Money Rehab with Nicole Lapin
What Not to Do When the Market Is Down with Peter Mallouk
Tue, 15 Apr 2025
Today, Nicole continues to unpack do's and don'ts for market downturns— this time, she's joined by Peter Mallouk, President and CEO of award-winning wealth management firm Creative Planning. In this conversation, Nicole and Peter break down the smart (and not-so-smart) moves to make when the market’s in the red. To learn more about Creative Planning and how they could help you meet your financial goals, visit: www.creativeplanning.com/nicole
Chapter 1: Who is Peter Mallouk and what is Creative Planning?
You know that I loved Creative Planning's approach to wealth management so much that I actually joined their team as a financial education advocate. Today, we talk about some things to do and not to do in times when the stock market is down. And stay tuned to the end of the episode where I share with you how you can get one-on-one help from Peter's team as well. But first, here's our conversation.
Peter Malouk, welcome back to Money Rehab.
Good to be back. Good to see you.
Chapter 2: How do bear markets typically behave and how should investors view them?
What a couple of weeks it has been. How are you doing?
I'm doing great. I think that like if you've been doing this a long time, you just know this stuff happens every year or two, one way or another. You bear market every four or five years, but you just get used to it. And it's a different story every time. You know, it's kind of like if you've seen a romantic comedy or a horror movie.
They have kind of this general same thread that goes through every single one of them, but that's a different story. So it keeps you interested. That's how I see bear markets. You know, sometimes it's a health scare. Sometimes it's a terrorist event. Sometimes it's a war. Sometimes it's a housing crisis. This time it's tariffs. You know, you just always have a different story, but in general,
It's a similar movie. And so if you've been doing it a while, you just embrace it. You just embrace it. I do think they're like horror movies in the sense that we know something bad is going to happen and then it gets really scary. And even though we know how this ends, you still get scared through the whole movie. And then we think we've killed the bad guy, but then the bad guy is really alive.
That's exactly like a bear market. Whenever it's gone, it'll be back. Might be back a year from now. Might be back five years from now, but it's always coming back.
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Chapter 3: What was the market reaction to the recent tariff announcements?
Yep. So bear market down 20 percent every four or five years. Correction down 10 percent every couple of years. We know this, but somehow it feel it always feels different. Like this one's going to be a different one from all of the time in history. You know, history doesn't repeat itself, but it does rhyme.
So people are definitely feeling scared and panic, especially around Liberation Day or as Bloomberg called it, Obliteration Day. Can you take us into the creative planning offices? We love you guys. I'm sure the energy was nuts that day. I mean, what was going on? Were you glued to CNBC or Bloomberg? Was your phone ringing off the hook? What was going on?
Well, it was very interesting because, you know, typically with a bear market, there's a series of events that come all at once, you know, COVID, 9-11, 08-09 housing crisis. And this was very much just one person making an announcement, right? And so President Trump had been talking during the election, after the election about what he was going to do.
He said he was going to impose tariffs, but he had used certain words like targeted, disciplined, focused. And this was Tariffs on everybody, everywhere. And much more extreme than he originally indicated. He originally indicated 10% and they were coming out with these huge deals.
So watching that announcement, watching the markets tank at the same time, I wouldn't say anyone here was nervous or worried. It was just like, well, here we go. The market's going to have to price all this in very quickly. And really one administration is going to decide what happens in the market for the next 30 to 60 days.
Now, this can go on for a while where no matter what they decide they want to do, enough damage could be caused that it takes on its own life force and a whole other issues come into play. But right now, I mean, the administration can make it much worse or much better depending on what decisions they make along the way. And so our job is to just navigate our clients through it.
And if opportunities present themselves, make sure that we seize them.
So let's talk high level about what those opportunities could be. What do you tell investors who don't know what to do with their portfolios right now? I'm sure even though you guys are calm because you've seen this movie before, people freak out and they call and they want to panic sell.
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Chapter 4: What advice does Peter give investors unsure about what to do during downturns?
Right. So I think it is interesting because there's all kinds of people out there. And I would there's what I would call the retail investor kind of doing things on their own. There's retail investors that have advisors. Those would be creative planning clients. There's institutional investors, which are big universities, endowments and so on. Our typical client.
really is, as a group, is generally unfazed by all of this. So we're constantly educating them on, just like you said at the top of this, Nicole, right? Corrections happen about every year or two. They're 10% or more. The average one's 14%. The bear markets, this is the third one in five years where there's a drop of 20% or more.
I mean, they know this stuff is going to happen and we've built their portfolios to prepare for it. So if you're young and we've coached people that are young, like this is amazing. You know, the longer a market can stay down if you're young, the better because you're saving, you're buying, you want to buy while they're at discounted prices. You don't want the market at all time highs.
You want it to stay down. If you're young or you're even if you're 55 and you're putting money away, the market run up yesterday was not positive because you want it to be lower while you're buying. But if you're retired or you're older and you're relying on the portfolio, well, you should have bonds to cover your short term needs. So either way,
the prepared investor isn't phased because they're prepared. They know these things happen and their portfolio is built in a way to prepare them. I think the average American, that's not how they're making their decisions, right?
They're buying stocks that they like and they watch them go down 20 or 30% and then they panic and then they go to cash and then the market goes up and you have this irreversible error. And you see that with the flows in bear markets. People tend to exit the market at the worst times and enter at the worst times.
Yeah. I mean, I think that when anything chaotic happens, it's always good to take a pause, whether in your personal life, in the market, not act irrationally. But during a downturn, you know, emotions get the better of people. Do you tell investors to stay the course with dollar cost averaging?
Or could there be a moment to double down and invest more, more aggressively if, you know, high quality investments are so-called on sale?
whatever they're doing in their 401k or that regular paycheck should always continue. But if for any reason there was some hoarding along the way where there was money, cash kept to the side that's not needed for emergency reserve, we do encourage them to invest that when the market's down. You never call the bottom. I think of it like mortgage rates drop 1%. You refi your home.
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Chapter 5: Should investors stay the course or invest more aggressively when the market is down?
The panicked investor is the worry. The biggest mistakes come from the panicked investors. If you're diversified, the way you're going to screw things up, the main way is by panicking. Now, if you only own one or two or three individual stocks, you have to worry both about the investor and the holdings. But if you're diversified, it's really the behavior that will drive the outcome.
If you've got the right behaviors... the right actions, follow those behaviors, you're going to be totally fine. Most of the permanent damage you see in portfolios is caused by people making mistakes.
Do you ever find yourself playing therapist more than financial advisor during some of these times? I'm sure. I mean, I know you're the head honcho, but maybe somebody's so freaked out. They're like, I must talk to the CEO. I must get to the top. I must panic sell. And then the red phone rings. I don't know what happens over there.
But how do you balance empathy with tough love in those conversations?
I think empathy is a key to this because a lot of people will call and say, I know what you're going to say, but, and then they'll ask the question. They just want the reassurance and kind of what I tell our team here is, you know, if The churches in America were full after 9-11 and nobody wanted to go there and hear anything but what they've always heard, right?
You want to be reassured in times of stress. And so reaffirming, hey, we've talked about these things and we've set up the portfolio this way and this is how this normally plays out is very encouraging. And that's really less about investing and more about education and empathy.
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Chapter 6: What is the biggest risk during a market downturn: bad investments or panicked investors?
Yeah, there's a little bit therapist that goes into this too. I think people want to know that it's going to be okay ultimately, and you can't hear enough. So I want to dig into some strategy. What's your take on rebalancing during a downturn?
So I'm a big fan of rebalancing in a bear market. And so if you think about a client that might have 80% stocks and 20% bonds, when the stock market goes down 20%, you're no longer 80-20. You now have less in stocks because the stock value has gone down. You've got more in bonds. The time to rebalance is right then when the market's down. Sell those bonds. Buy more stocks.
That's forcing you to buy the stocks when they're low. When the market eventually recovers, and that's what's happened every time in history, you'll be ahead of the market because you'll have added to that position in the down market. So that's something called opportunistic rebalancing. Some people never rebalance. Some people rebalance once a year. That's called periodic rebalancing.
Chapter 7: How does Peter balance empathy and tough love when advising panicked clients?
Really, the best investor will rebalance when the opportunity really presents itself.
Is it also a good time for tax loss harvesting? And if somebody doesn't know what that is, can you briefly explain it?
It's a fantastic time for tax loss harvesting. And basically that's realizing losses on purpose. So this is really hard for people to get excited about. So let's take last year. Let's say you owned the S&P 500 and you owned all 500 companies. Well, over the course of the year, the S&P 500 went up about 25%. That's great. And if you owned just the index, you would do no tax loss harvesting.
Chapter 8: What strategies like rebalancing and tax loss harvesting can investors use in a downturn?
It went straight up. But let's say you owned all 500 stocks and some of those stocks were negative throughout the year. Let's say Visa goes down. We would sell it and buy MasterCard. If Conoco goes down, you sell it, you buy Exxon. And you, you know, Hershey's goes down, you sell it, you buy Nestle.
Well, what happens is at the end of the year, you still get the same or extremely similar return to the index. You still have that 25%. But because you sold certain things when they went negative and replaced them, you get to put those losses on your tax return. And then you get paid back by the government on those based on your tax rates.
So you will wind up with a 25% return plus some additional savings on top of it. So it's an incredible opportunity when the market's down to be able to do things like that.
And how do you help clients decide when it's worth locking in a loss for a future tax gain? So, you know, at what point does Visa have to be in order to take advantage of tax loss harvesting? Or is that something you do regularly?
It's something we do regularly. And there's so much that goes into it. The market can't be too volatile to do it. It can't have There has to be a lot of people trading. There has to be what we call liquidity in the business. Buyers and sellers are really active. So we just automatically do it when all of the conditions are met. But usually if something's negative, we're just going to do it.
You alluded to a Buffettism that when you're young, you should want everything to go down and stay down until you need it later on in life. For clients nearing retirement during a recession, though, they don't have the luxury at that time. So what are the moves that you would have them make to protect their runway without sacrificing long-term growth?
I mean, you make a great point about the young investors. I mean, if you really believe like, okay, the market's at this level and when I'm retired, it's going to be much higher. The path from here to there, you want it to be as negative as possible and make it all up at the end, the sequence of the returns. really impacts how much money you will have.
But for the person approaching retirement, a lot of times they go, well, Peter, I need the money. I'm gonna need the money in a year or two. And the answer is sort of really when most people retire, they're still going to live 20 to 40 more years. They still need a very, very long-term portfolio. You know, in 1950, if you retired, the average person died that day.
The life expectancy, average person retired in their 60s and the average person died in their 60s. Well, that's not the case anymore. People still retire in their 60s on average, but they live into their 80s on average. So we get this portfolio to go on a long, long, long time. still has to be heavily weighted towards stocks and things like that.
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Chapter 9: How should near-retirees protect their portfolios during a recession without sacrificing growth?
Yeah, I think somehow we change mid-game, mid-play. I'm not a good sports analogy person, but we're long-term investors and then something like this happens. We can't all of a sudden switch to be short-term investors, right? We have to decide, are you a short-term investor, in which case that's a different bag, or a long-term investor, in which case the blinders have to go on as painful as it is.
That's right. When you're on the roller coaster and you're in the middle of the bear market, you cannot get off the roller coaster. You have to follow it to the end, get through the bear market, but then ask yourself, am I willing to ride that roller coaster again? The bear market is going to happen again. Like we said, it's just like the horror movie. There's going to be a sequel.
And so if you can't take it after that ride is over, get yourself on a different type of roller coaster, maybe a more moderate one. If you're totally unfazed, maybe you can even take more risk in terms of accept more volatility in your portfolio and move upstream. But the decision should be made after the market has returned to normal.
I really like the roller coaster analogy because I think there is a cost of admission to get to the carnival, to get into the investing world. You are able to get 7% to 10% returns over time. And so the ups and downs and the volatility is part of doing business as an investor. So I think that's important to remember. But people want to know how long those
downs are going to be and how long the ups are going to be those are things we definitely don't know but from what you're seeing right now is this more of a temporary storm do you think this is you know more of a russia ukraine situation where we rebounded in a matter of months or is this more of a 2008 when it took a few years to bounce back well i think the worst case scenario is off the table so i think that the announcement that hey we're going to work things out with most countries
The market has some relief there. But I think this is going to go on for quite a while because the reality is we're now doubling down on a trade war with China, which is our biggest trade partner. So it's a bigger deal to be in a trade war with China than the bottom 40 countries in the world. So I think that's a real thing for negotiations with the EU, Canada, Mexico.
This is going to go on for a while. And I think there will be more. I don't think it's over. Let's put it that way.
Now, we just talked to Steve Eisman, who, of course, if anyone saw the big short, hopefully everybody did. Steve Carell's character was based on and he was like, come on, this is not a 2008. We were looking death in its eye. That was that was Armageddon. This is not that this is this looks more of a like one of the garden variety corrections in the 100 percent.
Yeah. In terms of bear markets, this as dramatic as it is, would be on the lower end of drama in terms of bear markets.
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Chapter 10: What invisible work do financial advisors do behind the scenes during market downturns?
I mean, these are really, really big events that were external. This is self-caused. No one thinks the global economy is going to collapse. No one thinks everyone's going to die. We're going to get through this one way or another.
Yeah, I mean, we call them black swan events after economist Nassim Taleb, where they're basically events we can never predict. 9-11, COVID. This was actually something that President Trump talked about when he was campaigning. To your point, he said he was going to be much more targeted and precise, and then it got really aggressive, so people freaked out.
But do you remind clients that, you know, we already knew about this? This was told to us.
Well, I mean, definitely it was much bigger scale than expected. So I would never tell them like, hey, this was totally forecasted. But I do think that knowing there was going to be some tariff dispute, this should not be a surprise. And he did it in his first presidency too. And the market also went down 20% at that point. It took three weeks for that to happen.
So it was a little less dramatic, but it went on a very long time. It took almost a year for the market to get back to normal.
As you know, it's very hard not to mourn paper losses. It's also hard not to rejoice paper gains, right? The most important day is the day you buy and the day you sell and the rest is a whole bunch of, you know, nausea or whatever. But I think that, you know, optimizing gains is another part of this story.
So if we could switch gears and talk about some of the asset classes or strategies you find yourself looking for more often in a recession that clients might not expect, where are the big opportunities?
Well, the big opportunities in a recession are building the ownership part of your portfolio. So all investments fall into one of two categories, owner or lender. So if you own US stocks or international stocks or real estate fund or private equity fund, or you own your own business, or you own a duplex you rent out, those are all ownership investments.
And then the other side lending is loan money to the federal government. That's a treasury. You loan it to The state of California, that's a municipal. You loan it to Microsoft, that's a corporate bond. Those are all loans. You loan money to your friend, that's a bond as well. But in a recession, it's when being an owner, all those ownership assets are on sale in the recession.
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