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.

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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