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Money and Me

Jonathan Clements  |  March 28, 2020

IT’S BEEN A TAD over five weeks since the S&P 500 hit its all-time high. Five weeks have never felt so long.

It isn’t just all the articles that I’ve been writing and editing. I’ve also been busy with my own finances. I was on the verge of closing on the sale of my apartment here in New York and moving to Philadelphia. But then my buyer’s business collapsed amid the coronavirus slowdown and, with his income gone, he longer qualified for a mortgage.

My apartment is now back on the market, but I don’t expect to find a new buyer any time soon. My realtors are currently barred from showing properties—one of the restrictions now in place, as New York State looks to slow the spread of COVID-19.

Meanwhile, earlier this week, I updated my will. What can I say? It seemed like a prudent step to take. I even updated my letter of last instruction. If something happens to me, I hope it’ll make my kids laugh.

But like everybody else, my big focus has been my investment portfolio. I came into the decline with maybe 66% in stocks and 34% in bonds and cash investments. (This excludes the private mortgage I wrote for my daughter, which I consider part of my bond holdings and which, if counted, would boost my bond allocation by some 10 percentage points.)

Today, I’m at 72% stocks in my investment portfolio. How did I get from 66% to 72% over the past five weeks? I’ve been focused on four main issues:

Rebalancing. You know how the cobbler’s children have no shoes? Sometimes, that also applies to the cobbler. I’m usually pretty lax in how I manage my portfolio. In recent years, I’ve rebalanced periodically, but I don’t calculate my asset allocation with any regularity.

All that’s changed over the past five weeks. Every four or five days, I’ve been checking my portfolio’s split among U.S. stocks, foreign shares and high-quality U.S. bonds, and then incrementally rebalancing to get closer to my target allocation, which is 35% U.S. stocks, 35% foreign shares and 30% bonds. Thanks to this week’s rally, I’ve overshot a little and now have more in stocks than my written targets call for. And for now, I’m fine with that.

Trading over the past five chaotic weeks has felt, well, chaotic. I only own Vanguard Group mutual funds, which means my trades don’t get executed until the end of the day—an issue that HumbleDollar contributor Bill Ehart has also struggled with. Many folks have suggested that this is a reason to favor exchange-traded funds instead, so your orders get executed right away.

But I’ve resisted buying ETFs, because that introduces both trading costs and the risk you’ll get executed at a bad price, something that’s lately been a problem with bond ETFs. To be sure, I’ve put in mutual fund trades, only to find that the price at day’s end was much higher. But I’ve also ended up purchasing at far lower prices than I expected.

Still, to reduce uncertainty, I prefer to put in trades in the final 30 minutes before the 4 p.m. ET market close. Lately, that’s been a nail-biting experience, because Vanguard’s website has become excruciatingly slow, especially just before 4 p.m.

Some of my recent fund purchases have been at prices higher than yesterday’s close, but that’s the way it is in a bear market. You don’t know where the bottom is, so you just grit your teeth and keep buying, knowing that—five years from now—you’ll be happy you did. What if you rebalance and the stock market falls further? You can always rebalance again.

Simplifying. My portfolio’s core building blocks have long been total U.S. stock market index funds, total international stock index funds, short-term corporate bond index funds and inflation-indexed bond funds. But I’ve had a bunch of smaller positions that tilt my stock portfolio toward emerging markets, value stocks, small companies and real estate stocks.

As stocks plunged, I pondered whether to simplify things. I decided I was happy with what I owned, except my allocation to U.S. and foreign real estate funds. I sold both.

Why? Real estate companies are already in my total market index funds, and I’m no longer convinced I should overweight them by also owning separate real estate funds. Real estate stocks are very sensitive to interest rate changes, not something I want when the 10-year Treasury note is below 1%. On top of that, my foreign real estate fund is fairly closely correlated with my total international index fund, so it’s not giving me much added diversification.

Taking tax losses. Almost all of my money is in traditional and Roth retirement accounts. I own two stock index funds in my taxable account, but they’re far above their cost basis.

But my 80-year-old mother’s portfolio—which I oversee—is all taxable money. I’ve used the decline to take tax losses, unloading funds with unrealized losses and buying others that offer similar market exposure. She hasn’t been happy with her recent market losses, but I think she’ll be pleased when she does her taxes early next year.

Overweighting. Two of HumbleDollar’s contributors, John Lim and Sanjib Saha, have written about their plans to boost their stock allocation if the market falls further. This might look like market timing, which is frowned upon. But to me, market timing involves going from all stocks to all cash, or vice versa.

I consider overweighting stocks during severe declines—what some call countercyclical rebalancing—as more akin to exploiting temporary market insanity. I believe that, most of the time, markets are highly efficient, with rational investors easily offsetting what academics call “noise” traders. But sometimes, noise traders take center stage.

What if that happens? I’ve told friends that, if the stock market averages fall more than 40% below their Feb. 19 high, I’d consider taking my stock allocation as high as 80%. I’ve overweighted stocks like that once before. In early 2009, when I was still working fulltime and thus better able to shoulder risk, I boosted my stock allocation to 94% or 95%. At the time, many talked as if the world were about to end. I figured that, if that happened, it wouldn’t much matter what I owned. And if, perchance, the world continued to turn, stocks would rocket higher.

Today, I don’t sense that end-of-the-world pessimism. Indeed, we might have seen the market bottom last Monday. Still, there’s a chance this buying opportunity will get a whole lot better. If it does, you won’t hear me complaining.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include 27 Things to Do NowFear Not, Bad News and Don’t Lose It.

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