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“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 Empower 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!
Or not.
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:
- Tax Loss Harvesting
- Rebalancing
- Getting off the sidelines (if you’ve got parked cash)
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.
Tax loss harvesting (see my step-by-step guide) is a seemingly simple strategy of selling low, and buying back in, taking a “paper loss” while maintaining your position in the market. It becomes less simple when you start to read about 30-day clauses, substantially identical investments, and the lack of clarity from the IRS in regards to what constitutes a “wash sale.”
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.
15 thoughts on “Don’t just do something. Stand there!”
I announced my formal resignation for early retirement just as the market crashed in early February. I think it was down 10% year to date that day I told my boss I was heading out. It seemed like a precarious time, but we are going into early retirement with three years of spending in cash. That helps us sit on the sidelines and not worry too much.
Important topic. It always amazes me how often smart people violate this fundamental principle. It is however, a good method to objectively measure your stomach for taking risk. Ask yourself what you did when the market last tanked. If you sold, or lost sleep thinking you should sell, then you need to be honest with yourself about how much risk you can tolerate in your portfolio. If you always look at these drops as a buying opportunity, then that tells you something as well.
Brilliant post! Completely agree. It all boils down (pardon the pun, sorry about the ruined batch of syrup) to how good a job we believe the market does in pricing in news:
If the market is efficient, there is no point selling after the loss (except for the Tax Loss Harvesting, but provided you buy a related, but not identical asset, the same day). Just stand there! Do nothing. News is priced in, it’s too late to sell now.
If the market under-reacts, then indeed you want to sell after a big drop for fear more is to come.
If the market overreacts, then you actually want to buy during the dips (in addition to what one buys regularly). Deploy some more cash sitting on the sidelines.
I am mostly an efficient market kind of guy. If I had to pick a side on how the market is inefficient, I would probably side with overreaction, looking back at how equities behaved over the last few years, even decades. So, most definitely don’t get rattled by the occasional 10% drop!
Another reason against selling: when do you plan to go back into the market? What if the market bounces back the minute you sell? Do you buy back at the higher entry point? I know people who sold at or near the bottom in March 2009 and never got back in. Sad!
Big ERN for the win with the great pun. How did I miss that? I totally should have used that. I might have to harness the power of the “edit” button to sneak that into the post.
Your point about not knowing when the best time to sell or buy is my reasoning behind not owning individual stocks. I don’t have the time or interest to constantly making judgments on each company in a basket of stocks. And if I did have the time and interest, the odds of coming out ahead aren’t necessarily in my favor.
Best,
-PoF
Thanks PoF, glad you liked it.
Since you mentioned it twice already, I’ll also have to find a way to incorporporate Big ERN McCracken somewhere in a future post. Stay tuned!
Good night!
Love it! Great way to approach the oncoming correction. I will be saving my pennies.
Have you found an easier way to do TLH? I use multiple brokerages and it’s been a fear of mine of unintentionally violating the wash sale rule. Looking forward to your future post on the topic.
Thanks, WCM!
Tax loss harvesting is tricky if you keep “substantially identical” funds in different account, for example two different funds that both track the S&P 500. For my portfolio, I duplicate classes in different accounts, but keep no equivalent funds in my different accounts.
Best,
-PoF
I will mourn your loss of maple syrup…
Nothing in he world gets accomplished without taking action, but choosing to not take action is an action in and of itself.
🙂
I actually like the smell of burnt marshmallows. I don’t like the smell of burned portfolios, though. I just try not to look all that often, but when I do, and as I stated elsewhere, my fixed income portfolio often shows a positive value when my stocks are down so my overall account isn’t down that much and thus easy to just ride it out. I till haven’t gotten the hang of tax loss harvesting so can’t wait for your post on that. But, at the moment I only have a SIMPLE IRA, so it doesn’t yet apply to me, I think. :O)
We’ll have to agree to disagree on the taste of burnt marshmallows. I’m not talking about the brief flame that gets put out, and then you pull the black “skin” off and have a perfectly good marshmallow to place on your graham cracker and Hershey bar. I’m talking about the marshmallow that fell right off the stick into the hot coals and burns through and through. Not good.
It is true that TLH is only advantageous in a taxable account. I will plan to have a post on it by the end of June. Stay tuned!
Best,
-PoF
Hey PoF,
Hope all is well, wanted to swing by and say saw the PMD piece, glad its off to a good start and definitely agree with the last statement and would add at the end of “make a few calculated, shred moves”… “Then keep at it”. Even less catchy but just as important. Did the kids enjoy the smell of the marshmellows at least?
Best regards,
Dr. J
All is well, Dr. J; I’m glad you noticed the Physician’s Money Digest post. I’m happy to join you as a contributor.
Nobody enjoyed the burnt marshmallow smell. Roasted marshmallows are yummy. Torched-to-a-crisp marshmallows are not so pleasant.
Cheers,
-PoF
Tough advice to hear when the market is crashing, but you nailed it. As hard as it is to watch your assets drop, take a step back from the sell button and try not to do anything stupid!
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Burnt marshmallows -like your own very large s’mores party. Phew, close shave. Glad you caught it in nick of time.
Prolonged market dips – ice in veins required. Still does not get any easier watching it no matter how many years are on the clock!!