So with all the current upheaval, how am I investing currently? Inflation, dropping stock market, and declining bond funds…. With everything down, where am I holding our investments?
Where did I Move Our Investments?
So let’s rewind to 2020. The stock market was at an all-time high. Inflation was beginning to swing towards the positive. I don’t market time and I don’t keep dry powder. But I do adjust our safer investments based on the market situation. So before we talk about today, let’s talk about what I did then with the safer portion of our asset allocation.
Preparing Our Investments For Inflation
In late 2020, with inflation moving higher and the stock market looking shaky, I decided my safer investments needed to first take advantage of inflation. So I began to move any new money allocated to bonds destined for a safe allocation into I Bonds and TIPS funds. No more was moved than what maintained our asset allocation of 75% stocks and 25% bonds.
Mixed Success Rate for My 2020 Investing Moves
2 years on, this was mostly a good move. The I-Bonds are delivering a nearly 10% return. Coupled with our older IBond holdings, we’re up to nearly 5% of our portfolio in I-Bonds. Ten percent while still losing ground due to taxes from inflation, still beats any other gain in town. The TIPS funds, meanwhile have lost a little bit of ground but less so than regular bond funds. So not exactly a bad move either.
Where Does Inflation Go From Here?
While I know about the immediate inflation threat I have no idea where inflation goes in the future (and neither does anyone else) . Rather then leave existing bond funds at risk of inflation I decided it would be better to try and stay in place. That way I could react to the direction of the market or inflation going forward. So I took our bond funds and moved a sizeable chunk to a stable value fund at work. This fund returns about 2 percent a year.
A Guarenteed Loss or Less Loss?
This guarentees those funds lose about 6 percent to inflation annually. But it was light years better than sitting in the bond funds in retrospect. BND is down 13% even without accounting for inflation since I made that move. Obviously, these moves were in hindsight the right ones. The only way they could have been better is had I gone all in.
Dealing with Uncertainty in my Investments, Keep On Buying
Which is where I add the caveat as always. I prepared my fixed assets in a way to benefit from uncertainty. I did not change my risky stock assets in any way. Had the uncertainty played out differently I could have incurred a significant opportunity cost due to my moves. I can openly admit my significantly positive outcome was mostly luck.
The goal of my move at that time was simply to reduce risk, with the outcome unknown. I believe that move was the right one.
Anyway.. Fast forward over the last two years. I haven’t sold any stock other than some reallocation between classes (to maintain the right mix of small, mid, foreign, and large caps). But I have bought significant amounts and continue to do so.
Not Waiting For a Bottom
As I’ve noted in the past, no one knows what the market will do going forward. Waiting for a bottom with all your money out of the market is a fool’s game. So I haven’t pulled anything out and most new purchases were new money…
Except rebalancing. My Investment Plan (remember you should always have an investment plan so you don’t act emotionally) called for me to rebalance at 3 points. At 10% decline in the total US stock market, and at 20 percent decline, I was to push me back to 25% bonds. That meant selling off some of that stable value fund and buying stocks. The plan also states I should not sell stocks to buy bonds until the market returns to the previous top. So that’s what I have done.
Perhaps Too Aggressive An Investment Plan
Is that a bit aggressive? I will admit I wish my first rebalance point was at a 20 percent decline as I left money on the table. But I also set my targets based on the v-shaped recoveries we’ve had over the last decade. A draw down of 10-20 percent has happened a few times with a quick recovery. So my plan was set with an eye towards recent market trends with the assumption a decline beyond 20 percent for the overall market was a lower likelihood of occurrence versus benefiting from a quick dip. I let myself plan aggressively due to the emotions of the market.
But…. I also felt no concerns with the drop and still have none. IE I am still well within my risk tolerance. So that aggressive tone may have been mathematically a bit off, but so far I am none the worse for wear from it. Selling out at the top can be much worse as I know a few that have tried in the past.
So that is where we are today. If the market were to go back to all-time highs today I would end up a good 10% higher then where I started between contributions and rebalancing. On the other hand, this could be a dead cat bounce. IE. the market could drop precipitously from here.
What Happens If the Market Goes Way Down From Here?
In that case, I continue to buy stocks with new money and see what happens. I plan to buy IBonds with next years allocation if the situation remains constant, but otherwise until things level out I will continue to buy stocks instead of bonds. My asset allocation can shift to stock heavy without that much concern since I am still in the accumulation phase. Because what’s left of my fixed allocation is still somewhere between 20-25% or about 7-8 years of expenses. I’m not overly concerned about said fixed asset allocation percent being right on 25%.
What about rebalancing with existing money to stocks if things drop from here? Well, I don’t intend to do any additional rebalancing of existing money as long as my entire portfolio has not dropped 30 percent from the top as per my Investing Plan. New money will continue to be pointed to stocks and a yearly ibond contibution for both spouses.
Big Down Would Initiate Big Changes to My Investments
Note the wording here. It is not a 30 percent decline in the total stock market like above, but a decline of my portfolio by 30 percent. So far, my portfolio has not dropped more than 12 percent this entire time. My IPS was designed to take advantage of short dips if things look like they will quickly recover, but then convert to slow and steady if things look to be protracted.
After 30 percent things get more aggressive again. My plan has an adjustment in our asset allocation and a rebalance to stocks. Basically, I need to go back to 20% bonds and then hold.
Why? Two reasons:
- At a 30 percent overall situation my assets would be near the point where I made the decision to switch from 20% to 25% safer investments. IE. it makes sense that the conditions my risk tolerance could handle 3 years ago when I made the change would be back in play so should my asset allocation.
- A 30 percent pull back in my overall asset allocation would likely represent a significant stock market pull back. Probably 40-50 percent. At that point things begin to get like 2008 where long-term bargains can be had if you hold on. While there’s still no guarantee it will come back at that point (hence still holding 20 percent safe investments), at some point I have to bet on the long term prospects of the world economy. That would be it.
How Are You Investing Now
Anyway, so that is my current investment plan. What is yours and how is it playing out during the current situation? Have you stuck to it?