It’s not too late to rebalance. You can still choose to get your risk levels right, but these decisions get more difficult than they were a few months ago: if you’re overweight stocks, you have to sell some of them, perhaps down more than 20%. We think bonds will start to outperform stocks in the near term.
If the market drops further, say with stock prices down 25-30%, these decisions get tougher. And eventually some investors reach a point where they’re not able to be buyers (already over-allocated to stocks) but they also don’t want to sell, because prices are so low.
This is the wilderness, where investors are just along for the ride, with no way to act positively on the volatility. Some investors have recently exchanged irrational exuberance for wilting hope. I hope this gets better soon. I hope my account doesn’t go down further. And that’s not great investing.
This is the wilderness, where investors are just along for the ride, with no way to act positively on the volatility.
Good investing means you can sustain risks. You don’t need to sell when prices are down because you have adequate cash, some to tide you over and some to invest when everyone else is selling. Good investing means you have cash when other people are forced sellers.
This is Warren Buffet’s whole genius. As far as I can tell, he’s not great at market timing, and he makes some mistakes buying the wrong stuff, same as everyone else. But what he did very right, was to make an insurance company (GEICO) the center of his portfolio. Cash is always coming in (premiums), and sometimes it’s going out (claims). Premiums paid allow him to be a constant buyer of assets or to accumulate cash until he’s a buyer. He’s never a forced seller.
And in the worst markets, he’s been a financier of last resort, negotiating his own terms with Goldman Sachs and Bank of America in the financial crisis. High interest payments plus an option on the future growth of the business? Cheers. That’s expensive money. That’s pretty good work. How did it happen? He does tv interviews and drinks Coke and allows cash to pile up until there’s a good reason to put it to work. Aw shucks, gee whiz, now let me take a chunk of your business. Maybe I’ll buy the whole thing later. Let’s keep talking.
And in the worst markets, he’s been a financier of last resort, negotiating his own terms with Goldman Sachs and Bank of America in the financial crisis.
On the personal level, this is the value of the planning process (accounting for future cash flows) tied to an informed market outlook: you can act when others are passive and afraid. You can buy cheaper because you didn’t buy everything when prices were high. Of course there are elements of market timing to that approach, but in balance, not through extreme binary judgments where you’re all in or all out. Those judgment calls don’t work consistently.
What does work is to price investments. Stocks and bonds have a good deal less risk and a good deal more return potential when prices fall and interest rates are higher. This isn’t terribly complicated. The 10 yr. treasury is a lot better investment at a 3% interest rate than at 1%– or to put it in other terms, it’s a lot cheaper and less risky.
We regularly argue for clients to hold cash for multiple reasons: plan for your expenses, prices are high, visibility isn’t good. Whatever. The point is, you don’t want to be fully invested in risk assets unless you think you’re nearer the bottom than the top.
We regularly argue for clients to hold cash for multiple reasons: plan for your expenses, prices are high, visibility isn’t good.
Where are we now? No man’s land. The wasteland of fear and uncertainty between the bottom and top. For some folks, the Slough of Despond.
Not all your best opportunities exist today. They emerge through change, sometimes through violent change. Preparing correctly can make you eager for bad markets: the best investments are made when other people need cash and you have it.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
This material is provided as a courtesy and for educational purposes only.
Investing involves risk including loss of principal. No investment strategy, such as rebalancing, can guarantee a profit or protect against loss. Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability.
A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.
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Written by
Jeremy StricklerManaging Director, CFP®
I grew up south of Pittsburgh in the foothills of the Appalachian mountains. I'm the oldest of 5 children. My parents built their own house and gardened. We did everything ourselves. Independence is a...
Read Jeremy's Story →Our team is always happy to explore how these ideas apply to your personal financial situation.
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