A buddy of mine messaged me recently asking me whether it was time to worry about his investments. Over the last couple days, the market has apparently taken a big dip – it’s got people like him worried that this might be the big correction that we’ve all been waiting for. His question was, what could he do to minimize his losses.
As most of you can guess, I told him exactly what most of us here in the financial independence community preach when it comes to investing – do nothing and stay the course. But what about all of the losses he’s already suffered!? All of the gains from 2018 have already been wiped from existence! Or at least, that’s what the media likes to tell us.
It’s one of the things I hate about financial news – this never-ending push to emphasize “losses” as if, when the market drops, people have actually lost something. The fact is, if you’re invested in a diversified portfolio (ideally low-cost index funds) and aren’t planning to tap your investments anytime soon, then market movements should mean nothing to you. The only time market movements mean anything is if those investments are actually being sold and converted into income.
For a young investor like myself, my income doesn’t come from my investments. It comes from my job. And it’s my job that pays for me to go out to eat, buy clothes, or do anything else that I want to do. My investments don’t technically do anything for me right now except sit there and make me feel good or bad.
That’s why, in times like this, I always remind myself that those numbers that I look at in my investment accounts are imaginary! They exist only on paper and they aren’t real until the moment I click sell and turn those investments into actual cash. Since I don’t plan to do that anytime soon, why would I care whether the market goes up or down today, tomorrow, next month, or next year?
Gains Or Losses Are Imaginary Until Converted To Income
When you think about it, there are really only two ways for you to finance your life:
- You can use the income you earn from your job; or
- You can use the income you earn from your investments.
The vast majority of people – especially most 20 and 30 somethings reading this – will rely on their job for their income, not their investments. It’s the actual process of going to work that gives us the money we need to finance our life. If we’re smart, we also take the money that we earn from our job and invest it – the goal here is to eventually have enough money invested so that we can use our investments to replace our job income.
Unless you’re close to that point, anything the market does now really doesn’t matter. A 50% increase or a 50% decrease doesn’t actually impact you on the investment front – it’s a number on a piece of paper. That gain or loss can only become real when you take the action of converting your investments into income. The nice thing is, you can generally make the choice about when you want to make those gains or losses real. Obviously, don’t sell at a loss if you don’t need the money now. If you wait it out, there’s a good chance (pretty much guaranteed) that your investments will be worth more in the future than they are now.
There are some caveats of course. The assumption that your investments will go up over the long term is only true if you’re invested in a diversified portfolio of index funds. If you’re investing in single stocks or other weird things (like BitCoin), then there are no guarantees. But why make life harder for yourself by doing that?
The Only Thing You Have To Worry About In A Market Downturn Is Job Loss
Even though market movements are pretty much imaginary to those of us that aren’t using our investments as actual income, that doesn’t mean that there’s nothing to think about when the next crash happens (whether that’s now or later). For those of us that earn our income from working, a job loss is an actual thing to worry about. When markets crash, jobs tend to go with it.
What this means is that you need to make sure you’re either in a position where you can keep your job during a downturn, or you have ways to continue to finance your lifestyle, even if you lose your job. When I look back at 2008, no one who was investing during that time actually lost money unless they needed to use their investment income. The issue didn’t come from their investments losing value – it came from losing their jobs. People that weren’t ready for that might have had to turn their investments into income, which meant that they actually did lose money.
Remember, your investment gains or losses only become real once you actually convert it into income. Until then, it means nothing! So put yourself in a position where you don’t have to convert investments into income during a downturn.
Take Steps To Hedge Your Income
In short, don’t worry about your investments if you’re not using it as your income source (which most of you probably aren’t). Instead, the thing to worry about is making sure that you keep income flowing in from your job during a downturn.
The good thing is that we can hedge our bets when it comes to income. Keep a nice emergency fund on hand to hold you over during the tough times. I keep my emergency fund in 5% interest savings accounts, which means that not only do I have a good cash cushion to hold me over, I also have an emergency fund that isn’t losing money each year to inflation.
Another way to hedge our bets is to have multiple streams of income. I’ve always thought it was risky to have your entire income come from only one source. Instead, do what you can to create multiple streams of income. The great thing is that we live in the easiest time ever to start a side hustle. In 2017, I earned over $16,000 from over 12 different side hustle income sources, all while working a full-time job. If something happened and I lost my job, I’m fairly confident I could figure out a way to keep some income coming in – maybe not enough to also allow me to save money, but at least enough to fund my life.
So the takeaway here. If you’re a young investor and you’re wondering about what to do with any potential market drop, the answer is to just stick to whatever plan you already had. If the market drops 50%, remember that you haven’t actually lost anything – it’s all in your head. Market gains or losses only become real when you make it real. Don’t make them real until you want to make them real.