2651: How to Not Panic by Nick Maggiulli of Of Dollars and Data on Financial Stability & Historical Parallels

[00:00:00] This is Optimal Finance Daily, episode 2651.

[00:00:04] How Not to Panic by Nick Majuli of of dollarsanddata.com.

[00:00:10] And I'm your host and personal finance enthusiast, Diana Mariam.

[00:00:15] Welcome back to Optimal Finance Daily, where every day I read and offer commentary on some

[00:00:20] of the best personal finance blogs on the web in about 10 minutes or less. And with that, let's get right to it as we optimize your life.

[00:00:29] How to Not Panic by Nick Majuli of dollarsanddata.com

[00:00:39] Does the following quote seem accurate to you?

[00:00:42] Quote, throughout the pandemic, the nation lacked a uniform policy about gathering places.

[00:00:49] And there was no central authority with the power

[00:00:51] to make and enforce rules that everyone had to obey.

[00:00:55] Each community acted on its own,

[00:00:57] doing as elected officials thought best.

[00:01:00] End quote.

[00:01:02] What about this one?

[00:01:04] Quote,

[00:01:05] For young survivors of the pandemic, life would never be the same.

[00:01:09] Like shell-shocked soldiers, they bore emotional scars.

[00:01:14] End quote.

[00:01:15] I'm assuming that you, like me, found both of them to be somewhat true.

[00:01:20] But what I didn't tell you was that these quotes aren't about COVID-19. No, both of them actually come from Albert Marin's

[00:01:28] very, very, very dreadful,

[00:01:30] an account of the Spanish flu of 1918.

[00:01:34] Though Marin is summarizing an event

[00:01:36] that occurred over a hundred years ago,

[00:01:38] his words describe a world eerily similar to our own.

[00:01:43] I was reminded of these similarities after a friend asked me how is able to stay calm

[00:01:47] during a market crash.

[00:01:49] I told him that it's because I've spent a good amount of time studying history.

[00:01:54] And in doing so, I've come to realize that a lot of what we experience isn't as unique

[00:01:58] as we think it is.

[00:02:00] As the saying goes, history doesn't repeat itself, but it often rhymes.

[00:02:06] And rhyme it does.

[00:02:08] Consider what Marin stated on the frequency of pandemics.

[00:02:12] Quote,

[00:02:13] "'Flued pandemics are nothing new.

[00:02:16] Medical historians think the first one struck in 1510, infecting Asia, Africa, Europe, and

[00:02:22] the New World.'

[00:02:24] Between the years 1700 and 1900,

[00:02:27] there were at least 16 pandemics,

[00:02:29] some of them killing up to a million people.

[00:02:32] End quote.

[00:02:34] Given the regularity of these pandemics,

[00:02:36] you can see why our reactions to them

[00:02:38] have shown similarities over time.

[00:02:41] But humans repeat themselves in other ways

[00:02:43] across history as well.

[00:02:45] For example, consider how the US Senate recently passed the Sunshine Protection Act in an effort

[00:02:51] to make daylight savings time permanent across the US. This would mean that, if passed by

[00:02:57] the House and the President, the US would no longer adjust its clocks twice a year. No

[00:03:02] more spring forward and no more fall back, just the same time all year round.

[00:03:08] Unfortunately, Congress tried this already in 1974 and it didn't work.

[00:03:13] In fact, it was a disaster.

[00:03:16] After enacting the permanent daylight savings time, eight children in Florida died in pre-dawn

[00:03:21] car accidents due to the early morning darkness.

[00:03:25] The policy became so unpopular across the U.S. that it was reversed by Congress after

[00:03:30] only eight months.

[00:03:32] But the rhyming of history isn't limited to global health and politics.

[00:03:37] It's true in markets as well.

[00:03:39] The U.S. stock market typically declines by at least 10% every other year, 30% every 4-5 years, and

[00:03:47] 50% plus once a generation.

[00:03:51] And guess what?

[00:03:52] Since I made my first investment on July 6, 2012, I've seen the market decline over

[00:03:57] 10% on five separate occasions, 2015, 2016, 2018, 2020, and today.

[00:04:07] That's five declines in a 10-year period, or coincidentally, once every other year,

[00:04:12] as the historical averages suggest.

[00:04:15] Of course, this decline could be different.

[00:04:19] If you look at a chart pictured in this post of the five corrections I've experienced

[00:04:23] since I started investing in 2012,

[00:04:25] you'll see that our current pullback stands out. It's even more concerning when market

[00:04:30] veterans like Josh Brown say that quote, this is one of the most treacherous environments I've

[00:04:36] ever seen end quote. And I don't disagree with high inflation, geopolitical uncertainty,

[00:04:42] and asset prices declining across the board,

[00:04:45] things aren't looking great right now.

[00:04:48] But what did you expect after a year like 2021,

[00:04:51] which was arguably the craziest year in markets

[00:04:54] since the late 90s?

[00:04:56] Have we forgotten just how silly it all was?

[00:04:59] Consider a tweet from Drew Dixon

[00:05:01] near the height of the madness in which he asked,

[00:05:05] What would you rather buy for 2.3 million? A picture of a rock,

[00:05:10] Ether Rock, or a 3,700 square foot waterfront property overlooking Tampa Bay?

[00:05:17] In hindsight, it's ridiculous that such a question was ever asked, but here we are.

[00:05:23] After such a frothy year in markets, it makes sense that we would see a return to fundamentals.

[00:05:29] Unfortunately, the transition back sucks.

[00:05:32] It sucks because there isn't much we can do about it beforehand, and there isn't much

[00:05:37] we can do once it starts to happen either.

[00:05:39] Yes, you can try moving to cash and bonds early. But when exactly do you get out?

[00:05:45] Go too early and you may have to sit on the sidelines for years while the market rockets

[00:05:49] hire.

[00:05:50] And if you do get out, how do you know when to get back in?

[00:05:54] It's psychological on the exit and the re-entry.

[00:05:58] This is why, despite writing about the froth in markets last year, I knew there wasn't

[00:06:02] much you could do about it.

[00:06:04] Yes, you can make minor tweaks to your portfolio along the way. That is, sin a little.

[00:06:10] But you mostly have to roll with the punches. So why would you panic? What good is there

[00:06:16] in reacting to something that you can't control?

[00:06:19] If you disagree, you either, one, invested money you couldn't afford to lose, or two, didn't understand your true tolerance for risk until now.

[00:06:29] If either of those is true, that's unfortunate, but you learned something valuable for next time.

[00:06:35] Given the record of history, you should expect events like this to happen with some regularity.

[00:06:41] This is why my favorite speech from the film Margin Call is when Jeremy

[00:06:46] Irons' character rattles off all the major asset bubbles across history from memory. For 1901, 07, 29, 1937, 1974, 1987, Jesus didn't that f***ing up good.

[00:07:10] 92, 97, 2000, and whatever we want to call this.

[00:07:15] End quote.

[00:07:16] It's just all the same thing over and over.

[00:07:19] We can't help ourselves.

[00:07:22] Clever writing, you might think.

[00:07:24] Margin Call is fiction after all.

[00:07:26] How about some non-fiction then?

[00:07:28] Here's Jesse Livermore, arguably the greatest trader

[00:07:32] in Wall Street history.

[00:07:33] Quote, there is nothing new in Wall Street.

[00:07:37] There can't be because speculation is as old as the hills.

[00:07:41] Whatever happens in the stock market today

[00:07:43] has happened before and will happen again."

[00:07:45] End quote.

[00:07:47] This is how not to panic. You know history. You understand the risks. And most importantly,

[00:07:53] you know yourself. Then you let the chips fall where they may. You don't obsess over

[00:07:58] the headlines. You don't try to predict the future. You enjoy your life. You go out with

[00:08:03] friends and family. You make cherished memories. You go out with friends and family.

[00:08:05] You make cherished memories.

[00:08:07] You laugh.

[00:08:08] You cry.

[00:08:09] You remember that things like this happen.

[00:08:11] And you remember that they will happen again.

[00:08:18] You just listened to the post titled How Not to Panic by Nick Majuli of dollarsanddata.com

[00:08:25] and I'll be right back with my commentary.

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[00:10:06] I recall being worried in 2020

[00:10:09] when everything felt so uncertain

[00:10:11] and scary amid the pandemic.

[00:10:14] While I wouldn't have panicked sold my investments,

[00:10:16] I did make a fearful decision with my money.

[00:10:20] I was still in my W-2 corporate career at the time.

[00:10:23] And like many corporations, my employer was struggling. I was lucky in that I2 corporate career at the time, and like many corporations, my employer was struggling.

[00:10:26] I was lucky and that I wasn't furloughed, but I did take a 10% salary reduction,

[00:10:32] and my employer stopped all 401k matching.

[00:10:36] It felt like the writing was on the wall.

[00:10:39] I was probably going to lose my job, and it could take me a long time to find a new one. I graduated college in 2009 and it took me 9 months to find the job, even though I had

[00:10:50] a 4.0 GPA and strong work experience.

[00:10:54] Based on my experience, I felt like I needed to prepare for the worst.

[00:10:59] So while I continued to make my regular 401k contributions, rather than investing that

[00:11:04] money, I held it in money market.

[00:11:07] I rationalized that this would be a backup emergency fund, as I could have taken a COVID-related

[00:11:13] distribution with no penalty, and I'd have three years to pay the tax on it if I really needed to.

[00:11:20] Now, I understand in the moment it felt like an unprecedented time, and the apocalypse

[00:11:25] was upon us.

[00:11:26] But I didn't end up investing that money until late 2020, and so I lost out on a number

[00:11:32] of months of investment gains.

[00:11:34] And I simply didn't need to hoard this money.

[00:11:37] I already had a year of living expenses and cash.

[00:11:41] In fact, just eight months after I made this fear-driven decision, I

[00:11:46] decided to leave my job voluntarily because it was clear I had the financial bandwidth

[00:11:51] to do so. I share this example because as much as I expect market corrections and I

[00:11:57] know enough not to panic sell, I'm still not above the fear that comes with what feels

[00:12:03] like unprecedented times.

[00:12:06] And that does it for another edition of Optimal Finance Daily.

[00:12:09] I hope your weekend is going well, thank you for listening, and I'll be back with another

[00:12:14] post for you tomorrow.

[00:12:15] So I'll see you there, where your optimal life awaits.