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Why I’m Sitting Tight

Dennis Friedman

WHEN I WAS AGE 10, we moved from Ohio to California. My father got a job by answering a help wanted ad in a local newspaper. When we first arrived in 1961, we lived in a 36-unit apartment building in Inglewood. It’s located about two miles from the Forum, where the Los Angeles Lakers and Kings sports teams used to play their home games.

One of our neighbors in the building was an older gentleman called Jack Tarentino. He loved to play chess. It seemed like Jack was always playing chess with someone. He would sit in the common area with his tiny chess set waiting for someone to challenge him to a game. One day, he asked me if I wanted to learn chess. I guess he was desperate for someone to play with.

We played frequently until he moved away. After that, I didn’t play very often. But when I retired, I started playing more. One of the things I like about chess is that you have to think before you make a move.

I like to believe the game has taught me to be more patient and to avoid too many emotional decisions. When I slow down and think about making a move during the current bear market, I can’t think why I should. Here are seven reasons I haven’t made any changes to my investment portfolio:

1. My financial goals haven’t changed. Since my goals and investment time horizon remain the same, there’s no reason to change my asset allocation in this bear market. More important, I sleep well at night because my current portfolio is appropriate for my risk tolerance.

2. It’s hard to time the stock market. If I sell stocks to protect myself from further losses, I’d have to be right at least three times—the day when I exit an asset class, the day when I reenter and the amount of money I move with each trade. That would be tough to do.

3. Being out of the stock market for just a few days can be extremely costly. A study by Bank of America, using data going back to 1930, found that if investors missed the S&P 500′s 10 best days each decade, their cumulative share price return would be just 28%. But if they held firm through the ups and downs, the return would have been 17,715%. In addition, many of the best market days were bunched close to the worst days, making the market difficult to predict.

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4. The bond market is just as unpredictable as the stock market. Like stock investors, bond investors are constantly looking ahead and factoring in new information. If I sold my bonds and planned on buying them back when the Federal Reserve stopped raising interest rates, it might be the wrong move and I could find I’d locked in my losses. In the past, bonds have partially or fully recovered before the Fed stopped raising rates. The upshot: It’s best to stick with my current bond allocation.

5. I don’t want to lose the power of compounding. Compounding is what propels a portfolio’s growth. If I’m not invested in the market, I’m giving up the ability for those dollars to compound over time.

6. Cash isn’t a better alternative. Money market yields have climbed in 2022. Still, rates remain low and are well below inflation. It doesn’t make sense, even in the short term, to swap into an asset that hasn’t in the past kept up with inflation over the long haul.

7. It’s usually best to do nothing. In a bear market, that’s often the less risky approach. In the past, the broad stock market has always bounced back. Since my investment time horizon is almost certainly longer than this down market, my portfolio should recover.

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. Check out his earlier articles and follow him on Twitter @DMFrie.

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jay5914
jay5914
2 months ago

Thanks for the timely article Dennis. Agree with all your points. The only point I would add is the value of rebalancing when appropriate.  If a person has done the appropriate work up front and has set an appropriate allocation, then at times like these rebalancing should be the main (if not only) consideration. Some rebalance at a point in time of the year. Others, like me, rebalance whenever allocations are off by a certain percentage. With bonds falling so hard this year along with stocks, many may not have met their threshold for rebalancing. However, it is certainly an important part of the long term plan. (Obviously, for those who hold a target date, 60/40, etc. funds the rebalancing is automatic.)

Ormode
Ormode
2 months ago

I don’t do nothing. When stock prices are low, I am a buyer. If analysis shows that a company is selling below fair value, then you should act. I have been retired for 8 years now, and I have more money than I ever had.

Humble Reader
Humble Reader
2 months ago
Reply to  Ormode

Curious about the “buy when stock prices are low” strategy. To be able to buy, some asset needs to be spent. We keep enough cash on hand for planned expenses and to feel comfortable about the unplanned future. But most of our assets are kept fully invested. Perhaps we could do a modest amount of bargain buying with some of our cash, but not enough to make much of a difference. Do you hold more cash or other liquid assets specifically to be able to take advantage of buying opportunities? And if in cash, how does inflation factor in to your results?

Derek R. Austin
Derek R. Austin
2 months ago
Reply to  Humble Reader

You could finance purchasing stocks with margin loans (against your existing holdings), mortgage equity (by not prepaying your mortgage or using a HELOC or reverse mortgage), or fixed-rate (unsecured) personal loans.

R Quinn
R Quinn
2 months ago

If only more people would follow this strategy, especially workers in their 401k. I hope they are more educated today than back in 2008 when I was managing plans, but I’m not so sure.

You’re right, cash is not a good alternative in this context, but having a pile of cash in retirement for just such occasions as a bear market can help avoid these mistakes – I hope.

There is a plus side when markets decline. Capital gains, dividends and interest being reinvested are buying more shares for the ride back up in the future.

Last edited 2 months ago by R Quinn
Philip Stein
Philip Stein
2 months ago
Reply to  R Quinn

Another plus: If the bear market drives down the value of your portfolio as of December 31, 2022, your RMD in 2023 will be lower. A smaller required withdrawal should help your portfolio recover faster.

Martymac
Martymac
2 months ago

Good advice! With the Fed probably going to hike two more times this year, prime money markets will benefit.

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