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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.

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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 PeaceableMan.com. Follow him on Twitter @JamesBKerr and check out his previous articles.

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wtfwjtd
wtfwjtd
4 months ago

Thanks for this James, I’ve been having some of the same reflections here. In our case, I ultimately decided to keep most of our money in stock index funds,reasoning that a 10% loss in a bond fund could take years to recover, whereas a month or two or, heck, in some cases, a week or two in a stock index fund would take care of a 10- or 20% “loss” pronto. Viewed like this, from where I sit right now stocks look a lot less risky than bonds, especially considering that due to full employment and rampant inflation interest rates have nowhere to go but up. Although, to be honest, I don’t think it’s going to be a banner year for either stocks or bonds, but considering the run we’ve had over the last couple of years I’m OK with that. The main thing is, to figure out what *you* need to do, and stick to it.

booch221
booch221
4 months ago
Reply to  wtfwjtd

Approximately 50% of my Vanguard portfolio is in bond index funds. I own bonds for the monthly income they produce. Rising interest rates means my monthly bond income is going up. I really don’t care that the NAV is going down as I intend to hold them forever.

Jo Bo
Jo Bo
4 months ago

The tried and true approach is undeniably the best overall.

Some, albeit rare circumstances, do require listening carefully to one’s inner self. Three months ago, mine woke me from deep sleep to tell me to move the stock-based (and handsomely appreciated) assets in my 403(b) into guaranteed fixed income funds. Not crazy at all, given that I would retire in a few months and have plans to annuitize the entire account in mid-2023. Acting on this immediately has likely preserved several thousands of dollars a year in future annuity payouts.

Brains process information in ways still not well understood. Mine was screaming subconsciously “asleep at the wheel”!

Mark Caspary
Mark Caspary
4 months ago

Boy is this timely thanks for this post! My Gut has been beating me up lately as I watch both stocks and bonds hit the skids. Stay the course is a real test in times like these. Another thing Mr. Bogle use to say that could help now is “Don’t Peek” easy to say hard to do! Thanks again for your post!

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