Ignore That Gut

James Kerr

WITH THE MARKETS in a tizzy this year due to roaring inflation and the war in Ukraine, I’ve been kicking myself for not listening to my gut. At issue: an investment decision I made last fall.

When I left the corporate world in September, I took with me the 401(k) balance I’d built up over my five years with my former employer. I’d been aggressive with my investment choices in that 401(k), stashing half the account in Vanguard Small-Cap Growth Index Fund (symbol: VSGAX) and half in Vanguard Mid-Cap Index Fund (VIMAX).

That aggressive investment approach paid off in a booming stock market and, by the time I left, I had a fairly significant six-figure balance to roll over into my primary investment account at Vanguard Group, which is overseen by a Vanguard advisor.

Since the two funds had done so well, I initially thought I’d just keep the money invested in the same two funds. But after analyzing what my portfolio would look like with the addition of these two funds, my Vanguard advisor said that my overall portfolio would be too heavy in stocks. To get the portfolio closer to the 60% stock-40% bond split recommended for someone my age, he suggested that the 401(k) rollover be put almost entirely into the bond side of my portfolio.

I initially balked at this. My gut told me that interest rates were bound to go up when the Federal Reserve dialed back quantitative easing and, when that happened, my bond funds would likely be hammered. My advisor said that, while that scenario could indeed happen, he still recommended investing the additional money in bonds because historical data showed that a 60-40 portfolio provided the best diversification and investment protection for someone of my age.

I’ve been invested at Vanguard for years and trust the company to do what’s best for me. The upshot: I went with the advisor’s recommendation—and my rollover money went from stocks into bonds.

Lo and behold, six months later, interest rates are soaring and my bond funds are down about 10%. So much for investment protection.

“I told you so,” my gut scolds. “You should have listened to me.”

Ah, that gut of mine is so darn smart. He always knows the right thing to do.

After beating myself up for a while, I did a little digging into the numbers. The thing about the current market hit is that it’s double-barreled: Both bonds and stocks are getting crushed. Indeed, when I looked, Vanguard Small-Cap Growth Index Fund is down about 20% over the past six months. Vanguard Mid-Cap Index Fund has fared somewhat better over that timeframe and is down about 10%.

In other words, if I had kept my money in those two funds, I’d be down about 15% overall, even worse than my bond funds. When I took the time to think it through, all things considered, my diversified portfolio had indeed provided better investment protection than if I’d followed my gut.

Ah, my gut says—but you could have invested in commodities, which have been on a tear this year, or put the money in cash.

That’s when I have to say, “timeout.” Hindsight is 20-20. Who would have known, going into this year, that Russia would invade Ukraine, throwing a wrench into the energy market and sending commodity prices soaring? Certainly not me.

This is pretty much where I always end up in these internal debates with my wise-aleck gut. Many times, he’s right. But many times, he’s wrong, and it’s best just to go with the tried-and-true approach that has gotten me to where I am today and is backed by decades of market data. What is that tried-and-true approach? It’s simple:

  • Invest in a diversified basket of index funds and track the market, rather than attempting to beat it.
  • Dollar-cost average, so you spread your risk by investing when the market is both low and high.
  • Keep costs low.
  • Ignore market fluctuations and stay the course.
  • If you feel the need to test your investing prowess, carve out a little “play money.” While the bulk of my portfolio is in the account overseen by my Vanguard advisor, I have a separate pool of money that I used to buy some dividend-paying stocks in early 2020, when the market was crashing. Watching that account provides all the thrills I need when it comes to my investments.

The fact is, unlike hindsight, the way forward in the financial markets is always foggy—and, when you’re navigating through fog, you don’t want to go with your gut.

James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His debut book, “The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life’s Purpose,” was just published by Blydyn Square Books. Jim blogs at Follow him on Twitter @JamesBKerr and check out his previous articles.

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