PILOT IN COMMAND: NAVIGATING MARKET TURBULENCE

Tim:[00:00:06]Well, welcome back everybody to another episode of Pilots Portfolio. I’m back with a solo episode. In today’s episode, we are going to talk about how you are piloting command of your personal finances, right? You are in control. Now, we are going to acknowledge that there are some things that are outside of your control. And, then we’re going to talk about all the things that are inside of your control so either how you are responding or how you can be proactive to some of these events in the market and just in personal finance in general.
[00:01:32]So, my name is Timothy P Pope. I’m a certified financial planner. I specialize in the planning needs of the professional pilot. So, before we jump into the main topic of today, I want to share a few thoughts about the future with you. You know, often when planning with clients, say, Hey, I like to treat the future with the deference that it deserves, right? Because nobody knows the future. We live in a world of probabilities. These things are most likely to happen and we consistently update our strategy with new information. And so, with working with clients sometimes we work on shorter term plans and, goals for folks, right? So, six months, 12, 18, 24 months kind of thing.
[00:02:13]So, things that are gonna be happening relatively soon. And, then sometimes we really work with things that are many years in the future, and it’s a really rewarding experience to work with clients and help them just execute. the day to day tasks, sometimes the month to month, year to year tasks that are going to help bring these things into reality. And then as they are executing on large goals or sometimes even small goals, it’s really rewarding to watch that, now on the flip side about the future, on this show earlier this year I was talking about how, there’s optimism in the market, folks are feeling pretty positive and optimistic
[00:02:50]And then a short couple months later, I’m like, wow, those comments did not age well at all. Right now the market is responding to things that it does not like, right? And, that brings us to things that we cannot control. So one thing that we can’t control is if the U. S. gets into trade wars with its trading partners. We can’t control economic policy, nor can we control how the market responds to such policies. Something else that we can’t control is, hey, if there’s an economic slowdown more broadly, or if my airline is overstaffed because they’re not receiving deliveries, or perhaps they’ve lost a major contract. You know, I was talking to a couple clients here recently, and they were telling me, hey, we’ve been getting emails that our airline is overstaffed. If you’re on the bottom of the seniority list, that might give you some concern or, if you’re in an
economic position where you were really expecting to be able to fly a lot and your flying has been reduced, that’s going to give you some concern. [00:03:50]I asked one client the other day, I said, Hey, what’s the hiring climate like at your airline? He’s like, Oh, it’s medium rare. Okay. So, certainly there’s a lot of things that are outside of your control, that we have to respond to. For you guys in the 121 world, you have to retire at age 65 right now. You can’t control how close you are to 65. You could decide to retire early, but you know, if you’re retiring at 65, the age, your age, it is what it is. So those are some things that we can’t control. But, the things that we can control is how we respond or how we plan and a lot of times it’s planning and then responding and then updating your plan and then continuing to execute, So when it comes to market turbulence or when the market is, is just kind of choppy or it’s going down, you know what? How you respond is critical. Or how you don’t respond. Now, you guys probably heard me say before, and I’m going to say it again, but trying to time the market is not the way to go. [00:04:47]The research has been out there for a long time. It’s extremely clear. Trying to jump out of the market, allow it to fall, and I’m going to jump back in you know, when we reach the bottom or things have kind of settled down. That is just, really hard to do. And most everyday investors just do way under market average when they try to do that. And so, you know, trying to time the market is a poor strategy. Staying in the market, rebalancing your positions for sure, continuing to add to the markets tend to have just way better results. I think 2024 is a really good year. We can think about it. It’s in our recent memories. Okay, markets were up big time, but folks were emotionally charged going through 2024. It was an election year. How many times have I heard, Hey, we’ve got an election this year. I’m going to wait until after the election and then I’d like to invest my money. Well, if you sat on the sidelines until the day after election day in 2024, the majority of the returns had already been experienced.
[00:05:49]Now, the day after election day, so that would have been November 5th to November 8th, the market surged 4.4%. And then from November 8th, 2024 to the end of the year, the market was actually down 1. 9%. But the market was up over 23 percent for the entire year. And by the way, when I say market, I’m referring to the S& P 500 there’s other indices out there, but I’m using that one. So, if I had been participating the entire time, I may have captured far more of the market’s return than if I was trying to time it because, hey, there’s an election, And so, I think that’s a recent example, but I think one we can all understand where trying to time the market is extremely tough to do. The other thing is, if you say, hey, the market’s getting a little crazy, and maybe I want to pull my money out and then wait until it goes down. These things don’t happen
in isolation. So, if there’s a bear market or a recession, not only is the market going to be down unemployment’s likely going to be high.
[00:06:48]The financial news media is going to be saying that the world is ending. If you were not nervous, and you probably were because you pulled the market, your money out, if you weren’t nervous then, as the market continues to go down and down and down, your anxiety and your worry increases typically.so, it’d probably be really hard for you to pinpoint, hey, when everybody is running away because there’s blood in the street, you’re saying, hey, I’m going to go the opposite way and I’m going to buy this. And you feel like this is the point it’s going to go back up. So staying in the market, rebalancing, continuing to add to it, is a much better way to go than trying to time the market. Now, the other thing that you can control is how much you’re funding your investment accounts, or if you’re funding them at all. We believe in capitalism, right? The market is a huge wealth generator over time. And we should be funding it come rain or shine. And I think, you know, as we just talked about, the past couple of years have been an extraordinary example of that.
[00:07:41]So we believe that the U. S. economy in the future, as it’s made up of thousands of companies that are going to innovate and bring products and services to market, will figure out how to survive in different market conditions and will continue to drive returns over time. In the future, but market turbulence is the price that we pay to play, it’s the price of admission here.
[00:09:09]Another thing that we control as pilot and command is our asset allocation. Hey, have we rebalanced? When the markets are up, have we rebalanced our accounts to lock in the gains? The same is true on the flip opposite side. As markets decline in value, am I rebalancing my positions, taking from one asset class and putting it in another? And, there’s a couple things I’m trying to create there. One, I’m trying to maintain the risk profile of my portfolio. And then two, I’m trying to buy more shares at a lower price. You know, if I can, right? So, we want to rebalance that asset allocation and make sure that it’s always appropriate and it is certainly possible to have different stock to bond mixes in different accounts for different objectives and goals, right? That is absolutely okay and expected.
[00:09:57]We can also control if we are arriving to a large purchase. How much we’ve isolated those funds from market conditions. That’s going to help us weather a market storm and not have to do anything that we may regret later is, hey, I know in less than a year I’m going to have to, you know, make a house down payment or in two years I’m going to have to, you know, make a house
down payment and then buy a car and I’m going to buy the car cash or something like that. Well, if I know that I can isolate those funds from the market. So, the market can do what it’s going to do. And, I know that my purchasing ability for whatever that large object is, is still secure.
[00:10:35]What about shiny objects? You know, we can control whether we pursue or chase shiny objects or not. I’ve got a quick story for you. But, let’s think about some possible options trading, crypto, you know, real estate, sometimes business ownership, now in and of themselves, none of these things that I’ve listed are necessarily a shiny object, right? So something that could be business as usual for somebody could be a shiny object for me. It depends on how is this thing factor into my financial plan? How does it factor into my investment strategy? You know, what’s my exit strategy? What’s driving my interest in it? You know things like that. So, several years ago. I was talking to somebody and they said hey I’m really interested in options trading, and so I’ve been doing a little bit of options trading.
[00:11:24]And, you know, what do you think? I says, well, what’s your, background and what’s your education surrounding it and experience? He says, well, you know, I don’t have really any, you know, I’m kind of, you know, self taught here, but I’ve been dabbling in options trading and the markets have been doing well and I’ve been making money. And I said, oh, okay. I said, well, look. Options trading has different risk profiles than if you just buy a stock position and you’re going to be long in that stock position, okay? So, if you’re going to trade options, you certainly want to get smart on it. And, you’re going to want to go through multiple market cycles so you can figure out how your strategies are going to fare. And, you know, what to expect from your trades. So, then he came back a little while later and said, hey, you know, I’ve continued to, to trade options and I have a HELOC that is a really low interest. What do you think if I borrow money from a HELOC and I trade options with it, I can more than pay the interest rate back and then I can make money on top of that.
[00:12:26]And I says, well that would be a no, like do not pass go do not collect 200, I would not think that that would be a good idea. It’s something you want to engage in but of course they did and they were you know borrow from the HELOC put them in and put it in an options and, weren’t managing their trades. The market responded to a particularly bad piece of news that it didn’t like the trade went south, they panicked and they exited the trade and, then a day or two later the market reversed all of the losses and went in the opposite direction. But, it was too late because they had exited the trade and they had a $250,000 loss to show for it. And, and I don’t think the fact that you can deduct $3,000 of investment losses year over year on your income is a great consolation.
But I think that illustrates one point is options trading a shiny object. Well, if that’s what you do, or if that’s one of your investment strategies, no, it’s not. But if it’s perhaps fueling this, hey, get rich quick sensation, then it certainly could be. Right? And, so when you think about crypto or options trading or real estate, hey, I got to get into real estate or I got to own a business some of those things are like, you know, absolutely. And, I would just like to, let’s bring it back to the financial plan, where can we fit this in? What’s going to be your day to day commitment to these things? Do we need this for you to be successful? If so or if not, you know, what portion of your time or your resources should we allocate to this endeavor? [00:13:59]So we can control whether or not we engage in shiny objects. Here’s something for you. If market turbulence gives you anxiety and you know you’ve set your portfolio up with intention to help you reach your goals, one thing that you can do and is fully in your control is talk to your advisor. Right? So they can give you contacts. And the things that you’re going to want to know is, hey, what does the current market conditions mean for me? What does it mean for my plan? How should I respond to this? And by the way, choosing not to respond is a strategy. And, a lot of times it could be a valid strategy. So how should I respond to this? And am I still going to be okay? Right? So have those conversations with your advisor to talk about that if the market turbulence is giving you lots of anxiety. The other thing that you could do is look at your accounts less frequently. One hundred percent. Look at them less frequently, turn off the financial news right? [00:14:55]If you know that you’ve built your portfolio with intention to help you reach your goals. Now, if you don’t know if you’ve built it that way, then maybe that’s a first step is, you know, figuring out how to build it. The last thing that on this list that we can think about is you can control how intentional you are about your planning for what comes next. And this goes regardless of whatever phase you are in your financial journey. But I want to think about those of you that are five years or less from retirement so within being intentional about your planning for what comes next, you want to think about what large expenses can I take care of now? While I have a job so that I don’t have to worry about them after retirement. That could be paying off the mortgage. That could be securing your, your vacation home or that retirement home maybe, you’re going to snowbird maybe, you’re going to buy a property in a state that doesn’t have a state income tax.You name it. What large items could be upgrading the home, right? So what large items? Can you take care of now while you have earned income so you don’t have to worry about it in retirement? The other thing that you want to be intentional about planning for is how are you going to turn these assets into retirement income?
[00:16:10]You have worked long and hard to accumulate what you have. Okay, how do we now step away from a W2 or earned income and how do we generate retirement income? And, another question that you’re probably thinking about is how much after tax income can I expect? Okay, so if you’ve got pensions, Social Security, pre tax IRAs and 401Ks all of those are pre tax numbers, but you live and you spend on after tax numbers.So how much after tax income can you expect? And then, how much market exposure should you carry? Let’s assume that you’re retiring at age 65. We hope that you have another 20 to 25 years left in retirement. And so, a large part of your portfolio still is going to have to outpace inflation and last for another two to two and a half decades and, the market exposure is a great way to ensure that that happens, right? So how much market exposure should you carry though? Because, as you get closer to retirement, sequence of returns risk is real. So, you know, in the first couple of years, if the market’s down, but you are pulling out of the portfolio, that is going to have an outsized impact on the long term success of your portfolio.
[00:17:26]So, you’re thinking about that and then what’s your personal minimums when it comes to access to cash and liquidity? And that probably isn’t only a five years out from retirement, but I think it ties into the point that I just made of how much market exposure should you carry? So thinking about your personal minimums in the past, I’ve talked about how have different risk tolerances. Some folks like to keep a bit more cash. Some folks like to run it a little bit lean and so you want to think about that for your particular scenario. As you get closer to retirement, let’s make sure we make the right moves to secure that cash, Is it saving from our W2? Are we starting to peel some out of investments?
[00:18:04]How are we minimizing the tax impact? And so, there’s a lot to think about as you start to wind your career down. And move from one phase, which is the earning income phase now to the retirement phase. All right. So, there’s a lot of things that we can’t control on a day to day basis that certainly impacts how we experience our financial position. But then there’s a lot of things that are squarely within our control and, you know, you. are PIC, right? You are pilot in command of your finances. So that’s going to do it guys. I want to thank our sponsors Beacon Relocation for sponsoring the show and then thank our listeners as well for tuning in and making this an awesome show and I’ll see you on the next one.