Welcome, everybody, to another episode of the Sandwich Bread Podcast. I'm your host, Tom Kaminsky, and this podcast is about life and money conversations for the sandwich generation. Back by popular demand, I'm doing a solo episode. This is two weeks in a row. The last episode was received so incredibly well that everybody was calling for more content of just me talking into a microphone. So I'm bringing that to you today. This episode is may seem a little out of place, especially if you've been an investor over the last couple decades, but I feel it is evergreen content and an evergreen conversation that a prudent investment manager needs to have in their back pocket. And that is what to do with your investment portfolio during a severe market correction. For the sake of this conversation, I'm going to use a bear market as the definition of a severe market correction. Why a bear market, first and foremost? I'm a Bears fan and it's football season. It's for the sake of future repurposing of this content. This is fall of 2026. We've just seen Caleb Williams pull his hamstring, and it is highly likely that the Bears are on their way to another failed campaign. We'll see. Only time will tell. That's a timestamp that we'll come back to in the future. So back to the topic at hand. Enough about the Chicago Bears. Why this topic? Well, we don't know when a market correction's gonna occur. Despite what you may read and online or hear from news media, there is no true foretelling of a market downturn. You'll constantly hear pundits proclaiming that it is coming this time. And if they're wrong, what they'll do is just continue to repeat that a market correction will come so that they're eventually right. And statistically speaking, they will eventually be right. Market corrections do occur throughout market history, but it never occurs in a very clear, discernible pattern. Otherwise, folks would take advantage of that. And the recoveries always look different. So why this topic? Well, I think it's just important for folks to have a plan going into a possible market correction so that you're not reacting. You have a proactive plan and a proactive series of steps you can take to feel ready to go and ready to respond. So, what I'm gonna do is share with you the framework I use with my clients on how we will respond in the event of a market correction. So, for the sake of this episode, I'm thinking in terms of a bear market correction. By definition, this is the a decline in the stock market using the S P 500 as our proxy of 20 or more from its peak. It's sort of an arbitrary amount. There are different ways of measuring a correction. A technical correction is by definition usually a 10% or more decline in the market. I wanted to look at a more severe scenario where a market decline is 20 or more. So, how frequently do bear market corrections occur? Using the S P 500 as our benchmark, and if we go back about 100 years, there have been about 22 instances of a 20% plus decline in the market over 100 years. On average, that's about every for four to five years. Now, recent history, and poor Lauren, who sits in on all client meetings or as many as possible, has to hear me repeat this over and over. Recent history looks different. So since the market crash in 2007, 2008, you know, I'm 41 years old. So that was right at the start of my professional career. Since that point in time, by my view, we've really only experienced one real, quote unquote, real bear market. And that's in 2022. Now you may recall a rapid market decline in 2020 with the onset of COVID, but that stock market recovery occurred in 33 days. So markets, I think they bottomed out around 33, 34 when the world basically shut down as everyone tried to figure out and price in the new normal, but it bounced back incredibly quickly. And so I'm not really counting that. And businesses responded, the American economy responded, everyone adapted with shocking speed, and the recovery came back incredibly quickly. Now in 2022, I view that as a real bear market. In 2022, inflation spiked, interest rates rose rapidly, and the market fell. And so that was a very difficult investment year. But for a lot of folks, that's already in the rearview mirror. So let's rewind here. So going back to 07, 08, you know, severe market crash, financial crisis, that was almost 19 years ago. So over that span of time, 19 years, we've really experienced, in my view, a single bear market. And so I repeat over and over to clients that this stretch of time is not normal. We usually see, you know, as they always look differently and smell differently and they arrive in different ways, but we see bear markets far more frequently than what we've experienced in recent history. And so with my clients that are in their 30s in particular, you know, they knock on wood if they got a job right out of college. They've been putting money into a 401k and essentially have watched the balances rise. And it's not normal. And so what I'm coaching my clients up on is this isn't normal. Corrections will occur, but we're going to be ready for it and we're going to make sure your plan is aligned and ready to go when, if and when they do occur. Now, I'll add a little note to this. We have had an activist Federal Reserve over the last couple decades, and they have made a number of moves at different times to try to basically counter what could have turned into a bear market. And that may continue into the future, and we may see lower frequencies of corrections as a result. But that's not something I'm going to guarantee, or that's not something I'm going to count on. So, and again, using the data I just referenced, that was research provided by Ben Carlson, and that's backed by Bloomberg data as well, just to credit the source there. I'll also add the important caveat. We got we love our disclaimers on this podcast. None of this is predicting the future. So I love to look at historical data. I reference it often and I think about it often in the context of the decisions I make, but the future always looks different. And none of this is predicting a market coming tomorrow or next year or even the next five years. But I did want to offer a playbook that I believe can be helpful for any bear market whenever it occurs. I'll also add the caveat. You know, if you want to entertain yourself, or if you're nerdy enough to entertain yourself, every year in January, some of the top banks, top investment firms in the world will put out annual predictions of what they think the market will do for the forthcoming year. And if you look at those lists, occasionally folks will hit it pretty well. But a lot of the top economists, top PhDs in the world are woefully wrong when trying to predict what the stock market will do. In that vein, I make almost no short-term predictions about the stock market. And I discourage my clients from listening to folks who speak with any grain of certainty when predicting short-term market movements. With that, I'd like to offer my approach to navigating a severe stock market correction, aka bear market. These are the tactics I use when evaluating my clients' financial pictures and considering how we respond in the event of a rapidly declining stock market. Step one, first and foremost, I help assess my clients' overall financial picture and I start with their careers. Now you're asking, we're talking about portfolios and investment performance. Why are we starting with careers? To make well-informed portfolio decisions, we need to look at careers first. So I always start by looking at my clients' households and saying, all right, do we have one or two sources of income? Then I talk to my clients and I ask them, how safe and secure do you feel your job is in the context of a rapidly declining economic environment? Now I'll also add the important caveat. Stock market performance is not the economy. And so, you know, if a stock, if the stock market has declined, that can often be in advance of economic decline or can follow economic decline. Seldom do they move hand in hand. But if the stock market is rapidly declining and it is connected to economic conditions deteriorating, first thing I do is look at my clients' career situation and their sources of income. If they have stable sources of income, that's a really important consideration for how much emergency fund money they need to have on hand. Emergency fund money is basically a set-aside account in an FDIC insured savings account. And I consider that money for unexpected emergencies like job loss. So we stress test how safe your career feels. Then we look at the emergency fund and we compare that to the spending needs for each family. And so if you have a two-income household and you can live off of one of those incomes, the emergency fund may not be need to be that substantial. But if you're a single income household or one partner is leading financially with income by a wide margin and they experience job loss, it's super important that we set aside money to allow for as low a stress transition to new work as possible. So, how does this tie into your investment portfolio? Well, if you're way overextended in stocks and you don't have enough emergency funds set aside, that will be one of the first places I start with my client conversations to decide, you know, what we should do in the event of market decline. You never want to sell at the bottom, obviously, but I will always start by saying, how much emergency fund buffer do we have and is it significant enough and sufficient to cover a job transition? If it is, then we turn our attention to the investments. I know that's sort of a boring first step, but it's so critical because you need to have a nice foundation built with your financial plan before you can start to talk about investments and talk about how all those pieces we're not gonna be trading stocks up and down if we don't have a good firm financial foundation in place. Next, we shift to non-job related goals. So this can be retirement, house projects, college savings. And for the sake of this podcast, I'm gonna focus in on retirement accounts specifically because that's a little bit more universal and touches uh most folks. Let's start with the young listeners in this audience. If you're if you're feeling relatively financially secure, you've got the appropriate emergency fund built, and your retirement horizon is 30 plus years in the distance. I will generally ensure that the clients continue their savings aggressively, and I will generally encourage them to invest heavily in equities during this time. If we're in a market correction and you've got decades ahead of you, I think it's most prudent to be fairly aggressively invested for most investors. Now, obviously everything is has caveats and unique considerations. So every piece of advice you receive, and this is not advice, should be tailored to your unique situation. But in general, if you're young, feeling financially secure, and we're in a severe market correction, I might even try to ramp up retirement savings during this time because for those types of investors, it's sort of an exercise in saying things are a little bit on sale right now, potentially. The price to earnings is low and the price to book and valuations are favorable. It's almost like buying at a discount. So for young investors, it's full speed ahead. Mid-career folks, again, feeling potentially financially secure and they have a good emergency savings buffer in there. If your retirement horizon is more like 20 years or maybe just under 20 years, we may have started to introduce bonds into your portfolio. And we again will assess how is your portfolio performing? Are there any abnormalities with the allocations in place? But for these mid-career folks, I we are likely to hunker down. We are not going to get out of the market because that, you know, if you time it poorly, that could literally disrupt your retirement plans decades in the future. So we will most likely will stress test everything. We'll look at the allocations, but we're likely to encourage those clients to continue to hunker down and stay diligent and keep saving, keep saving, keep saving. Now, if you're entering retirement, say less than 10 years away, or in retirement, the critical balance that we keep an eye on for these individual investors is their cash and bond allocation. Our preference for our clients is to have six to eight years of living expenses needed inside of your portfolio in the allocation of cash and government bonds or highly rated corporate bonds. The design here is that six to eight years of money set aside is a conservative way to allow for most historical market corrections to recover. So essentially, during a severe correction, we will ideally draw down cash, draw down bonds, and maintain that equity allocation and give it time to recover. It can be reckless entering retirement to be overweight equities if you haven't considered your living expenses. So that is a different approach we take for folks that are near or in retirement. We really want to maintain that cash. Short-term bonds, highly rated corporate bonds buffer from which the individual can live. Historically, this amount has been sufficient to allow for a recovery. Of course, the future is always different, and we can't predict a future, but we can rely on historical evidence to make prudent recommendations. Further, if you have pensions or Social Security or other stable, reliable income sources, we'll adjust that six to eight year balance accordingly. So if you can live off of a pension in Social Security and you really don't need to tap into your investment portfolio, well, we'll of course be a little bit more aggressive accordingly. So this is the place we start for those near retirees or in retirement individuals. We also work hard to establish a quote unquote paycheck for folks in retirement. And flexibility with your spending in your retirement plan can make it incredibly powerful and create more buffers. So in the market, in the event of a major market decline, we may discuss our clients pulling back spending a little bit and waiting for the recovery. And then during market rises or bull markets, we may consider increasing spending or doing extra trips that we've been talking about in our planning work together. So I do like to invite a little bit of flexibility for retirees and we tailor our advice accordingly. Those are some different strategies and some different areas we begin with our clients when it comes to assessing how their portfolio is positioned in a market correction. But let's talk tactics. I've made a list of five things that we tactically would consider with clients to take advantage of or optimize a bear market environment. First thing we'll look at for most clients, and I'll add that these are not in any particular order. So, first tactic to look at, we may consider for all clients in a significant market correction a rebalance of the portfolio. A rebalance is when you sell some of one position that might be overweight, or you maybe you've got too much inequities because things are a little bit out of whack with the overall market. And you might be underweight bonds. You know, so that typically occurs in a bull market where market stock market is rising. You may have some extra stocks, a little bit extra above and beyond the desired weighting. So we'd just basically sell a little bit of the stocks and buy a little bit of the bonds. In a severe market decline, we may actually find ourselves overweight bonds. Like we have too much in bonds because stocks have fallen substantially. And maybe in this case, bonds have been relatively level or even risen a little bit. So in that case, we would actually sell some bonds and buy some stocks. This is called rebalancing. Now, we don't do this all the time, and evidence is a little bit mixed about the benefits of tactical rebalancing in terms of long-term performance. However, our goal is not strictly long-term performance. It's making sure the investment allocations align with each family's unique goals and needs. So during a severe market decline, aka bear market, we may look at rebalancing a portfolio to get better aligned with our desired target allocation. Number two tactic we might use is doing tax gain or loss harvesting. Again, in this particular unique tactic, it's important to consult a tax professional and or work with a financial professional because there are a lot of unique elements to executing this the right way, and you want to be careful when doing so. But market declines may offer a quote unquote off ramp for appreciated holdings and or positions you've been trying to reduce in your overall portfolio. Quite commonly, I will have clients be offered company stock, and that company stock in some cases performs quite well. But the clients themselves are saying, I don't really want to hold on to this. I don't want 25% of my net worth tied up in a single stock. And we have a whole separate workflow for that. But say, for example, a client is a little bit overweight, a stock that they really never wanted to own, or they feel trapped from a tax planning standpoint, holding the position. Well, market correction may offer a unique window for us to say, all right, you've been wanting to get rid of this. We may have some losses we can generate by selling it or less gains. That might be the time to act. It can also be an opportunity, you know, if you do have positions with losses, to potentially offset capital gains that you've realized elsewhere. And so it's a unique tactical moment for you to act on individual securities or ETFs or mutual funds you might hold. So that's one consideration we'll review with all clients. And quite often we reach the conclusion that doing nothing is a reasonable approach to make here, but this is a tactical moment in time that we can take advantage of. Next is Roth conversion planning. So in the event of a sharp, unexpected market decline, we maybe have already been planning a Roth conversion for our clients and be analyzing the pros and cons of that decision. Well, a market decline offers, in theory, a unique opportunity to accelerate that conversion and or make it a little larger than planned. If in the event of a severely compressed market where future high expected returns are higher, converting tactically from pre-tax assets to a Roth IRA could be a unique opportunistic approach to take. There are a lot of technical and tax considerations with this idea as well. So trade carefully. If you were not planning on doing a Roth conversion and the market goes down, isn't necessarily appropriate to just dive in and do a Roth conversion, carefully think through the pros and cons of it. But this is something that could be a tactical consideration for the folks that it's a fit for. Next thing we look to do tactically for each client in a severe decline in the market is buy. So if you have available cash that's spent on the sidelines that doesn't have a clearly defined short-term use and your emergency fund is sufficiently buffered, buying as the market falls can be a really cathartic exercise. I actually enjoy doing it. I am well conditioned to continue to stay invested personally throughout the life of the stock market. I have seen enough ebbs and flows. And what I do personally, if I have sufficient funds on the sideline, is I tend to buy when I the market's going down. That's a coping mechanism for seeing the balances shrink. So, you know, this of course is not an individual recommendation for a purchase, but if you have available cash that has a long-term goal assigned to it and it happens to be sitting in a savings account, if the market's down, there's no reason not to buy if you're planning to buy anyway. So we may accelerate some purchases or talk to clients about cash that you know they've had on the sidelines that might have a long-term use for it. Well, if valuations are looking more favorable, buying as the markets fall can be a great way to navigate and feel empowered by a very difficult and stressful time. And last but not least, because this is really a common thing, conclusion we reach for our clients, but tactically, one of the things we often do is nothing. This can be a very reasonable way to respond to a market correction. If you're feeling secure in your career, you're fully aligned with your finances and your financial goals. The best action to take can be to simply focus on your family and your career and your health. Hiring a financial professional to stress test your portfolio and to assure you that it is well aligned with your goals over the long, long haul can be the right thing. And doing nothing can often be the right choice. Just keep buying, keep saving into your retirement plans. And if the future looks anything like the past, markets tend to go up. And so you just got to write out the rough stretch, but it can often lead to great results for your family and your portfolio. So that concludes this episode of the Sandwich Bread Podcast. Thank you for listening in on another solo episode and hanging in there with me. I just wanted to offer some proactive considerations in the event of a market decline so that you feel armed and empowered next time one inevitably comes around. Thanks again for tuning in, and we'll be back again in a couple weeks with our next episode.