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WORKING ON A TRADING floor has its perks—or, at least, it did back when we were all in the office, instead of toiling away from home. The trading floor where I work is small, but it still houses perhaps 50 people.
As you’d expect, we have TVs all around, tuned to CNBC, Bloomberg and—my personal favorite—The Weather Channel. My colleagues often talk stocks and portfolios. What’s neat is you get a good sense of investor sentiment being out on the floor and among finance folks who are geared to day-to-day market movements.
But even though I haven’t been on the trading floor for a few months, it’s easy to sense that many people are cautious—fearful of the next shoe to drop or that we’ll “retest the lows”—and so they’re holding more cash than they want. If you’re in that camp, you shouldn’t beat yourself up about it. But you need a strategy for getting back in.
One thing I’ve learned about investing: We should always have a plan for what we’ll do if we’re right and—more important—if we’re wrong. It’s the latter situation that a lot of people are unprepared for.
Are you one of those investors sitting with cash on the sidelines and you realize you should put some or all of it into stocks? You’ve probably heard this before: We hate losses 2½ times as much as we enjoy gains. Regret is an emotion we constantly seek to minimize. With that in mind, here are five strategies that I use when putting money to work in the stock market:
1. Run the numbers—and then just do it. I check my personal asset allocation to see where I’m underweight and then, during the trading day, I’ll do some buying if it feels like a good moment to invest. The hard part for me is pulling the trigger, so I’m okay being a little impulsive about when I buy.
2. Use mutual funds, not ETFs. Exchange-traded index funds, which can be bought and sold throughout the trading day, seem to be all the rage right now. But the beauty of mutual funds is you can run your numbers, place your buy orders quietly on the weekend and wait for your order to be executed at Monday’s 4 p.m. ET market close, rather than dealing with the stress of entering a market or limit order during the hectic trading day.
3. Seize the opportunity. With regret minimization in mind, a strategy you might employ is “reverse” asset location—and then fix your asset allocation along the way. With bond yields low and the pullback in many stock market sectors (U.S. large cap growth not so much), you might revamp your portfolio to hold stocks in tax-sheltered accounts and bonds in taxable accounts. My thinking: Bonds will produce little taxable income, so there’s not much tax cost to holding them in a taxable account. Meanwhile, stocks may generate far more capital appreciation now that valuations are lower, so keeping them in a retirement account could be a smart move.
4. Start from scratch. A way to combat “status quo bias” is to ask yourself, “If I were starting out, would I buy the portfolio I own today?” Often the answer is “no.” Consider the current pullback a chance to rid yourself of investments you no longer want to hold. An added bonus: With share prices down sharply, there may be little tax cost to selling these positions—and you might even generate losses that’ll reduce your 2020 tax bill. I’ve been doing some of this.
5. Play the long game. If you’re like me, when you buy an ETF, do you check how it’s doing later that trading day and in the days that follow? This, of course, is completely irrational. I bought the ETF to pay for retirement and yet I’m checking on it after a couple of days to see how my decision panned out. Yes, it’s scary to buy when we know stocks could drop sharply. But the fact is, I’m in my early 30s. I likely won’t touch my portfolio for 30 years or more. Whether I deploy a little cash today, or when prices are 20% higher or lower, hardly matters.
Mike Zaccardi is a portfolio manager at an energy trading firm and a finance instructor at the University of North Florida. He also works as a consultant to financial advisors on an hourly basis, helping with portfolio analysis and financial planning. Mike is a Chartered Financial Analyst and Chartered Market Technician, and has passed the coursework for the Certified Financial Planner program. His previous articles include Riding the Bear, Stepping Up and Where’s My Refund. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn and email him at MikeCZaccardi@gmail.com.
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The only thing is that capital appreciation in a retirement account will be taxed as ordinary income. Isn’t that a negative for people in higher brackets?
Mike, nice article. I love the notion of having a plan for when we are wrong. First step is admitting we were wrong.
But you don’t know what the numbers will be at Monday’s 4 p.m. ET market close.