Money Guy Show: Fear, Financial Markets, and Your Money
Host: Brian Preston (with contributions from Bo Hanson)
Date: March 18, 2008
Episode Overview
In this episode, Brian Preston tackles the pervasive fear surrounding financial markets during turbulent economic times. He aims to reassure listeners—ranging from new investors to seasoned wealth managers—that panicking during downturns is counterproductive. The discussion focuses on the importance of diversification, understanding the cycles of market emotions, avoiding costly mistakes, and maintaining discipline during downturns so that listeners can weather volatility and build long-term wealth.
Key Discussion Points & Insights
1. Market Fear and Emotional Investing
- Context: The episode airs during significant market turmoil (2008 recession fears). Many clients are anxious, leading Brian to emphasize the value of composure and analytical thinking.
- Main Message: Fear and emotional reactions to bear markets often lead to poor investor decisions.
Quote:
“You don’t have to lose your mind and lose all of the analytical thought process that puts you into the plan that you’re currently in. You don’t have to leave all that behind just because we’re in some dark times here for the economy.” – Brian Preston [04:38]
2. The Power of Diversification
- Explanation: True diversification is having exposure across asset classes—stocks, bonds, cash, real estate, commodities, and more—not just different stocks.
- Lesson: Investors who put everything into one asset class suffer the most during downturns.
Quote:
“If you’re just buying all equities, you’re not diversifying and following the rules that we’re trying to tell you on the power of diversification.” – Brian Preston [08:18]
Memorable Example:
- Brian recalls years like 1998 and 2003, when S&P 500-only investors did well, but without diversification, they suffered in bad years.
- Real estate, although unpopular in 2008, is not “a cuss word” in portfolios for the long-term.
3. Risk and Reward, and Controlling Your Emotions
- Insight: Investors commonly overestimate their ability to stomach risk when markets are rising, but react emotionally (and badly) when losses occur.
- Cyclical Markets: Investment returns fluctuate—sometimes wildly—and the key is not to abandon plans during volatility.
Quote:
“The relationship between risk and reward…with that great reward that you can earn, there’s also quite a bit of volatility that comes with that, meaning it’s a roller coaster.” – Brian Preston [11:00]
4. The Cycle of Market Emotions
- Resource: Brian references a “cycle of market emotions” chart (available in show notes), breaking down how optimism turns into euphoria (“maximum risk”) and then falls through anxiety, denial, fear, and depression (“maximum opportunity”).
- Key Insight: Most investors do the opposite of “buy low, sell high.” Emotions cause people to buy when markets surge and sell at the bottom.
Quote:
“We all hear the adage that you want to buy low and sell high, but…many of us out there do the exact opposite. A lot of us do…we’re buying high and then we sell low.” – Brian Preston [13:20]
- Historical Example:
- In February 2000, the biggest inflow into mutual funds occurred right before the tech bubble burst.
- In October 2002, the market bottomed—and many investors had just exited.
5. Historical Bear Markets and Recoveries
- Segment: Brian discusses how past bear markets have always been followed by recoveries.
- Statistics & Examples:
- 1973-74 bear market: Down 45% over 694 days.
- 2000-2002: Down 49% over 929 days.
- Recoveries are explosive: After the 2002 bottom, the S&P 500 jumped 15% in the first month, and 33% over the first year.
Quote:
“That’s why you want to hang in there. Because if you’re doing the right thing with your portfolio, hopefully you’ve only got a third to half the volatility of the broad markets. And then when it comes back, hopefully you’re recapturing two-thirds to three-quarters of the upside.” – Brian Preston [33:37]
- Personal Example (“Selling at the Wrong Time”):
- A client demanded to sell after a short-term loss, missing the full recovery that soon followed.
6. Avoiding the “Three Costliest Mistakes” (from Barron’s article) [50:20]
a. Failing to Diversify
- Many employees have too much 401(k) in company stock, leading to devastation if the company fails (e.g., Lucent, Bear Stearns).
- Recommendation: No more than 5-10% of your portfolio in your company's stock.
b. Trying to Time the Market
- Investors tend to pour money in at peaks and sell at lows, consistently underperforming.
- Dollar-cost averaging and systematic investing outperform haphazard, emotion-driven approaches.
Quote:
“The kind of behavior of getting excited about good news and scared after bad news causes many investors to give up between 2.5 to 3 percentage points a year.” – Brian Preston [59:30, referencing research]
c. Overpaying Investment Expenses
- Investing in high-cost, loaded mutual funds costs tens of thousands in lost returns over decades.
- Always choose low-cost index funds or no-load funds when possible.
Quote:
“There’s a $5,018 difference on a $10,000 investment over a 20-year period that you would have paid. That’s money you could have earned additional earnings on…” – Brian Preston [01:05:21]
7. The Media’s Role and Market Negativity
- Observation: Media coverage focuses on negative news because “fear sells.”
- Advice: Don’t let media hype drive your investment decisions; positive developments get little press.
Quote:
“You cannot tell me the media has not recognized that it’s much more profitable to sell bad news than it is to sell the good news that’s out there.” – Brian Preston [43:20]
8. The Big Picture: Confidence in the Economic System
- Even in worst-case scenarios, US business innovation and governmental flexibility (rate cuts, tax policy) underpin long-term recovery.
- If the US economy were truly “finished,” the stock market would be the least of our worries.
Quote:
“If capitalism does not work in the United States anymore, who cares what’s going on with your stock portfolio? Because you need to go find an island out in the Caribbean... That’s going to be the stuff that gets in your head and causes you not to make the right decisions.” – Brian Preston [01:10:24]
Notable Quotes & Timings
- [04:38] “You don’t have to lose your mind and lose all of the analytical thought process that puts you into the plan that you’re currently in.”
- [11:00] “The relationship between risk and reward…with that great reward that you can earn, there’s also quite a bit of volatility that comes with that, meaning it’s a roller coaster.”
- [13:20] “We all hear the adage that you want to buy low and sell high, but…many of us out there do the exact opposite.”
- [33:37] “Hopefully you’ve only got a third to half the volatility of the broad markets. And then when it comes back, hopefully you’re recapturing two-thirds to three-quarters of the upside.”
- [43:20] “You cannot tell me the media has not recognized that it’s much more profitable to sell bad news than it is to sell the good news that’s out there.”
- [59:30] “The kind of behavior of getting excited about good news and scared after bad news causes many investors to give up between 2.5 to 3 percentage points a year.”
- [01:05:21] “There’s a $5,018 difference on a $10,000 investment over a 20-year period that you would have paid. That’s money you could have earned additional earnings on…”
- [01:10:24] “If capitalism does not work in the United States anymore, who cares what’s going on with your stock portfolio? ... That’s going to be the stuff that gets in your head and causes you not to make the right decisions.”
Suggested Action Steps & Takeaways
- Diversify your investments (across multiple asset classes, not just stocks)
- Maintain discipline and don’t panic-sell during downturns
- Avoid timing the market: Invest regularly, regardless of market swings
- Minimize investment costs by choosing low-fee or no-load funds
- Tune out the media hype and focus on long-term fundamentals
- Trust the long-term resilience of the market and US economy
Additional Resources / References
- Show Notes, Charts, and Articles: Available at moneyguy.com
- Featured Articles Referenced:
- “What You Should Know in an Uncertain Market” (Brian’s October 2002 article)
- “Avoid the Most Common and Costliest Mistakes in Retirement” by Karen Hube (Barron’s)
- “Weathering the Storm in Volatile Markets” by Bill Cleveland
Conclusion
The episode delivers a calming, fact-driven message: market downturns are normal, cycles of fear and greed are predictable, and disciplined investing is the key to long-term success. By diversifying, ignoring the hype, and keeping investment costs low, listeners can survive volatility and achieve financial goals—even in the midst of chaos.
For further resources and to revisit earlier episodes, visit moneyguy.com.