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April Fool

William Ehart  |  April 10, 2020

HERE IS WHY I DON’T trade, and don’t make big market bets, and why you shouldn’t, either.

Headlines last Monday at 6 a.m.: Nation Braces for Brutal Week, At Least a Fourth of U.S. Economy Goes Idle, British Prime Minister Boris Johnson Hospitalized.

Headline at 9:30 a.m.: Dow Surges as Tech Stocks Rally

I got spooked last weekend. It was epic. I was actually scared after days of hearing about the bungled federal response to the pandemic and about states fighting over medical supplies. I wasn’t about to sell stocks—I knew that would be a dangerous emotional reaction—but I felt compelled to warn family and readers that things would be even worse than most people expected. In initial drafts of this column, penned early on Monday morning, I wrote that I was preparing mentally for the worst bear market of my lifetime.

Three hours later, the market bolted to its sixth-best percentage gain in 87 years.

In the spirit of Stephanie Grisham announcing that she was stepping down as White House press secretary after never holding a single briefing, I can confirm here that I am no longer Wall Street’s most influential market strategist.

It’s so seductive and ego gratifying to believe we know something others don’t. I was bent sideways all day Monday, desperate to avoid admitting what I’ve actually known for a long time: I’m a reliable contrarian indicator. My thought process was thoroughly corrupted as I went through the stages of grief—on a day when I was making thousands of dollars, thanks to my portfolio’s 76% allocation to stocks.

Of course, one day’s or week’s market action doesn’t sound the all-clear. What if I really, really believe things are going to be much worse than the market expects? Frankly, my investment stance shouldn’t change much.

Our individual market outlook matters little as long as we’re invested within our risk tolerance. We can get modestly more conservative or aggressive, but we should never make major, sudden portfolio shifts. Buying when things seem safe and selling when we get scared is the Exhibit A of bad investor behavior.

After my March 25 article appeared, a few guys on social media took me to task for writing, “25% to 30% off the high is a good opportunity” to buy, which I had indeed been doing. No, they said, this market is heading lower. Most people will die and go bankrupt before the stock market recovers, wrote one poor socially isolated soul.

Guess what? The universe doesn’t care what you or I or unverified Twitter accounts think will happen next. But it does seem to reward us for observing basic truths, following simple rules and maintaining good habits. In the investment world, here are some of them:

  • Investing in a broad collection of company shares is your best chance to build wealth over the long term. No, it isn’t a guarantee, just your best bet.
  • Remaining invested at all times is the only way to ensure that you’ll capture such gains.
  • Understanding your risk tolerance, and using it to drive your allocation to stocks and bonds, can help you avoid selling in a panic.
  • Periodic rebalancing keeps your portfolio’s mix of stocks and bonds close to your predetermined targets—and commensurate with your risk tolerance.
  • Don’t overthink any of the above.

There’s another rule I should probably add to this list: Make sure your portfolio fits with your broader financial life. Which brings me to perhaps my biggest worry: My job is still in jeopardy. As a 58-year-old father of one recent college graduate and another preparing to participate in a virtual baccalaureate, my first responsibility isn’t investment growth, but ensuring I’ve got a big enough financial cushion to fall back on.

Therefore, I’m recommitting to a conservative stance outside of my retirement accounts. I have a decent chunk of cash in an online savings account, though not as much as I’d like. Now is a great time to save more, while I have no commuting costs and I can’t dine out.

On top of that, my employer recently suspended its 401(k) matching contribution. That prompted me to stop my own contributions and instead set up automatic transfers of the same amount to savings. Over the next year, I may make IRA contributions instead of funding the 401(k). But I’ll make that decision based not on my feelings about the stock market, but on the safety of my job.

It’s been another crazy week. I’m grateful that, when fear knocked, I may have answered the door—but I chose not to make a contribution.

William Ehart is a journalist in the Washington, D.C., area. Bill’s previous articles for HumbleDollar include Different This TimeLuck of the Irish and No Sweat. 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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davebarnes
davebarnes
1 year ago

Since the panic started, I have made one “move”.
I took our regular monthly withdrawal of $4K from cash in our taxable account.
I don’t even know what our asset allocation ratios are. Don’t care.

R Quinn
R Quinn
1 year ago

Excellent article and perspective. Sound advice.

Thomas
Thomas
1 year ago

Bizarrely, the pandemic has reaffirmed my decision to be invested 100% in stocks. I’m in my late 20s and have no reason to fear market volatility right now, but last year while the market was surging I worried that I might not have as much risk tolerance as I anticipated. It turns out that my risk tolerance is even greater than I thought it was (which is surprising because outside of investing I am actually rather risk averse). Although I am of course saddened by the deaths and economic damage wrought by the virus, I didn’t bat an eye while the market was tanking.

Of course, it’s easy to be nonchalant when you have good job security and a flush emergency fund. My reaction would have been very different if I didn’t have either of those things.

Langston Holland
Langston Holland
1 year ago

What I love about this article is its warning about our primary investment opponent: ourselves. Stocks are our best shot at beating inflation, and while their near-term movements are a mystery, the long-term is not. Logic allows surprisingly simple rules to keep us out of trouble. Assuming our primary opponent doesn’t upset the apple cart. 🙂

A second thing I noticed was the comment about the bungled federal response to the pandemic. The opposite could be argued given that the flu has still taken more US lives this season than the coronavirus and current projections continue this trend. This doesn’t prove the federal response was good, but it does indicate that we won’t know until this is over and all the data is in.

I say this just to illustrate how powerful our emotions are (I’m no exception!) and how important rules guided by logic are to making good decisions.

Another decision that can be approached logically is the event the markets are closed for today. The link below is a 13 min. video that beautifully illustrates the logic behind the biblical account of Easter. It’s a direct reading of a wartime Feb. 1942 British radio transcript that was later included in the book “Mere Christianity” by C.S. Lewis.

https://you tu.be/bxzuh5Xx5G4

Roboticus Aquarius
Roboticus Aquarius
1 year ago

We can get modestly more conservative or aggressive, but we should never make major, sudden portfolio shifts.

I really think this is key. If you aren’t a pure buy and hold investor (and for me this is sometimes difficult), avoiding impulsive behavior is key. That’s why I created personal investment rules to protect my portfolio. I limit any portfolio adjustments to once per month, and the amount to 10% of my portfolio. Any significant change in my AA is going to take many months to accomplish, and that gives me time to reflect on the wisdom of those changes along the way.

I feel the importance of a sufficient financial cushion as well. Something about your kids starting college seems to bring home the realization of just how much may depend on our ability to manage our money with wisdom and an eye to worst-case risk-assessments.

Roboticus Aquarius
Roboticus Aquarius
1 year ago

I have very strong emotions about the Pandemic. There are many things this administration had little control over, yet I could literally write paragraphs of factuals regarding the pandemic that support the statement that the response was ‘bungled”. I’m going to leave it at that with a heartfelt thank you for acknowledging the truth, and make no more comments about it here.

medhat
medhat
1 year ago

Yes, the gyrations of the market would most definitely have punished fear-based selling. But on the other hand, market optimism may be premature. Personally I’ve always and continue to be an advocate of scheduled buying. I still need to make 2019 IRA contributions. Am I buying at the nadir/peak? Don’t know. All I know is that I’ve got to buy before the deadline, when I get around to it. Likewise, regularly scheduled buying keeps me from obsessing over the day-day, week-week movements.

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