A few weeks ago, I posted my psychological response to the ongoing pandemic. It was solely about mindset and trying to maintain a positive outlook as our lives are upended.
This week I’ll talk about how I’m responding financially to the crisis. I’ll go over our family’s asset allocation and investing strategy during these times.
Why am I writing this? Because we personal finance bloggers and FIRE seekers are deeply invested (pun intended) in the current crisis. We’re all wondering what, if any, money moves we should be making.
It is perfectly fine to “stay the course” and continue dollar-cost-averaging into the market in the coming months.
For others who may be considering taking a more active role in the present circumstances, I offer my take.
Disclaimer: I’m about to talk about the future and investing money. Please do not construe this as investing advice. Rather, it is an insight into my thought process as I decide what to do with my money during these uncertain times.
First, let me start with a few pseudo-predictions. I need to establish my expectations and reasons why I am making the money moves I will describe.
I hate to even suggest that I can make accurate predictions as to what will happen. Obviously, no one knows for sure what will happen next. That being said, I have a set of expectations that I am basing my investing decisions on as we navigate this period.
- Things will get worse before they get better.
- The market bottom is not yet in.
- We will recover eventually.
From an economic and health impact, things will almost certainly get worse in the coming days, weeks, and months. There will be more infected Americans, and more deaths. There will also be more layoffs. And, eventually, we will see more businesses fold. This is only considering the direct effects of the pandemic. In all likelihood, there will be second-order outcomes that we can’t even predict. This is inherent to any large-scale disruptive event.
My second prediction is slightly more bold. I don’t think we’ve seen a market bottom yet. In fact, at the time of writing, we’ve clawed back nearly 50% of the drop since the February 19th high. I’m not an economist (or a seer), so I won’t try to explain or predict what happens next. I’m just very skeptical that everything will be normal again by the summer, and the stock market will cruise along like nothing happened.
I am optimistic, though, that we will eventually recover. If I didn’t believe this, I would have converted all of our assets into gold, guns and MREs at this point. I have a feeling that the recovery will take a while, but my investments don’t depend on a quick recovery.
Is This Market Timing?
I’m about to describe how we are investing during a tumultuous time for the market. I will talk about buying and selling in a volatile environment. Am I trying to time the market? Well, yes and no.
I would characterize what I’m doing as strategic rebalancing and opportunistic investing.
Howard Marks calls it “calibrating” in his most recent memo. The idea is that we should be evaluating the current conditions and adjusting our plan according to a changing economic landscape.
In this post from Fat Tailed and Happy, the author summarizes the idea of business cycle investing. Traditionally, the market goes through boom and bust cycles (although the Fed is doing it’s best to prevent this). It is prudent to be aware of what stage in the cycle we’re traversing, and use this to guide your money strategy.
What I’m NOT advocating is selling on the way down, or panic buying as the market rebounds in a FOMO fever. As you’ll see, I’m making moves that were mostly predetermined, and in concert with my long-term investing plan.
Asset Allocation, 2005 – Present
I started investing around the same time I started working full-time in 2005. At that time, I had no idea what I was doing, but I knew I should be saving some of my money for retirement. My 401k contributions were automatically and arbitrarily invested in a few different mutual funds.
Beginning during the financial crisis in 2008-2009, I embarked on a decade-long journey of understanding personal finance and investing. I read books like The Intelligent Investor, and I put my “prowess” to the test by investing in various individual stocks.
Related: The Brewing FIRE Investing Hierarchy
Throughout the past decade, I was 100% invested in equities, and the vast majority was in individual stocks.
Well, I sucked at individual stock investing, like 99% of investors, and so I underperformed the index for most of these years. In late 2018, I finally figured this out, and sold all of my individual stocks as a result. The proceeds went into low-cost, broad market index funds.
At the same time, a funny thing happened in the bond market. Treasury yields, which had been artificiality suppressed for nearly a decade, began to rise. The yield on the 10-year treasury note exceeded 3%. For the first time in a long time, government bonds were yielding more than the S&P.
I took this opportunity to start investing a portion of my portfolio into a bond fund. My thinking was this: I don’t mind getting a 3% return on a relatively small portion of my portfolio, and if interest rates collapse again, the bond price will go up accordingly. In a way, I win in both scenarios.
During the last two years, I slowly rebalanced and invested in a total bond fund, and by the end of 2019 I had a roughly 85/15 split between total stock market and aggregate bond ETFs (SCHB / SCHZ).
Then the crisis hit.
Here’s my plan. It’s pretty simple and straightforward.
- Methodically re-allocate bond fund ETF (SCHZ) into total stock market ETF (SCHB).
- Rebalance at specified points in the market decline, layering into equities in equal tranches.
- Supplement with additional cash investments as declines increase.
Now, I admit that I did not have this plan written down and pasted to my wall before the crisis started. At the same time, I’ve been waiting literally for years for an opportunity to invest at lower prices. The late 2018 bear market lasted hours, and was a true V-shaped recovery. Thankfully, I didn’t miss my chance this time.
In the table below, you can see my investment plan and progress made so far.
|S&P Target (drop)||Investment|
|2,709 (-20%)||20% rebalance|
(SCHZ –> SCHB)
|Executed – March 11th|
|2,370 (-30%)||20% rebalance||Executed – March 18th|
|2,201 (-35%)||20% rebalance||Executed – March 23rd|
|2,032 (-40%)||20% rebalance + cash||Pending|
|1,693 (-50%)||20% rebalance + cash||Pending|
As we currently stand, I was able to rebalance approximately 2/3 of my bond funds into SCHB. In dollar terms, this represents approximately $40,000 of our investment portfolio that was shifted into equities during March.
I will continue to shift assets from bonds into equities as hit the targets outlined in the table. Additionally, I will begin transferring cash from our savings account into our taxable brokerages if we decline any further.
As mentioned in my March Net Worth Update, we are sitting on a substantial cash pile due to some unplanned windfalls, so we have plenty to invest. If the S&P falls below 1,700 (50% decline), I will even consider “pulling forward” some of our planned investment contributions, and rebuild up our cash reserves in the back half of the year.
What if I’m Wrong?
First off, I will be wrong about something. I have no idea what happens next. I’m not trying to time the bottom, or day-trade these market swings. I’m just putting a predefined plan into action.
If the markets fully recover in the next few months and we approach new highs, I will rebalance some of my assets back into bonds. Yes, I will have accumulated a bunch of cash on the sideline that could (should?) have been invested. But I won’t cry over a slightly larger emergency fund.
If the market crashes even more than my plan anticipates (>50% decline), then I will continue to invest each month as our paycheck contributions hit our brokerage accounts. Which is the same plan as always.
In the (possible) event that we see large swings between the February high and recent lows, I may re-rebalance our portfolio. In other words, I will shift back into bonds as we approach previous highs, and then continue buying equities as the market declines. Think of it as rebalancing on steroids.
And that’s basically it. I will periodically update on my investments as we continue through this unpredictable time.
I haven’t spoken much about market psychology in the post, but I’ll make a few observations.
First, we are able to calmly invest amid this crisis because of the preparations we’ve made over the past 10+ years of our path to FI. I’ve been diligently slashing expenses, optimizing, and investing for many years. We have a robust emergency fund, and we’re fortunate to still be employed.
Being a part of the FIRE community has made all of this possible. I feel incredibly prepared for this moment, because I’ve been reading and thinking about how to handle it since I lived through it the first time 12 years ago.
I hope all of you are doing well, health and wealth-wise, and can’t wait to get through this mess and come out on the other side.
What do you think of my plan? Are you employing similar methodologies? Have you stuck your head in the sand? Let me know in the comments.