As the Dow Jones continues to wobble admits fears of a novel corona outbreak in the US, South Dakotans might be fearful about economic disruption and their financial future. We asked wealth advisor and financial therapist Rick Kahler to talk us through how investors should handle the emotions and the details of a financial panic. He joined us from the Black Hills Surgical Hospital studio in SDPB's Rapid City space on Friday, March 4. You can listen to the original conversation here:
Lori Walsh: Rick Kahler, first of all, thank you for joining us today. We're going to take a little bit of a different turn with our conversations today, but connected to a lot of the other things we've been talking about, because a lot of people are sort of panicking about coronavirus or COVID-19 and we see that panic in the stock market. People are calling their financial advisors now and saying, "What do I do?" What do we do? Where do you want to begin with this? First of all, you're getting calls too, aren't you? People are wondering.
Rick Kahler: So far, I've had one call from a client, but I just got off the phone with the National Organization of Financial Planning Practitioners, asking me to speak to them next week because if you've been an advisor, financial planner for 10 years, you've never been through a downturn. You've never been through a panic. Even the advisors are starting to have some difficult emotions.
Lori Walsh: All right. You've been through panic before.
Rick Kahler: I have been.
Lori Walsh: Tell me about just a few of the panics that you've seen in your career as a financial advisor. Certainly, 2008.
Rick Kahler: Yeah. 1987 sticks in my mind because that was the week that I think in one day the market was down 25%. To put that into context, that would be pretty close to a 9,000, 7-8,000 point drop in one day of the Dow.
I remember that very poignantly. There's been the dot com crash of 2000. I think 2008, especially September to February of 2009, was a pretty memorable time. Actually, the week that we just went through was the largest one week drop since 2008. It was just seven days before that that the market had hit all-time highs.
It's causing a lot of people to be pretty scared.
Lori Walsh: Some of the things that trigger that quick evidence of fear and panic are ... Is it just worries about what's going to happen if people have to socially isolate or are quarantined or is it actual what we're seeing happening with Apple or other companies are having immediate true impacts?
Rick Kahler: In typical Lori fashion, you have zeroed in on what is going to make this one a little bit different because it's not, I want to say it's not, a "normal" recession or a normal pullback in that there is another emotional component going on which you articulated, which is the fear of the virus, the fear of being quarantined, the fear of death and the high fatality percentage of this particular virus.
I think the emotional component of this is even more important than normal panics, if you can call it normal, because our brains aren't usually functioning really well as investors when things look really bleak. In this case, you've got your personal safety concerns along with it.
Lori Walsh: I want to talk about some of the specific things that people should be thinking about doing, but before I give everybody what they want with those questions, I'm just going to guess, Rick, that so much of that panic and that emotional response really ties into some of our money beliefs. Doesn't it?
Rick Kahler: Oh totally.
When you look at it logically, and I do not mean to make, not make light, but minimize the deaths that have happened. Globally, we have about 28-2900 deaths. We have 85,000 people that have been sick. When you look at that and compare it with other issues, you're going, is this really a logical response?
No panic is, especially when you're talking about the stock market, is ever logical. 2008 wasn't logical. The stock market is illogically driven because it's behaviorally driven. That's something to keep in mind, but it doesn't mean that it's not happening. It is happening. People are illogical and this response is as such.
Nevertheless, there is a real reason to be concerned economically because our economy is supported by consumer spending. I've often laughed that people like me preach paying off your debt, living on what you make, or hopefully living on less than what you make. If everybody in the country did that, we would have a recession because consumer spending would contract.
We have a situation where the manufacturing sector was already in a recession because of the China trade wars. It was the retail sector that was kind of keeping things going. Now, retail's being hit. People are going to stay away from entertainment and spending money, especially the travel sector is going to be hit hard. We're going to have that contraction. You can easily see how this could start a recession.
Lori Walsh: This reminds me of, and I've talked about this on this program before because it's just one of those moments that I'll never forget, which was after September 11th, 2001 and President George Bush coming on television and saying, "Don't let them win. Keep the economy going. Go enjoy yourself. Fly to Disney World." I think that was the first time that I ever had a realization that what could happen if everybody just got frightened and decided to stay home. It was an eye-opener for me.
This is different because at that time, although back then we were still trying to figure out what the threat really was, but this is different because it's a virus and it may come to a city near you at some point. There's a leadership aspect to this where people are saying, "Hey, keep going", because the results could be kind of terrifying. Keep calm but take action.
Rick Kahler: Yes. It does call on all of us to rethink our own personal hygiene. I've been more aware of touching my face. I just got back from London, and I was anxious about traveling and being in planes. It is a good time to be really aware of our hygiene. Nevertheless, we are dealing with something where you can be contagious and be asymptomatic. That's kind of something new.
There's certainly cause of concern and I think it's kind of a foregone conclusion. There's going to be short-term disruptions, potentially supply issues and things of that sort. I don't think it's going to be a major long-term concern to anybody's investment portfolio.
Lori Walsh: Let's talk about the impact. Are there ways to sort of predict or anticipate, estimate what the impact will be looking at other things like this, other outbreaks, other panics?
Rick Kahler: Yeah. I think so. I think if we had to guess how far down the stock market might go, I'd say try 36%. Now, I don't have a crystal ball. That is simply the average fall in a normal bear market. When you think about it, we're 12 years into this bull market. It's unprecedented, the run that we've had. People like myself have been saying for a long time we're going to see a bear market, which is a fall of 20% or more in the US stock market. We're going to see a recession. You do not have to be a rocket scientist to come out with those prognostications.
What you do have to be is a soothsayer to say when. We know that this, something like this, and I don't even know this is this yet because we're only down 13% right now, but we know this is coming. It quite frankly is no different from any other panic when it looks so bleak at the bottom. Now, are we at a bottom? It wouldn't be a bear market if we are. It'd be a correction. Again, nobody knows.
The really important thing, and we've talked about this before, is to separate my emotional responses from my actions. This is where emotional intelligence comes in and is so important. I'm looking at the stock market falling, I'm hearing all the warnings about the coronavirus, and fear is just rising in me and I have anxiety and I have a couple of decisions. One is to acknowledge that fear and that anxiety, go, "Oh wow. I am just scared to death." The other one is to resist that, saying, "How can I get immediate relief from this?" And that is pick up the phone, call my advisor, and tell him to sell.
That can help eliminate immediate anxiety, like, "Oh good. At least I got out", but the rebound of that is going to create even more anxiety knowing when to get back in or if when you sell out the market starts running up. It just sets a person up for even worse anxiety and can do financial damage to a person.
Lori Walsh: I want to tie this back to this idea of even if you ... I think there are a lot of people who don't necessarily have ... They have not built wealth. They don't invest in a lot of things and this impacts them less than it maybe impacts somebody who considers themselves a savvy and wise investor. Although, many of us have money in pension funds and 401ks and retirement plans. Even for the people who really feel like they're playing this game well and have made good decisions, that panic can take over pretty much anybody. That gets back to this idea of doing the emotional work around your money and your finances and your wealth before there is a panic, before there's a downturn.
Rick Kahler: Yes. Hopefully, they've been listening to your show for awhile.
Lori Walsh: I think so. I've been reading your books and doing financial therapy along with their investments. It's not just for people who are in debt and trying to get out. It's for all of us. Yeah.
Rick Kahler: You're exactly right because am I feeling anxiety? Yeah. Absolutely, I'm feeling anxiety, especially with my international travel schedule. Anybody can with this, with what's going on here. Like I said, it has this double component of both the markets reacting and a very real physical threat.
Separating and being able to recognize, "I'm scared. I am frightened", and being able to acknowledge that just to yourself can completely change your behavior or your actions. Be able to separate the difficult emotion from, "So does this require any action?" Usually, the only action that's really required is acknowledging it and feeling it.
Lori Walsh: How long before things turn around again if you do nothing and we watch the chart go down and we turn on the news and see how much the Dow has dropped today? How long before it rebounds after something like this usually, historically?
Rick Kahler: I think historically bear markets run about nine months if I'm right. They're very, very ... They're much shorter than bull markets, but they tend to be steeper and quicker. The chances are that this is going to last for a few months. The chances are it could be very scary. The chances are when the things look the worst, that's about the time the market would start going up and people are going, "Why is the market going up? The world's ending." That's kind of a typical pattern.
I sat beside, ironically, a virus flu researcher that works on the vaccine coming back from London. He had said, "First of all, this is a pandemic, even though the WHO's saying it isn't yet." He said, "Second, it's going to be with us a year or two. What we hope is that it moves slowly so it doesn't overwhelm our capacity to take care of people and to deal with it."
Again, nobody knows, but I think we need to be prepared that the virus part's going to be with us for a while. The markets are going to do what they do, and the chances are it'll be steep, ugly, and short.
If you think about 2008, the worst time was between September of 2008 and February of 2009. It felt like a lifetime, but it was six months.
Lori Walsh: What are some of the money beliefs you should check for at this point when you feel that panic, those emotions?
Rick Kahler: Yeah. I think the first thing to check for is the feeling. "Am I feeling fear, anxiety? What's going on?" The money belief is behind that. If I can find the feeling and then go, "Okay. What's the belief? What is true for me?", and it could be an unlimited number of beliefs, whether it's with sicknesses in general or fears that I'm going to lose everything and be a bag lady or-
Lori Walsh: Never be able to retire. "I've messed this up. I shouldn't have done it. I shouldn't have listened to that person. I can't be trusted with my money. Investing isn't safe." There's all kinds of things. Yeah.
Rick Kahler: And especially if you've just recently gotten into the market, like last week or two weeks ago. "See? I knew the stock market's gambling." We think we can go on a lot of different routes, but one thing important in a person that has listened to us much will know the importance of diversifying. If a person has a diversified portfolio, even though the stock markets are down 10%, your portfolio is probably only down 3% or 4%. We have so much focus on the US stock market, but if you're diversified, that may only make up 15% or 20% of your entire portfolio. I can't tell you how often people will call, we'll get into their portfolio, and they'll go, "Oh. I thought it was going to be much worse than that", because all we hear is the S&P 500 or the Dow.
One thing might be check your portfolio, and that may help anxiety just to find out what is real. Rick Kahler: 50% of people in the US do have a 401k, or do have something in the market. The best advice, right now, is don't do anything.
Lori Walsh: What about these people who are moving at to, "I'm going to invest in Netflix, I'm going to get out of Uber." We're watching this individual companies rise and fall because they're indoor companies versus go out and do something social companies.
Rick Kahler: Yeah well, good luck. The research doesn't really support trying to figure out which companies are going to be winners and losers. I mean, right now we can say, "Well, if I had a company making masks things could be a pretty good. And if I have a retail business, especially in areas of the breakout, things are probably not so good," or any company involved in retail. But it's kind of probably too late. That has happened as far as market movements. So it's always, always so difficult to buy winners and sell losers because usually it's the exact opposite that happens. And there's tons of research behind this and you probably are going to do it at about the wrong time.
Lori Walsh: All right. So step one, feel the feelings, check your feelings and just kind of allow them to be part of your life. Don't do anything. Don't take drastic steps or measures, but maybe do take time to understand what exactly is in your portfolio, it might not be as bad as you think. Rash decisions are always bad. What have I forgotten?
Rick Kahler: One thing and it might be a little bit late, but maybe not so much, is if you're living off of your portfolio set up, what we call, a reserve account. In other words, we recommend putting two to five years of spending in a cash account to get you through times like this to help the panic because, "Hey, I've set aside two, three, four or five years, I'm going to be okay. I don't need to be withdrawing at the worst of times." So, I think everything else you hit.
Lori Walsh: Yeah. What if you are getting close to retirement? You're older, you were about to make ... as you said, there's the new investor who just finally took the step to invest in, and now is having those emotions of, "Oh, this was what I was afraid of." There's also people who had a pretty secure plan and all of a sudden there's a hitch in that plan.
Rick Kahler: Again, you really nailed one of the things to watch out for and the research is, unfortunately, not very good for a person who is retiring and going to be drawing off their portfolio right at the bottom of a market drop. And I did have people retire in 2008, 2009 and what you need to take a look at is, based on where I'm sitting, what's it going to look like? A person might need to put off retirement a year or two for things to retire, or for things to settle down. But that is statistically one of the pitfalls of retiring in a downfall.
Lori Walsh: All right. Any thoughts for, I remember in 2008 we're still doing stories about people who graduated from college that year and went into a market that was depressed and some of the consequences of that. What about for younger people who are just getting their start, maybe just now thinking about investment, what are some of their actions to take right now? Do you wait, or is now a good time to meet with a financial planner and say, "You know what? This is happening, but it's outside of our plans. Let's talk anyway."
Rick Kahler: How opportune to be starting to do your investments now. This was like starting to invest in 2008. So, absolutely stocks are on sale. And, if you think about it, stocks are one of the very few things that when they go on sale, we run the other way. Like, "No, no, I don't want to buy because, usually, there's lots of negative things happening in the economy, and difficult emotions. So if a person is just starting, wow, you can buy stocks today at 13% less than they were a couple of weeks ago. So, that's a good thing. So I would not put anything on hold. I would start putting in monthly, we call that, dollar cost averaging. And don't worry about what the market's doing. If it goes down, you just keep buying at lower and lower rates. If the market goes up, well at least you bought some when it was down. So, I think this is a great time to be investing.
Rick Kahler: In fact, I've gotten two calls, one concerned. And then I got a call from one of my clients who's like, "Okay, we're bringing in some money. Stocks are on sale," and they did the same thing in 2008.
Lori Walsh: Right. All right. Any final thoughts on some money beliefs that it's a really good ... just to recap that, or to add anything else, some money beliefs. It's really good to sort of about how to address if you're feeling that sense of panic and you're saying, "Well, I didn't realize, I believed that," identifying money belief for the first time, what are some of the next steps to address it?
Rick Kahler: Yeah, I think on any money script that we can identify one could be that ... well one could be, "I can time this." I was approached by someone who says, "Well we know that the market's going down so why not get out now and buy in later?" Well, do we really know? I mean, that's a money script. Do we really know? No, we don't. So, it's really question those beliefs. And with any money script, we've talked about this before, there are typically three variations of that money script.
So it's to try and get ourselves into a place of curiosity to look at what is true. And one way to find them out is just write down what's true. Well, it's true that this is going to get worse. Well, do we know that? It's true that the markets are gambling, or whatever they could be is to really question those. And try and find three different versions of that money script. And sometimes that's really hard for us to do because well, it's just true, there is no other version. It's true.
And so maybe getting with somebody else, or this is where when we work with groups of people we'll have the groups come up with the various ways of looking at that. That kind of can help build flexibility, right?
Lori Walsh: All those scripts are true some of the time, I remember that.
Rick Kahler: All money scripts are true some of the time. And they're all false some of the time. And it just depends which time we're in.
Lori Walsh: Well, and this is the fact this has been resonating for me lately about healthcare decisions because just various things that are happening in my life. And I've just, because of our conversations together, have uncovered some, what turned out to be, money scripts about how I was making some of these healthcare decisions. And immediately it was like, "Oh, I think I could save a lot of money in the future, now that I know that." And really it turned out to be this thought that I had picked up when I was maybe 10. And I'm not 10 anymore. And it was really an eyeopening moment when you were like, "Oh wait, you're behaving like that 10-year-old who was afraid of this. And all of a sudden, that was just a whole lot clearer. And I went, "Oh, we've been talking about this for how long now? And that one just kind of revealed itself."
Lori Walsh: So it's worth the effort to really think about this more than once. It's not just a read a Rick Kahler book and then go about your business kind of thing.
Rick Kahler: It's layered. And we keep discovering deeper and deeper money scripts. And it's sometimes things, crises like this that bring them up like, "Wow, I didn't even know that was there." I'm fascinated to have a further conversation with you.
Lori Walsh: I'll do that in the future.
And not only is it an opportunity to buy things on sale in the stock market, but it's an opportunity to really get to a different layer of money scripts and looking at your behavior. So, use this as an opportunity to do something other than panic.
Rick Kahler: Another opportunity to grow.
Lori Walsh: We just love those opportunities to grow, don't we? Rick Kahler, thank you so much. We appreciate you stopping by for this timely conversation.
Rick Kahler: Yes, thanks again. It's always great to talk to you, Lori.