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I’M DETERMINED NOT to repeat my mistakes of 2008-09. I was ruined by that financial crisis or, more accurately, I let it ruin me. I led into it with my chin.
I’ll spare you the details of my personal situation in the years leading up to the crash, but the upshot is I was egotistical, financially reckless and looking for a big score. As the crisis unfolded, I piled risk upon risk, mistake upon mistake. I bought 2008 all the way down, loading up on many of the beaten-down financial names: Goldman Sachs, Morgan Stanley and even Lehman Brothers.
Unfortunately, I purchased Goldman and Morgan Stanley with borrowed money, using my margin account. I had been using such leverage for years—within prudent limits, I thought. I calculated potential downsides but, of course, it was the potential gains that seized my imagination.
The hard lesson for me? It wasn’t that margin investors can be forced to sell stocks in bear markets, particularly the worst and most sudden ones, leaving them no means to buy back in. I knew that. What I didn’t know is that brokerage firms can decide overnight that some securities are no longer marginable and hence they don’t count as collateral. E*Trade said I couldn’t borrow against my Goldman and Morgan Stanley shares anymore.
I was forced to sell. Probably less than two months before the low. Then I was laid off at the end of 2009 and missed about a year of potential 401(k) contributions as the market recovered.
I entered 2020 much poorer for my folly. But I have no debt today. The car is paid off and has many miles left on it. My big risk is getting laid off again—unfortunately, a real possibility, as it is for so many.
But unlike 2008, I’m not picking the hardest-hit stocks and trying to beat the market. I’m not hanging on the words of CNBC celebrities. My investments, largely in target-date retirement funds, are a mix of stocks and bonds appropriate for my age. I have targets for my exposure to U.S. shares, foreign stocks and bonds, and rules for rebalancing to stay near those targets.
How am I handling the fastest bear in history? So far, I can only grade myself a B, with a B+ for planning and preparedness, but a C+ for execution.
Why? I got emotional. I entered a perfectly well-reasoned buy order on Friday, March 13, with the market down 25% from its high, as I said I likely would. That was my first buy order of this downturn. But mutual fund trades don’t settle until the close. Not only did I end up buying after the “Trump bump” late that day, but the bump slumped all the way back down the following Monday, March 16. I’d unintentionally bought higher than I wanted, only to see prices immediately tumble.
I said I wouldn’t get upset, but I was. I wasn’t going to let that happen again. My two subsequent moves were rushed, even though they were limited and kept my stock exposure within target. I also made a modest trade on March 16 in my mother’s account, selling a tax-exempt bond fund for the Vanguard Total World Stock Index ETF. With my “Trump bump” experience in my mind, I insisted to her financial advisor that we buy the exchange-traded fund, not the regular mutual fund version. I wanted that price, that minute. No need to call me back. Just buy it. In fairness to me, Mom’s stock exposure remains reasonable and she might benefit from a bit more foreign diversification.
You’ve heard the cliché about fear and greed. But one component of greed is Fear of Missing Out and, last week, I caught FOMO like a virus. Mom and I were almost immediately underwater on all three trades, though yesterday’s big rally undid a lot of the damage. But such short-term losses aren’t a big problem or surprise. I know it’s not about buying at the bottom, it’s about buying when the market gives you opportunities. And 25% to 30% off the high is a good opportunity, just not necessarily the bottom.
Maybe I should add a time element to my rebalancing plan. Last week, a smart investment advisor told me that he rebalances client portfolios when their allocations get too far out of established ranges, but that he only considers such rebalancing once a month. Similarly, a Vanguard Group wealth management executive told me they generally rebalance client portfolios quarterly, though they’ll move between periods if portfolios get too far out of whack.
There’s discipline in that. A discipline that tames the FOMO virus. Markets may be higher or lower by the end of this month or the next or the one after that. There’s no way to know. But when you’re in the throes of FOMO, you are thinking markets are more likely to rise than fall in the near term. And none of us has any business making assumptions like that, any more than we should sell because our gut tells us markets are heading lower before they head higher.
The market being the cruel beast that it is, I suspect that until FOMO gets beaten out of me, the lower we go. So I need to slow my roll, but not make the opposite mistake of being afraid to buy when called for under my plan.
Am I beating myself up too much for rushing some trades? Maybe. I’m still prudently invested. Unless I lose my job for an extended period, I won’t be forced to sell, like I was 11 years ago.
This pandemic is a horrible tragedy, as well as a financial and economic crisis, unlike anything we’ve ever seen. But we have a responsibility to invest wisely and opportunistically. In wealth management terms, this almost certainly is a great buying opportunity. This time, I want to be able to tell my family that I bought.
William Ehart is a journalist in the Washington, D.C., area. Bill’s previous articles for HumbleDollar include Luck of the Irish, No Sweat and Resolve to Rebalance. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart.
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I use both time and valuation based limitations. I don’t maintain a stable AA, but I do maintain it in a range, with some small tactical adjustments a few times per year.
If I make any change to my portfolio, it’s limited to no more than 10% of my portfolio (5% if it’s a re-balance, due to the conditions that usually surround that big a shift in AA), and I can only do it once per month. Anything else I want to do has to take place 30 days later.
I use a 5% rebalance band as well.
In the ‘rather be lucky than good’ category, this worked out very nicely so far. I hit my 5% rebalance band two weeks ago, but my 30 day window was still in effect. So finally last weekend the 30 days were over, and I put in my rebalance order. It was a 9% rebalance from bonds to stocks, so I cut the amount in half, moving about 4.5% of it. I’ll do the other half in 30 days. It executed monday night, so I lucked out and bought at the recent bottom. I won’t get that kind of timing to happen again for a hundred years.
The time element helps prevent me from making too big a change too fast. I’ve found that as a long term investor, one of the biggest dangers is over-reacting – both too much and too soon.
That’s why I have these oddball rules – I slow it down on purpose, and chew my lip a lot.