No Sweat

William Ehart

I’M STRUCK BY HOW calmly I’m taking this fast-and-furious coronavirus selloff. The human toll is getting worse every day, and the economic and other consequences could be catastrophic. But I’m not tempted to sell. I’m also not in a hurry to buy the dip, though admittedly my pulse quickened Friday afternoon when the market was down 15% from its Feb. 19 high.

There’s absolutely no way to know what will happen first: Whether I’ll regret not buying the dip or Dustin Hoffman will knock on my door in a biohazard suit. Why am I feeling so serene—at least so far? There are three reasons:

  • I’ve learned a lot of hard lessons over a long investing career. I’ve been there, done that, reaching out my greedy palms for falling knives. Heck, I grabbed the Sword of Damocles with both hands in 2008-09 and thought I was a genius. Turned out that buying Goldman Sachs and Morgan Stanley on margin in the middle of a financial crisis wasn’t the right play. Go figure.
  • I’m a man with a plan. I am fully invested in a global portfolio in accordance with my predetermined risk tolerance, diversification strategy, age and circumstances. When the market falls is a really bad time to decide you can’t tolerate as much risk as you thought.
  • Market pullbacks just aren’t the same when you’re mostly in target-date funds. This is the first downturn since I put most of my portfolio in them. When I started writing this piece, I was thinking about my asset allocation targets, and rules of thumb for rebalancing and dip-buying. But then I remembered that the good folks at Fidelity Investments and Vanguard Group, who oversee my target-date funds, are doing almost all of it for me. They aren’t sweating it. Automated systems are using inflows and outflows of money from investors to keep my target-date funds at a set ratio of U.S. stocks, foreign shares and bonds. Right now, my funds are buying the dip for me.

We invest long-term in stocks to capture historically robust after-inflation increases in corporate profits and dividends. But we also know that those gains are subject to gut-wrenching plunges that scare many out of the market.

Why do otherwise sensible and experienced investors bail out of stocks at times like this? Blame it on the narratives they come to believe. There are stories to explain every market decline. The further the market drops, the scarier the stories get. Soon, people are babbling about the end of the world. The financial media will even trot out seers who have been predicting catastrophe their entire careers—and suddenly we imagine they were right all along. But just as “this time it’s different” is a bad attitude when the market is levitating, it’s a dangerous thought on the way down, too.

Are you thinking, “The market’s headed much lower, and this time it isn’t going to recover within a few years”? Or are you telling yourself, “When I look back a dozen years from now, the market won’t have tripled, as it did from its Oct. 9, 2007, peak through Feb. 19, 2020”? Of course, such thoughts could prove correct.

But them’s sellin’ words—the kind uttered by many a poor man over the centuries, but not too often by successful investors. If you really want to know the right time to hit the bunker with masks, bullion and automatic weapons, subscribe now to my newsletter for $99.99, and I’ll throw in my…. Oh, never mind. Wrong blog.

On the other hand, the agitation you’re feeling—and that tingle I got Friday afternoon—may not be fear, but greed. Maybe you want bragging rights, to be able to say you sold near the top and bought near the bottom. You think you’re smarter than the average bear and you want to prove it. You’re all about oscillators and moving averages, and for some reason you just started using your discount broker’s spectral analysis tool, whatever that is.

Bernard Baruch, who made millions with adroit market moves and later advised two presidents, Woodrow Wilson and Franklin Roosevelt, said it well: “The main purpose of the stock market is to make fools of as many men as possible.” In other words, fear and greed are both emotional reactions that are hazardous to our wealth.

I could cite a raft of statistics on the depth and duration of historical stock market selloffs, as well as recovery times and subsequent returns. For instance, the Dow Jones Industrial Average rose 26% in the year after the flu pandemic of 1918-19 peaked. That influenza killed tens of millions around the world, including nearly 700,000 in the U.S. If the Dow’s performance then provides you with some comfort today, fine. But it may be a useless factoid.

My point: Don’t try to game this out.

A year or two ago, as I thought about future selloffs, I gave myself the flexibility to modestly increase my target stock allocation—currently 72%—if the U.S. market sold off about 20% or more. One way I could accomplish that is by swapping some money from a shorter-dated target fund into a longer-dated one—going from, say, a 2030 fund to a 2035 fund. As of Friday’s selloff, it’s officially on my radar. But even if I do it and make a nice profit, it’s not the kind of thing I can brag about at parties. Can you imagine the reaction? “Check out that guy, he’s a target-date fund trader.”

My trading days are done. Partly as a result, my retirement days are getting closer.

William Ehart is a journalist in the Washington, D.C., area. Bill’s previous articles include Resolve to RebalanceDurn Furriners and Oldies but Goodies. 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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