Hi, my name is Bob Brooks. Today I want to talk to you about how to invest in a declining stock market. Before we get started, as always, I want to make sure that you know the intention of these videos, these are educationally based videos, they're not intended to give advice, man, I'm not trying to tell you what to do. I'm certainly not trying to tell you how to think that's the the the whole purpose of these videos is to teach you the pros and cons so that you can draw your own conclusion. So always keep that in mind. As we talk through these these issues, these important issues dealing with money.

I was back in 2007. And I never forget this. I was talking about the risk that I saw building in the markets. I was talking about the subprime mortgage meltdown that I thought was coming. I was talking about the financial crisis that that was coming. I had no idea it would be as bad as it was.

But I was just talking about this. It's not that I can predict anything. It's just that I was looking at the facts and the figures and said, this is unsustainable. And I'm talking about This, I talked a lot about it on the radio because I wanted people, you know, I wanted listeners to be aware of what's going on, I wanted them to be informed so they can make good decisions for their own portfolios, and for their investments. And so I got this phone call, I was on the radio. And this listener said, yo, Bob, that's great.

Thanks for the analysis. Thanks for the information. And I still appreciate it. And now what do I do? You're telling us about all this stuff that could happen. You're not telling us what to do?

What, what the steps that we can take, give us some idea. And that question has always struck me and stood out to me because as someone who manages money, I know what to do. I know what investments to use and what investments to stay away from. I know what strategies make sense in a declining market. And that's just through years of experience that I've learned that but that's not something that someone can go really apply on their own with a 401k plan. And so I got to thinking, you know, I don't really have a good answer for this.

So over the years, I've been develop what I call Plan B strategies in this concept of Plan A and plan B. Now, here's the thing is that these strategies or ideas, their ways to manage risk, because the problem is we're not taught how to manage risk, a good risk management system. We're taught, we're taught about taught, taught how investments grow, and growth, everything's focused on growth. Now, this plan a plan Beeman, the concept is Plan A is a good market, in Plan B is a bad market. And so the mutual fund industry will have you kind of lead you to believe that these bad markets, that's not a big deal, you're a long term investor, you just stay invested in your ride the roller coaster, I don't know about you, but if the markets losing 40 50% that makes sense to me to be in it.

So it's all about having this plan B. Now, when I talk about these, these strategies, some that you'll like some that you maybe don't agree with some AC got a radical to you based on what you believe in what You've been taught, and then some, you may want to combine two or three of them and have a big strategy. But let me tell you why Plan B is so important. I'll use the last bear market as an example. Now, if you go back in history, and I'm a big history buff when it comes to the market, if you go back through history, you'll see that there is an extreme number of years of bull market where the market went up. And there's a smaller number of years when the market went down, and that's called a bear market.

Let me tell you why Plan B is important because what the mutual fund industry will have you believe, is that there's just a smaller number of years, so it's no big deal. And so if you look at between 2007 and 2009, when the stock market crashed, and went through a devastating bear market, guess how many years that wiped out of growth 18 months almost wiped out 13 years of growth. Do you think a plan B is important? That's why I want to stress to you don't just blow off these periods of decline. You know, they'll tell you don't look at your statements just ignore, just write it out. I don't think that you have to accept that.

And the other thing too is I don't think that any investor should be on the stock market roller coaster, where you go up, you go back down, you go back up, you go back down. And we go through environments like that. And so you want to be careful that you have a plan B in place for a bad market. Now, in order to implement, there's a couple of things that they're their fundamental drivers to long term success when it comes to comes to investment success. So it's this and these go hand in hand, the ability to control emotions and the ability to make decisions. What have a skill set that I would encourage you to read about.

There's books, tons of books written about decision making, and becoming a good decision maker because here's at the crux of it, is that every time you make a decision, you're when it comes to investing and you're shifting from Plan A In the back of your mind, you're going to go What if I'm wrong? And what that does is that puts up that puts that brick wall in front of you creates hesitation. And a lot of times people just look at changing to a plan B strategy, but they don't. They're taking losses and they're wondering what if I make the wrong decision and the market comes back and it stops declining? So you have to become a good effective decision maker, and you got to be able to remove that emotion. Anything financially, you've got to build remove emotion, because money can cause stress, anxiety, fear, you name it.

I'm sure you've, you've, we've all experienced it to some degree. So you have if you if you make decisions through that filter of emotions, chances are you're going to make an emotional, irrational, bad decision. Make sure that you're taking a step back, realizing and acknowledging, Hey, I got a lot of emotion here. But what I want to do my goal is to make a decision, not through the lens of emotion, but through the lens of practical information where you've weighed out the pros. The cons. So let's start out with the first Plan B option.

Now, if you are a follower of pop culture finance, you're going to completely disagree with me most, most people who are who are in the business are going to disagree with me. And that is get partially or completely out of stock market. This is the one thing they tell you never ever to do, don't ever get out of the market don't ever sell because you're going to be wrong. This is and it's kind of one of those things. And then they publish all these statistics, but they don't publish the other side of the story. But they publish these statistics.

We're going to do a teaching video on this, by the way, they tell you the biggest mistake you're gonna make and show you why. But once again, they don't show you the other side of that if you get out of the market. So this is this is about looking at your portfolio and saying, you know what I'm, I am, I've made good money this year, I'm positive. I think I want to get out of the market, sell on my investments, go into a money market and just kind of hang out there for a while. Now. Or maybe partial Part A part of your investments that you want to do that, here's the thing about it.

Where most people make their mistake is they don't have a game plan to get back in. And that is the biggest mistake I see investors make. They don't have any idea how they're going to get back in. So they stay in cash. And guess what they stay in cash for years, because they never had a solid game plan and agreement with yourself, this is how I'm going to do it. So it might be that you say in six months, I'm going to take a look at this and evaluate if the markets done this, the markets done that I'm going to take this move, whatever it is, or maybe it's going to in six months, I'm going to start putting money back to work a little bit at a time over 12 months.

Whatever the strategy, have one and be intentional about it. Don't get out of the market with any idea how you're going to get back in. That's the biggest mistake I think people make another plan B option is adjust your risk level. And I talked a little bit about this on another teaching video. But I think it's it's good to bring this back up. And what you'll find on these teaching videos, by the way, is you'll find repeat teachings throughout some of these videos, the more times that you're exposed.

I think the more that you really learn and grasp it. So adjust your risk level, think about putting your foot on the pedal given the car, some gas, putting it on the brake and pausing for a bit. This is the same concept with investing. So you're going to look at how much the key question, what percentage of risk of the stock market do I want to take? Let's say that you're all out positive and you want to take 100% of the risk of the stock market, well, then you'd have 100% of your money invested in stock funds. So that's, that's how you base your risk.

Well, let's say that you're not really sure you're kind of positive, but you're kind of pessimistic on the market, and you wonder you're 5050. So say you want to put 50% in stocks in 50%, that other 50 cent percent by the way, for most cases, inside a 401k goes into into bonds. Now, I've done a teaching video on bonds and why you need to be careful in a post financial crisis world, in bonds can lose value. So you got to be careful with the type of the bond type investment that you use. It may be that in a lot of 401k plans have stable value funds, you could use that that that operate a little bit differently. But the bottom line is you want high quality, low duration type funds if the bond market is not in a good spot, so you got to evaluate that as well.

And not just buy into pop culture finance, just because you're diversified, you're in good shape. So determining what your risk level is what level of risk that you want to take. So maybe it is that you will take 20% of stock market and you put 20% in stock funds and 80%. At any given time, you can adjust that mix. Now of course, within an any investment account or 401k account, you got to make sure you're very familiar with the company's rules on changing investments because some will penalize you if you do it within a certain time period. So this is something else that you can do.

Number three, clean up your portfolio. Everybody at one time in their life, had an investment mistake. It happens it's happened to me and put money into investing go wow, that didn't work out and but and then there's a tendency to hang on to it. As if it's going to come back and it might come back, or it may just be a bad investment, take the opportunity to go through your portfolio and say, this investment is no longer something I want to be invested in this investment, maybe I want to take the profits and maybe this investments a higher risk that I want to take now and sell off that percentage of your portfolio and put that into cash. And then once again, what's the rule of thumb, if you go to cash, have a game plan to get back into the market, but this way you have the funds that you want to stick with, versus the ones that you just been hanging on to.

And the other thing too, is that this goes back to the whole decision making skill set is that sometimes we don't want to admit that we made a mistake in that investment. And so that keeps us from a psychological standpoint keeps us from making a decision, but if you're a plan B scenario, get rid of what's not working and get rid of what you don't like us lower beta funds. I talked about this in detail in one of my other teaching videos. And this is this is To a risk measurement of a mutual fund, and it's not an absolute risk management, it is a way to manage risk. I like it because it's easy to understand, it's easy to communicate. And you can take this and you can apply it to a plan B strategy.

Basically, the What the What it means is that a beta of one is simply that you're taking the exact same risk of the stock market set another way, if you have your money in a mutual fund that has a beta of one, and the market drops 30%, this is probably going to drop around 40% as well. If you have a beta of point five, that means you're taking half the risk of the stock market with your mutual fund. And that if the market goes down, you're not going to go down as much. If you have a beta of over one, you're taking more risks in the stock markets. This is a great way to look at your mutual funds or maybe build a different mutual fund portfolio of low beta stock funds. Now having said that, you got to test it out, test out that beta and they have betas for one year three year period five years tenure.

But you want to look to see how did that fund actually do back during the financial crisis. It's a great litmus test. In fact, you can go back to the financial crisis, you can go back to 2000. In 2002, the technology bubble that burst and see if they did indeed lose way less than the market, and then see how quickly they made the money back. One of the things I found with low beta funds I did a study on this is that most low beta funds that were true to their beta last, they did lose money in 2008, they lost not nearly as much as the market, but they made that money back quicker. And that's the thing, smaller losses, you can make back a lot quicker than bigger losses, it takes a lot more time.

So you can check the beta. Now we'll stop here and say this is that now you can start to see how some of these mixed together. So let's say that you want 50% of the risk of the stock market. Well, wouldn't it make sense to say if I'm going to take 50% of risk of stock market that 50% I want to be invested in low beta funds, you can kind of start making Seeing that together and making these strategies work together. Another Plan B option is to make room for alternative mutual funds, I have some disclaimers to go along with this. And this is a newer category of mutual funds love this category because alternative funds, mutual funds can actually help hedge some of the risk in a portfolio list.

Basically, what the alternative mutual fund is designed to do is to go the opposite direction, the stock market, they implement strategies to make money in a declining market. Now, obviously, you can't that's not guaranteed or anything and there could be decisions that are made by that alternative mutual fund manager that lose money but that's what they're designed to do. Now my disclaimer is is that there are a lot of alternative mutual funds that call themselves that but yet they are far from it. And you know, they're losing money while the markets losing money that never made sense to me they shouldn't even be in that category. So you're you're wanting to make sure that you find some that are true to the to the Category being an alternative fun. So think about this for a second.

Think about that you got a portfolio 50% in stocks, maybe 30% in bonds and 20% alternative mutual funds, those stock fund those stock funds go down in value these go up in value, you can see how this can start to offset this or a portion of this and limit your loss. So they do I think make a great, a great alternative when it comes to diversification. Because what if you are in a situation? What if we face a situation where bonds and stocks both lose money and have something making money in your portfolio? So picking the right alternative fund is it could be a great plan B strategy Now, having said that, they're a little bit more expensive. You know, I don't put as much weight on expense ratios as the mutual fund industry does.

Because I think if they're providing value in it making money in a declining market is providing value, then that's okay. It's and they're also a there's a different set of risks that go along with it. So you want to make sure that It's suitable for you as well. But this can make a great plan B option, how to invest in a declining stock market. If you listen to the mutual fund industry, it's all about planning, investing and staying in vested whether or not the market is going up or down. We've talked about how devastating those market declines can be on returns, which is something they conveniently don't tell you.

So it's important to have a plan A markets go up and a plan B when markets go down. And to make sure that you know ahead of time, this is what I'm going to do because a stock market decline can sneak up. Things can deteriorate pretty rapidly. You don't want to be just thinking about what my plan B is going to be at the time. When things are kind of deteriorating in the market you want to know ahead of time, but the best way to ensure potential financial success is to have a plan a and a plan B