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.
More Recommended Ebike/Scooters
Check out these other ebikes/scooters I've had the chance to do a review for:
- GEN3 Outcross Bike – The GEN3 Outcross is a solid, affordable fat tire ebike that does a good job of doing what I need it to do. It works great for city riding, giving me a smooth ride in all conditions. It’s works really well as a winter ebike since the fat tires give it good traction over snow and ice. Check out my GEN3 Outcross Review.
- Himiway Escape Bike – The Himiway Escape is an interesting bike for anyone looking for a moped-style ebike. If you’re a gig economy worker, the Himiway Escape is particularly interesting and it’s possible to think of it as an investment, especially if you can opt to do deliveries with the Himiway versus using a car. It’s not cheap, but you can definitely make your money back when you compare the mileage you’ll put on your car versus using an ebike. Check out my Himiway Escape Bike Review.
- Espin Sport Bike – The Espin Sport is a good ebike for someone who is looking for an ebike that feels and rides more like a regular bike. There are many ebikes that are really only bikes in name. In reality, they’re basically electric mopeds. The Espin Sport, by contrast, is a bike you could probably ride without the battery and you’d feel like you’re just riding a regular bike. Check out my Espin Sport Review.
- Varla Eagle One Scooter – The Varla Eagle One is an excellent scooter that can make sense for a lot of people. It can work as a primary mode of transportation. You can use it to work on gig economy apps like DoorDash, Uber Eats, and Grubhub. And it can also be a recreational vehicle if you’d prefer to use it for that. Check out my Varla Eagle One Review.
- Fucare H3 Scooter – The Fucare H3 is a fun scooter and I’ve enjoyed testing it out. For a daily commuter or quick trips or errands, the Fucare H3 is probably the scooter I’ll use. It’s portable and easy to maneuver, so it’s just easier to take on the road when I need it. Check out my Fucare H3 Scooter Review.
More Recommended Investing App Bonuses
For additional investing app bonuses, be sure to check out the ones below:
- M1 Finance ($10) – This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $10 for opening an account. Check out my M1 Finance Referral Bonus – Step-By-Step Guide.
- SoFi Invest ($25) – SoFi Invest is an easy brokerage account bonus that you can earn with just a few minutes of work. Use my SoFi Invest referral link, fund your SoFi Invest brokerage account with $100 and you’ll get $25 of free stock. I also have a step-by-step guide for the SoFi Invest referral bonus.
- Moomoo (5 free stocks) – Moomoo is a free investing app currently offering 5 free stocks (usually worth around $75-$100) if you open an account using a referral link and deposit $2,000. Read my Moomoo referral bonus guide for more information.
- Webull (5 free stocks) – Webull also gives you 5 free stock valued between $3-$3,000 each if you open an account using my referral link. Here’s a guide I wrote about how to earn your free stocks using Webull.
- Robinhood (1 free stock) – Robinhood gives you a free stock valued between $2.50-$225 if you open an account using my referral link.
- Public (1 free stock) - Public gives you a free stock valued between $3-$70 if you open an account using my referral link.
More Recommended Bank Account Bonuses
If you’re looking for more easy bank bonuses, check out the below options. These bonuses are all easy to earn and have no fees or minimum balance requirements to worry about.
- Chime ($100) - Chime is a free bank account that offers a referral bonus if you use a referral link and complete a direct deposit of $200 or more. In practice, any ACH transfer into this account triggers the bonus. This bonus is easy to earn and posts instantly, so you’ll know if you met the requirements as soon as you move money into the account. I wrote a step-by-step guide on how to earn your Chime referral bonus that I recommend you check out.
- Digital Federal Credit Union ($100) – Digital Federal Credit Union (DCU) is a free, nationwide credit union that I recommend to readers for two reasons. First, DCU has a $100 referral bonus if you open a free DCU checking account with a referral link. Second, DCU has a saving account that gives you 6.17% interest on your first $1,000. Check out my in-depth post on how to set this account up.
- Upgrade ($100) – Upgrade is a free checking account that’s currently offering a $100 referral bonus if you open an account and complete three debit card transactions. These bonus terms are easy to meet, so it’s well worth doing this bonus as soon as you can. Importantly, this bonus says that it’s now scheduled to end on January 31, 2023. As long as you get your account opened before January 31st, you should be eligible. Here’s a post I wrote with more details: Upgrade $100 Referral Bonus – Step By Step Directions.
- SoFi Money ($275) – SoFi Money is a free checking account from SoFi. They’re currently offering a $25 referral bonus if you open a SoFi account with a referral link and deposit $10. You can also make an additional $250 as well if you complete a direct deposit. This is a good bank that is also 100% free, so you won’t have to worry about managing this account. Here’s a post I wrote with instructions on how to earn your SoFi Money bonus: SoFi Money Referral Bonus: Step By Step Guide.
- Current ($50) – Current is a free fintech bank that’s offering new users a $50 referral bonus after signing up for an account using a referral link.Current is an easy bonus to earn and also gives you access to three savings accounts that pay you 4% interest on up to $2,000. That means you can put away up to $6,000 earning 4% interest. That’s very good and makes Current an account I recommend to everyone. Check out my step-by-step guide on how to earn your Current Bank bonus.
- Fairwinds Credit Union ($100) – Fairwinds Credit Union is offering a referral bonus for users that sign up using a referral link. Fairwinds has no fees or minimum balance, so this is a particularly easy bonus to earn. Since this is a smaller credit union, my gut instinct tells me this offer won’t be around long, so if you’re in a position to meet the bonus requirements, grab this bonus before it’s gone. Here is my step-by-step guide on how to earn your Fairwinds Credit Union bonus.
- OnJuno ($60) – OnJuno is a fintech/neobank that is currently offering a $10 referral bonus if you open an account using a referral link and make a deposit of $50 or more. You will also get 1000 JCOIN. The 1000 of JCOIN is cryptocurrency. At the time I'm writing this, it'll be worth about $50. Check out my OnJuno referral bonus guide here.
- Varo ($30) – Varo is a free fintech banking app similar to Chime or Current. It’s currently offering a $30 bonus to new users that open a new Varo account with a referral link. The bonus for this bank is very easy to meet, all you need to do is spend $20 within 30 days of opening your Varo account. Check out my step-by-step guide to learn how to earn this bonus.
- Novo Bank ($40) - Novo bank is a free business checking account that’s currently offering a $40 bonus if you open a Novo business checking account using a referral link. In addition to being a good bank bonus, Novo is also a good business checking account. It has no monthly fees or minimum balance requirements and operates a good app and website. Indeed, it’s the business checking account I currently use for this blog. Check out my post on how to easily open a Novo account.
- Albert ($150) – If you can manage to do a real direct deposit, Albert is an easy account you can use to earn a referral bonus. Here’s a review about Albert I wrote. And here’s a step-by-step guide on how to earn your Albert referral bonus.
- Netspend ($20 + 5% Interest Savings Account) – Netspend is a company that provides 5% interest savings accounts. If you sign up using my referral link, you’ll get a $20 signup bonus once you make your first deposit into your Netspend account of $40 or more. That means you get a 5% interest savings account and a free $20 to start! Make sure to check out my in-depth guide on how to set up these accounts.
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $250 if you complete a direct deposit.
- DCU. Digital Federal Credit Union (DCU) is a free, nationwide credit union that I recommend to readers for two reasons. First, DCU has a $100 referral bonus if you open a free DCU checking account with a referral link. Second, DCU has a savings account that gives you 6.17% interest on your first $1,000.
- Novo Bank. Novo bank is a free business checking account that’s currently offering a $40 bonus if you open a Novo business checking account using a referral link. It’s the business checking account I currently use for this blog.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $10 for opening an account.
- Personal Capital. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
Feel free to send Kevin a message here.
Agreed. But what about all those people that do live off their investments in the markets. What do they do?
Or what about if they were just about to tap into their investments?
Aaron
People who live off their investments should have done proper asset allocation for their risk level up front. But if a person is approaching retirement and there is a crash, they should extend their employment or take up a new job – its the worst case for sequence of returns. Also, people not close to retirement should actually be hoping for a correction so they can put more of their money in while the market is less expensive. Best case for people is that the market is in a prolonged bear market while they are contributing and then just before they retire, it springs back to life and makes up for all the lost ground.
Great points. Agree with everything you said.
I agree with what the other commenter said – asset allocation and figuring out as many ways as possible to reduce your portfolio use to avoid the sequence of return risks. The things I mentioned, having an emergency fund and other sources of income equally apply to anyone who’s actually going to be using their portfolio soon.
We write from our own experiences, and unfortunately, I’m still too far away from actually living off my investments to have personal knowledge about what to do on that front. If your investments are income to you, then definitely folks like Our Next Life are the ones to look at. In fact, they wrote a post about that just recently here: https://ournextlife.com/2018/02/07/sequence-risk/. Definitely read that post for more info.
I agree, we need to get everyone to realise they are just paper losses, until you sell and convert them to actual real losses.
Right! It’s not a loss until you make it a loss!
Thanks for the reminder! A lot of times long-term investors like me panicked and forget that we’re here for the long haul. Human nature I guess. I think that for 2018 the stock market will still end up positive although we may be in for a roller coaster type ride. Let’s keep drinking those calming teas and relax.
I just try to remind myself this. It’s hard because I graduated during the last recession, so I know what the recession was like, but I don’t actually have any personal experience investing during a recession. I think I should have the stomach to tough it out, but can I really know? All I can do is keep reminding myself that its not real yet!
My parents are both finally fully retired. I know a market dip (or crash or correction or whatever word we are using) isn’t an ideal thing to face at the start of retirement, but they have a solid plan. I think one of the biggest mistakes that anyone can make is to view retirement as meaning that you’re still not in the market for the long haul. While they may draw down some of their investments, they will still be in the market.
This is a great post (as always!).
Hi FP, do you have any recommended books on investing? For example, Bogle?
Great question – I should probably put this in my recommendations section.
For investing, I really just recommend two books: (1) The Simple Path to Wealth by JL Collins, and (2) The Bogleheads Guide to Investing. Both books will change your life.
Thank you for your reply, Kevin! Yes, it’s a great idea to add a book list to your recommendations section! Love the FinTech apps you recommend, too!
wheres this 5% savings account? Ally is at 1.45% and consistently one of the highest i find.
They’re the Netsend and Insight accounts I write about. It’s a little hack that a lot of churners/optimizer folks like us do to maximize our savings. Basically, it’s a prepaid debit card that comes with a 5% interest savings account. Takes some work to set up, but once you set it up, it runs itself and gives you 5% interest in an FDIC insured savings account.
Thanks for sharing the article. Worth to read this article. I admit we must get everyone to understand they are only paper losses till you sell and change them to real losses. This is a great post.