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LIKE THE COBBLER whose children have no shoes, I get so busy with this website and other projects that I tend to neglect my own portfolio. I think of it as benign neglect: If you’re invested in a globally diversified portfolio of low-cost index funds, there isn’t much reason to look or much need to trade.
But for the past week or so, I’ve been doing plenty of looking—and a little trading.
By the market close on Dec. 24, the S&P 500 stocks were down 20% from their September high, putting them at 18 times trailing 12-month reported earnings. For anyone with a contrarian bent and cash to invest, it seemed the market was presenting a wonderful holiday gift. But that gift was quickly snatched away: Three trading days later, the S&P 500 had bounced back 6% and valuations are a tad less appealing.
What to do? We all have different financial situations and are at different stages in our lives, and that will drive how we react. Here’s what I’ve been doing—and plan to do.
Thanks to the market slump, my stock allocation got down to 62%, with the remaining money split between inflation-indexed bonds and short-term corporate bonds. If I count the private mortgage I wrote for my daughter in 2015, which I consider part of my bond holdings, my asset allocation would be even more conservative.
The drop to 62% prompted me to move 2% of my portfolio from bonds to stocks. That, combined with the rally of recent days, has boosted my stock allocation to 66%. Should I raise my stock allocation further? As I wrestle with that question, four notions run through my head.
First, I believe markets are efficient—most of the time. Every so often, however, investors seem to lose their collective moorings. Think about purchasers of tech stocks in the late 1990s, home buyers in 2005 and early 2006, and bitcoin speculators in 2017. Think also about the panic selling by stock investors in 2002, and again in late 2008 and early 2009. Periods of frenzied buying are moments of grave danger—and periods of frenzied selling are moments of great opportunity.
That brings me to a second, related notion: Great opportunities are becoming harder to spot. Even at the depth of the bear market in early 2009, stock market valuations didn’t seem that compelling. Indeed, because valuations over the past three decades have been so much higher than the historical averages, it’s hard to know what normal is. On top of that, this is a market dominated by professional traders and money managers. If stocks resume their decline, the market will bottom not when your neighbors panic—which you may hear about—but when the professionals do, which likely won’t be visible to you and me.
Third, the financial freedom I have today was bought, in part, by shifting my portfolio to 94% or 95% stocks in early 2009, while also pouring any extra money I could find into the stock market. It felt like shoveling dollar bills into an incinerator—which is how great buying opportunities feel. Today doesn’t feel that way and, I suspect, we won’t get there. While we have ample political turmoil, the underlying economic problems seem far less worrisome than those of 2008 and 2009.
Fourth, I already have enough set aside for retirement and hence I don’t need to take a lot of risk with my portfolio. In my current semi-retired state, I’m no longer adding fresh savings to my portfolio. But I’m also not drawing much from my nest egg. I figure I probably won’t regularly tap my portfolio for income until I’m age 60, which is five years away. The upshot: I calculate that I could take my bond holdings down to 20% and stocks up to 80%, and still go 10 years without being compelled to sell shares.
Should I get that aggressive—and arguably take risk I don’t need to take? When the market falls, folks tend to view stocks as increasingly treacherous. I see just the opposite. As shares slide and valuations subside, owning stocks strikes me as less and less risky. I’m a lot more comfortable buying stocks today than three months ago.
My current plan: If the stock market continues to trade at current levels, I’d gradually rebalance my portfolio to a 70% stock allocation, which I deem to be a neutral position. If the S&P 500 drops more than 30% from its Sept. 20 closing high of 2930.75, I may go even higher—perhaps as high as 80%.
This, I readily acknowledge, is suspiciously like market timing. But I’d argue the portfolio changes I’m talking about are incremental, not the big all-or-nothing bets that market timers make. More important, I’d only end up at 80% stocks if the market presented a truly stunning buying opportunity—one of those rare moments, like late 2008 and early 2009, when investors collectively freak out. It would be great if it happened. I fear I won’t get so lucky.
Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Strings Attached, Seven Ideas and Just in Case. Jonathan’s latest book: From Here to Financial Happiness.
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My asset allocation in my portfolio is “fixed” in a “window allocation” of 70-(75)-80% index fund equities much like yours allowing me latitude to “invest on the leading edge of the present” and take advantage of those moments of greedy and fearful hesitation by others to buy and sell that present much like the gravitational hesitation of a rising ball at its zenith before gravitational forces take hold and pull it back in earth’s direction. That window is my “play money” 5% that might otherwise go into a speculative stock picking “Funny Money” portfolio allocation. There is a little stock picker or market timer in all Intelligent Investors. Just ask the ghost of Ben Graham about the influence that “Geico” had on him and his legacy!
Great post Jonathan. I’d also like to mention, as well as being a good opportunity to review investment portfolio allocations, a down market is also a great time for Roth conversions. What better time to do such a conversion than when share prices are down? With the recent market drop, it’s almost like the IRS is having a “20% off sale–but only if you act now!” deal. These kinds of “tax specials” don’t come along very often, best to jump on them whenever they do, I figure.
If there’s one thing I regret, it’s not more fully utilizing the Roth IRA. I guess I was too taken in by the “tax savings” hook of the traditional IRA, and didn’t realize that such an account doesn’t offer tax savings at all, but merely–tax postponement. Which is a good thing, but–the Roth is even better! I know, hindsight is 20/20…but to me, a Roth conversion is almost like getting a “do-over” and correcting that oversight on my part. When it comes to retirement investing, do-overs late in the game are few and far between–and getting a do-over late in the game with a discount is just icing on the cake.
I’m a big fan of the Roth and, you’re right, now would be a great time to do a conversion. But a traditional, tax-deductible retirement account can effectively give you tax-free growth as well:
https://humbledollar.com/money-guide/how-to-think-about-that-tax-deduction/
Have been thinking the same thing. We just converted about half of my wife’s IRA a few weeks ago. The only thing giving pause on converting the rest is that it’s early in the year, and it’s uncertain how the rest of the year will go. At the end of the year we can see more clearly and know for sure that we’re not going to push ourselves into another tax bracket or maybe into the 3.8% tax on net investment income.
“On top of that, this is a market dominated by professional traders and money managers”
Is that really true? From what I understand, most trading is done by robots nowadays.
The robots are programmed by the professionals, so — yes — it is true that the pros dominate trading. Unless, of course, the robots have taken over and are now calling the shots….