Notes on Scary Markets From Your Sketch-Wielding Drill Sergeant

I want to talk to you about scary markets. For the sake of this particular subject, I want to be blunt and a little bit in your face. So for the next few minutes, please, just think of me less as your friend and more as your Scary Markets Drill Sergeant. O.K.? Great.

Now, you may be saying to yourself, “Why is he talking about this now? The markets aren’t even that scary.” That’s true. And it’s also true that I can’t predict when the next bad market is coming.

But I can predict that another bad market will come again, eventually. And when it does, you’ll want to have a plan. That’s precisely why now is such a good time to hash this out. Because you don’t wait until your house is in flames to buy a fire extinguisher, right?

Let me set the stage for you. It’s sometime in the near future. The market just got really scary, like 2008 or 2009 scary. You and I are sitting down together for lunch to talk about what you should do. We’re going to start with a couple of assumptions. First, you have a portfolio that was built specifically and intentionally to give you the greatest likelihood of reaching your goals. Second, your portfolio is down 20 percent or more, and you want to sell all of your investments and go to cash because that feels safest.

But before you do that, before you make this huge, drastic decision, I will have a little conversation with you. Here’s how that conversation would go.

Me: “Why are you invested the way you are?”

You: “Because this portfolio gives me the greatest chance of meeting my goals.”

Me: “Are your goals still the same?”

You: “Yes, they’re still the same.”

Me: “O.K., great. Step one, you own the right portfolio. Check.”

Let’s pause there a moment for dramatic effect and reiterate that you have the right portfolio. Back to the conversation.

You: “But I just can’t take it anymore! I’ve got to sell everything.”

Me: “Got it. Now, just so I understand, if you do that, is that going to be a permanent decision? In other words, are you getting out of the stock market forever?”

You: “Well, no…”

Me: “O.K., then. So when do you think you are likely to get back in?”

You: “When things settle down!”

Let’s hit pause again.

Now we know three very important things.

■ You have the right portfolio.

■ You’re not going to abandon the stock market permanently.

■ You’re going to reinvest when things clear up.

Let’s flesh this out a bit. I want you to imagine what it will be like when things clear up. So why don’t you go ahead and answer just a few more questions from your Scary Markets Drill Sergeant:

■ When the market clears up, will it be less scary than it is now?

■ When the market clears up, will the economy be better?

■ When the market clears up, will that guy on the financial pornography network be telling everyone and their mother to buy more stocks?

■ When the market clears up, will all your neighbors and friends be sitting around the barbecue grill again chatting about investing?

We all know the answers to those questions: yes, yes, yes and yes.

But one last question. Drum roll please: If the market isn’t scary, the economy is better, the guy on the financial pornography network is yelling “buy, buy, buy!” and everyone you know is planning to invest, how do you think the market then will compare to the market now?

It’ll be much higher, of course!

So, to review: Your plan is to sell your perfectly tailored portfolio, right now while your investments are down. Then, you’re going to wait until the market improves. When it does, you’re going to buy back Plan A at a much higher price.

To which I say: Seriously?

I hate to be annoying, but I really want to hammer this conversation home. It doesn’t make a lick of sense to sell a portfolio tailored for you when the market is low, and then buy it back when the market is higher. It makes infinitely more sense to simply keep your portfolio through the scary times and tough it out. Right, soldier?

Instead of doing what fear is making you want to do, just think back to your Scary Markets Drill Sergeant and remember these three things:

■ You made your portfolio based on your goals.

■ It still matches your goals.

■ If you sell that portfolio now and buy it back later when the markets are better, all you will do is lose money.

It’s that simple. Just. Don’t. Do it.

Think of this as something of a lifeboat drill. This is meant to help you remember that when the ship goes down and you find yourself in the lifeboat scared and cold, you don’t throw common sense to the wind and jump in the icy water. Just stay in the rescue boat, tough it out through the turbulent times and wait until the next big ship comes to pick you up to carry you safely to your destination.

This commentary originally appeared May 16 on NYTimes.com

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Carl Richards, CFP®

Carl Richards is the creator of the weekly Sketch Guy column in The New York Times and is a columnist for Morningstar Advisor. Carl has also been featured in The Wall Street Journal, Financial Planning, Marketplace Money, The Leonard Lopate Show, Oprah.com and Forbes.com. His simple but meaningful sketches served as the foundation for his first book, "The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money."

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