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I’m sitting down to write this post at 8:30 in the morning on Monday March 2, 2020. The previous week that ended February 28th was the worst week for the stock markets since the 2008 financial crisis, spurred in large part by fears over the Coronavirus.

stock market droppingI normally don’t pay much attention to what the stock market is doing on any given day, week, or month. But it’s hard not to pay attention when news of market volatility and an accompanying pandemic is everywhere you turn.

I do look at my investments at the end of each month. So it was convenient that February 29th came at the end of one of the craziest weeks investors have experienced in quite a while. 

Taking a look at my investments had me thinking about volatility, uncertainty, and market timing. It gives me an opportunity to share how I’m feeling and what I’m doing with our family’s investments.

Here are five questions I ask while investing through these times of volatility…

Do You Have A Plan?

Mike Tyson famously said, “Everyone has a plan until they get punched in the mouth.” If you’re approaching or are already in retirement, you likely saw your portfolio value drop by six-figures in one week. That qualifies as a proverbial punch in the mouth for those of us not born with nerves of steel.

John Bogle consistently advised investors, “While the interests of the business are served by the aphorism ‘Don’t just stand there. Do something!’ the interests of investors are served by an approach that is its diametrical opposite: ‘Don’t do something. Just stand there!’”

But does anyone actually do this? News sites and social media become a circus at a time like this. Even reasoned investment educators who I follow and respect seem to feel the need to be doing something.

On Friday February 28th, Ben Carlson tweeted: 

And JL Collins tweeted:

I’ve found it vital to not only think about what to do in advance of times like this, but to write out an investment policy statement and refer to it when necessary. Here is the written statement we started with and how my wife and I have changed our priorities and plans since transitioning to a lower earning early/semi-retired stage of life.

Your plan should be specific to your needs, strengths, weaknesses and personality. If you don’t have a written plan, take time now to develop one. If you do have a plan, how does it hold up when stress tested? 

We often think of risk tolerance in abstract terms. How you’re feeling right now is a much better indicator of your emotional ability to handle volatility.

Can You Time the Market?

I must have seen a hundred tweets over the past week about “buying the dip” or that this market downturn presents a “great buying opportunity.” There may be something to that.

Buying on Friday afternoon the week the market fell 15% is better than buying the Friday before when it was near all time highs. For those in retirement, the opposite is true. It would have been much better to have sold a week ago when your assets were worth more.

But no one ever knows when it’s a great opportunity to buy or sell until after the fact. Maybe the market will drop another 15% or more over the next week, month, quarter, or year before bottoming out. Clearly that would be a better buying, and worse selling, opportunity.

Looking at the returns of our investments shows that everything but our money market and bond holdings are down year to date as of February 28th. But going back one year, both of the bond funds and four of six of the equity funds we own are still up.

The Vanguard Total Stock Market Index is the closest approximation in our portfolio to what most Americans are talking about when they reference “the market.” At the end of a horrible week, that fund is still 7% higher than it was one year ago. It is currently selling at the price it was last fall. 

If you have money sitting around that you could invest in the market right now, what excites you to buy at these prices that didn’t excite you just a few months ago? And if you’re scared to be holding stocks now, why are you fearful now if you weren’t afraid last year when every few days markets were hitting new highs?

Should You Consider Valuations?

A popular idea in investing circles is that you consider market valuations when making investment decisions. There is some logic in that.

Markets are cyclical. When stocks are cheap and interest rates higher, you expect future returns to be higher. When stocks are expensive and interest rates lower, you expect future returns to be lower.

Here’s the thing. Every day, people smarter than you and I are making arguments on both sides of this debate. The consensus of these opinions over how much stocks are worth is the market. No one can accurately predict the future of interest rates either.

This isn’t to say we should ignore market valuations. When projecting future returns for planning purposes, it is wise to be more conservative in our current environment of still lofty stock market valuations and rock bottom interest rates.

For short-term investment decisions, it is probably a waste of time at best and an expensive mistake at worst to make investment decisions based on market timing. It is far better to control what you can control.

Developing and following a plan that includes rebalancing periodically may slightly improve performance over time. It will help control risk by preventing any particular segment of your portfolio from becoming too large relative to the total portfolio.

What Is Your Worst Case Scenario?

In a recent interview I did with David Stein, he recommended assessing risk tolerance by asking, “How would your lifestyle be changed if stocks fell 60%?”.

We often consider our risk tolerance when developing a portfolio. But a 60% drawdown when you have $100,000 and are regularly contributing to your investments is a lot different than a 60% drawdown when you have $1-2 million, are close to or in retirement, and rely on your portfolio to support your spending.

I admit, when I looked how much our portfolio dropped in one month between January and February, it made me uncomfortable knowing we continue to hold 80% stocks and it could get much worse. So I asked myself the “60%” question.

At this time, we plan everything year to year based on uncertainty with getting medical insurance. We decided last December that my wife will continue to work enough to qualify for insurance through her employer through at least this December. Consequently, her earned income should cover most if not all of our expenses this year. 

I’m starting to see income from my book and my efforts on this blog. My income won’t cover our expenses, but combined with dividends from our taxable investments, they’d cover enough to have minimal impact on our lifestyle.

In the unforeseeable event that both of our incomes went to zero, we hold a full year plus of expenses in cash which would buy us some time before needing to sell any stocks or bonds. We have another 4-5 years of expenses in bonds that we could sell while stocks recovered.

Seeing our portfolio go down further on paper wouldn’t feel good, but it wouldn’t substantially impact our lives. That’s reassuring for us.

Would it be for you as well? That leads to the big question.

What Should You Do?

Quite simply, we can’t tell you what to do. The value I get from reading blogs that I can’t get from academic research is learning from what other people are actually doing. In the name of full disclosure, here is what we did.

One of our goals this year is to fully fund both my wife’s and my Roth IRA. We’re using the dividends from our taxable investments to do this. Those dividends are swept to our money market account.

Our plan is that once we have $6,000 in our money market account, we’ll fully fund one. When we accumulate another $6,000 we’ll fund the other.

We had a little over $4,600 sitting in our money market account, waiting for our next dividend payout later this month. With such a dramatic drop in the market, I decided to invest that money now. 

We bought shares of Vanguard’s Small Cap Value Index Fund in my wife’s Roth IRA account because that was the fund furthest from its target allocation in our portfolio. Small moves like this allow me to feel like I’m doing something that may help performance without risk of doing any real harm.

We didn’t sell anything. We also didn’t go out of our way to move cash from our savings to accelerate our buying plan. I have no clue what the market will do next. So I don’t feel an urgency to deviate any further from our plan.

Following a plan and periodically stress testing it with these types of questions removes emotions while managing our investments. Our process is not perfect. But I’m confident it will help keep us on track for long-term success as we manage our portfolio for decades to come.

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. You can reach him at chris@caniretireyet.com.]

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