continuing. ...

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Understanding Bear Markets and Recessions

Additional Materials

Clarifications

  • Bear markets are periods of declining stock prices, typically defined by a 20% or more drop from recent highs. They are a natural part of the market cycle, occurring every few years. Investors expect bear markets as they are followed by periods of recovery and growth. Understanding their cyclical nature helps investors prepare for and navigate through challenging market conditions.
  • The comparison between the current market downturn and the 2008 global economic crisis revolves around the severity of the economic conditions and the potential threats to the global financial system. The 2008 crisis was characterized by a near-collapse of the banking system, posing an existential threat to the global economy. In contrast, the current downturn is seen as milder, with a more stable financial system and economy, indicating a less severe impact compared to the events of 2008.
  • A "garden variety" correction in the market typically implies a normal, expected adjustment in stock prices without extreme or catastrophic implications. It suggests a correction that is within the usual range of market fluctuations and not a severe or unprecedented event. This term is used to convey that the current market downturn is not as alarming as past crises like the 2008 global economic meltdown. The phrase aims to provide perspective ...

Counterarguments

  • While bear markets may occur on average every 4-5 years, predicting their exact timing and impact can be challenging, and past patterns do not guarantee future occurrences.
  • The fact that this is the third bear market in five years could suggest increased volatility and a deviation from the historical average, which may warrant further investigation into underlying causes.
  • Describing the current market downturn as a "garden variety" correction might downplay the potential risks and the impact on investors, especially those who are not well-diversified or are nearing retirement.
  • Comparing the current downturn to the 2008 crisis may not fully acknowledge the unique challenges and economic conditions of the present, such as different triggers, policy responses, and global interconnectivity.
  • Even if unemployment is under 5% and corporate earnings are strong, these indicators may not fully capture the economic hardship faced by certain sectors or demographic groups.
  • The a ...

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What Not to Do When the Market Is Down with Peter Mallouk

Investor Psychology and Avoiding Behavioral Pitfalls

Panic Prompts Irrational Investor Decisions in Downturns

Peter Mallouk and Nicole Lapin explore the psychological pitfalls that investors encounter, especially during market downturns.

Investors Exit and Re-enter Markets Poorly, Locking In Losses

In their discussion about the dark theater of investor panic, Lapin and Mallouk compare the fear during bear markets to the tension felt in a horror movie. Despite knowing what might happen next, investors often make poor decisions out of fear. This can result in the detrimental strategy of exiting and re-entering the market at inopportune times, effectively locking in losses.

Mallouk has observed a pattern where the average American investor buys stocks, watches their value drop by 20-30%, and then out of fear sells and switches to cash. When the market begins to recover, these investors re-enter, usually too late, thereby locking in their losses. He notes that people tend to exit the market at the worst times and re-enter at also the worst times, a clear indication of panic-driven decision-making.

Maintain Perspective and Stick To a Long-Term Plan to Avoid Traps

Mallouk argues for maintaining a long-term perspective to avoid falling into these psychological traps. He cautions investors against heeding the advice of those who claim to know exactly what the Federal Reserve will do or where the market will head. The rapid market movements often incited by platforms l ...

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Investor Psychology and Avoiding Behavioral Pitfalls

Additional Materials

Clarifications

  • "Locking in losses" in investing occurs when an investor sells an asset that has decreased in value, realizing a loss on that investment. By selling at a lower price than the purchase price, the investor "locks in" or solidifies the loss. This action crystallizes the negative return on the investment, making it a realized loss on the investor's portfolio. It is a common behavioral mistake driven by emotions like fear or panic, often leading to selling low and missing out on potential future gains if the market recovers.
  • Financial advisors play a crucial role in evaluating how much risk an investor is comfortable with (risk tolerance) and ensuring that the investments in their portfolio align with their financial objectives and constraints (portfolio suitability). By understanding a client's risk tolerance, advisors can recommend investments that strike a balance between risk and potential returns. Assessing portfolio suitability involves tailoring the investment mix to match the client's goals, time horizon, and financial situation, aiming to create a diversified portfolio that aligns with the client's risk profile and objectives. This process helps investors avoid taking on too much risk or investing in assets that may not be suitable for their financial circumstances.
  • During market downturns, investors can fall into psychological traps that lead to irrational decision-making. Fear and panic often drive investors to make impulsive choices, such as selling assets at low prices out ...

Counterarguments

  • Investors may sometimes make rational decisions to exit the market based on their individual circumstances, such as a need for liquidity or changes in their risk tolerance, rather than purely out of fear.
  • The concept of market timing is controversial, and some research suggests that certain active management strategies can outperform the market, challenging the idea that it is always a mistake to exit and re-enter the market.
  • The effectiveness of financial advisors is varied, and some investors may achieve better results through self-education and self-management of their portfolios.
  • The role of social media and information platforms in investor decision-making is complex, and not all investors are equally influenced by platforms like Twitter.
  • Long-term perspective is generally sound advice, but it may not be suitable for all investors, especially those nearing retirement or with short-term financial goals.
  • The assumption that all investors who sell during downturns are acting irrationally may overlook the co ...

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What Not to Do When the Market Is Down with Peter Mallouk

Investment Strategies For Downturns

Understanding how to manage investments during market downturns can significantly impact long-term financial health. Peter Mallouk discusses valuable tactics to employ during such times, emphasizing strategies like rebalancing, tax-loss harvesting, exploring private investments, and maintaining a bond allocation.

Rebalancing & Tax-loss Harvesting: Valuable Down Market Tactics

Rebalancing Forces Investors to Buy "On Sale" Stocks, Boosting Long-Term Returns

Mallouk is a strong advocate for rebalancing in a bear market. Rebalancing involves returning your portfolio to its original asset allocation; for example, readjusting an 80% stocks and 20% bonds portfolio back to its intended configuration when a market dip causes an imbalance. He recommends selling bonds, which then take up a relatively larger share of the portfolio, and buying stocks that have fallen in price. This approach, referred to as "opportunistic rebalancing," can set investors up to benefit more significantly once the market bounces back.

Tax-loss Harvesting Offsets Capital Gains Taxes

Tax-loss harvesting is another tactic Mallouk favors. This strategy involves selling securities that have experienced a loss to offset taxes on both gains and income. The idea being, an investor can sell a stock like Visa following a drop in value and then immediately purchase a similar stock like MasterCard. The realized loss can be claimed on tax returns, possibly enhancing year-end returns by adding tax savings. Mallouk explains that tax-loss harvesting is executed regularly, provided market conditions are favorable, such as lower volatility and sufficient liquidity.

Exploring Private Investments For Opportunities in a Down Market

During recessions, Mallou ...

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Investment Strategies For Downturns

Additional Materials

Counterarguments

  • Rebalancing may not always lead to higher returns if the market continues to decline after purchasing more stocks, or if the stocks bought do not recover as expected.
  • Tax-loss harvesting can be complex and may not always provide the intended tax benefits if not done correctly, especially considering wash-sale rules and the need for careful coordination with overall tax planning.
  • Private investments often come with higher fees, less liquidity, and more risk, which may not be suitable for all investors, particularly those who are not accredited or lack the expertise to eva ...

Actionables

  • You can set calendar reminders to review your investment portfolio quarterly for rebalancing opportunities, ensuring you're sticking to your intended asset allocation without having to constantly monitor the market. By scheduling these check-ins, you can systematically buy or sell assets to maintain your desired investment balance, which can be particularly useful after market shifts that may have thrown off your original allocation.
  • Create a simple spreadsheet to track the performance of your investments, highlighting those that are underperforming for potential tax-loss harvesting. This tool will help you identify which assets might be sold to realize a loss, which can then be used to offset taxable gains. By keeping this record, you can make informed decisions at the end of the financial year or whenever you need to optimize your tax situation.
  • Start a savings plan specifically for investing in private markets, ...

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What Not to Do When the Market Is Down with Peter Mallouk

The Value of Financial Advisors in Volatile Markets

Peter Mallouk discusses the critical role that financial advisors play in helping clients navigate through the emotional and psychological challenges of market downturns and in leveraging market conditions to their advantage.

Advisors Guide Clients Through Emotional and Psychological Market Downturns

During times such as bear markets, financial advisors play a therapeutic role, providing their clients with reassurance and guidance. In these emotionally and psychologically challenging times, it becomes crucial for clients to have someone to reaffirm the strategy and setup of their portfolio. Mallouk believes that empathy is key in advising clients during these periods and compares the need for reassurance to people seeking comforting words in times of stress, like after 9/11. He emphasizes providing education and emotional support, assuring them that "it's going to be okay."

Advisors as "Therapeutic" Guides For Reassurance and Perspective

Mallouk’s discussion suggests that financial advisors provide perspective amid rapid and emotionally-driven market changes, acting as therapeutic guides. He views the advisor's role as both educational and supportive.

Advisors Can Leverage Market Conditions

The current unpredictable times, where even presidential advice can sway the markets, highlight the value of having a financial advisor to steer through such volatility. Mallouk points out that advisors can help clients take advantage of opportunities during volatile markets, including making strategic tax trades.

Rebalancing, Tax-loss Harvesting, Alternative Investment Opportunities

In discussing how financial advisors leverage market conditions, Mallouk emphasizes rebalancing in a down market and tax-loss harvesting. These strategies assist clients in improving their positions in both a short-term tax context and a long-term investment growth context. By performing this invisible work behind the scenes during downturns, advisors also explore alternative investment opportunities for their clients.

Comprehensive Financial Plan, Diversified Portfolio Defend Against Volatility

A comprehensive financial plan and diversified portfolio serve as a defense against market volatility. Ma ...

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The Value of Financial Advisors in Volatile Markets

Additional Materials

Clarifications

  • Tax-loss harvesting is a strategy where investors sell investments at a loss to offset capital gains and reduce their tax liability. By realizing losses, investors can use them to offset gains and potentially lower their overall tax bill. This technique is commonly used by financial advisors to optimize their clients' investment portfolios from a tax perspective. The goal is to improve after-tax returns by strategically managing gains and losses within the portfolio.
  • Alternative investment opportunities typically involve assets beyond traditional stocks, bonds, and cash. These can include investments in real estate, commodities, hedge funds, private equity, and more. These alternatives often have different risk-return profiles compared to traditional investments. Financial advisors may explore these options to diversify clients' portfolios and potentially enhance returns.
  • Rebalancing in a down market involves adjusting a portfolio by selling assets that have performed well and buying assets that have underperformed to maintain the desired asset allocation. This strategy helps investors stay aligned with their long-term investment goals and risk tolerance during market downturns. By rebalancing, investors can take advantage of lower prices in a down market to position their portfolios for potential future growth. It is a proactive approach to managing risk and maint ...

Counterarguments

  • While financial advisors can provide guidance, their advice is not infallible, and they may not always accurately predict market movements or protect clients from losses.
  • Emotional and psychological support is important, but it should not be the sole basis for making financial decisions; data-driven analysis and independent research are also critical.
  • The effectiveness of leveraging market conditions through strategies like tax-loss harvesting or rebalancing can vary depending on individual circumstances and market timing.
  • A diversified portfolio is generally a sound strategy, but over-diversification can lead to suboptimal performance and may not always protect against market volatility.
  • Having a clear financial plan is beneficial, but rigid adherence to a plan can sometimes prevent investors from adapting to changing market conditions or new information.
  • The value of financial advisors must be weighed against their fees, which can sometimes erode investment returns, especially in the case of advisors who charge a percentage ...

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