I’ve made a few investment mistakes in my life that were only revealed when the market took a tumble. It’s arguably time to look back and assess what effect past lessons learned had this time around—arguable because I don’t believe we’re near the end of the current market turmoil.
Our portfolio has always been centered on index funds. Still, I began investing outside my original strategy during the dot-com boom. The old saying about everyone being a genius in a bull market is correct. It was hard not to do well in the nineties, but the real test of investment wisdom came when the bottom fell out.
All at once, institutional investors figured out that companies with no bottom line didn’t make for suitable long-term investments. They bailed out of these stocks, and amateur stock-pickers got slaughtered. I learned then about the value of broad diversification; some equity sectors did better than others, and bonds held value or appreciated as investors fled to safety and stability.
These individual stocks were a minority of our portfolio, but the losses were painful. We moved what remained of our tech stock holdings into a couple of managed equity funds and left stock-picking behind.
Eight years later, the realization of what was about to happen led me to mild panic and a rebalancing out of the bulk of our equity holdings, just before the housing bust occurred. The conventional wisdom holds that timing the market is a losing proposition. I was lucky to get out when I did, but even more lucky getting back in at nearly the right time. Even so, I missed the first 30% of the recovery.
I easily could have waited out the recovery on the sideline, though, unwilling to re-take the risk that I’d successfully unloaded. How much wealth gain would I have missed then? That’s the trouble with timing—it’s a two-step process, and you have to get them both right. Luck shouldn’t be a deciding factor in successful investing.
I learned that jumping out too early or getting back in too late could have undone the good work of a well-diversified portfolio. I realized that I’m in the market for a reason and that I set an allocation for a reason. Either those reasons are valid, and I should stick with my strategy, or they’re invalid, and I should try something else. Jumping back and forth only adds risk.
I incorporated what I learned each time, so when the recent sharp decline hit, I remained convinced we’d keep the portfolio intact, come what may. I kept a fairly aggressive 75%-stock allocation in place until just this past week.
We suffered a decline over the last quarter, but nowhere near the drop in the broader market. Our diversified bond buffer worked as intended.
I’ve been in the habit of periodically rebalancing our portfolio to the allocations I’d set for it as it drifts out-of-balance over time. I stepped up that practice to once per month as market values eroded, essentially buying into now-cheaper equity shares with bond shares that were holding their value. Doing so helped, but not to a great extent. This was a very short period to test rebalancing theory, so I’ll continue the practice regardless.
So what did I learn throughout this turmoil? Nothing is exciting about holding investments that don’t move much when the stock market is on an upward tear. Still, they pay their way by reducing portfolio volatility and providing resources to purchase beaten-down shares when the market comes tumbling down. There’s always a tumble looming. The jury is still out on increased rebalancing.
In short, staying the course has profited me. The V-shaped bounce back up in equity prices helped exemplify all of this quicker than I expected—most recessions take longer for the markets to clear. This one is unusual in our lifetimes. Lately, most significant declines are so.
If I knew what the next year or so holds for the pandemic, or the stock market, or life in general, I wouldn’t be writing about it. It’s the uncertainty that’s intriguing. A few things seem clear, and I’ll prognosticate beyond.
Some US states are showing a sharp uptick in COVID-19 cases since the grand re-opening. It’s almost as if the virus is making us all suckers. This raises the specter of a re-closing before the fall flu season.
The travel, hospitality, and restaurant industries are all going to suffer significant job losses soon, regardless. Many re-opened businesses will not survive. Restaurants only succeed with packed houses. Ditto bars. Airlines make money only when their seats are near-full. Hotels are much the same. Many of these businesses report low demand. How many will remain past the fall of 2021? Fewer, I think.
I believe we’ll see a significant re-testing of the lows in the US stock market as a result, so I’ve recently re-allocated our portfolio to 50%-stock. That’s relatively conservative for me, but I feel a more defensive posture is the right way to face what comes next.
I’ll continue rebalancing monthly, regardless. That practice has proven its worth. Some caveats to that are the cost of rebalancing—trading commissions and fees, and mutual fund restrictions on frequent trading.
When the day comes that we have a COVID-19 vaccine, I’ll go back to a higher stock allocation. Recall that the past decade’s run-up was predicated on Fed intervention in the markets after the housing bust. The same type of response, only much higher in degree, is going on right now. Imagine how that will spur the market down the road.
Nothing I write should drive your investment decisions. This is an effort to organize my thoughts and consider next steps. Do your own homework. Investing can be a rewarding duty, but only through education and discipline. If that’s not your cup of tea, finding a professional investment advisor is a smart move.