Regarding the stock market, “If you don’t know who you are, this is an expensive place to find out.” wrote Adam Smith. Everyone says they are investing for the long term. The joke is that “long-term” means only until the next bear market for a lot of people. Were you a long-term investor on 12/31/2019? Are you still? Did you rebalance your portfolio? Panic sell? Panic buy? Just panic, but leave the portfolio untouched? Or maybe you haven’t looked at the particulars because a three month time period doesn’t mean much to you? Look at your actions this year. This is who you are.
This is Who I Am
After the 4th quarter of 2018 when the market ALMOST dropped 20%, I tweaked my rebalancing approach. That’s not entirely true. While I rebalance quarterly if needed, I didn’t have a rebalancing approach for big market drawdowns. Seat-of-the-pants may have been a generous way of putting it. I figured I’d recognize a rebalancing opportunity if it came. I also thought I’d have plenty of time to execute on the rebalance. So as the market approached a 20% drawdown on Christmas Eve, I figured I’d wait for it to hit 20% then add to the stock allocation. Why 20%? Why not 19% Or 21.24%? Because it’s a round number, a completely arbitrary and irrational choice. The market didn’t cross the 20% mark. Instead, it shot up to new highs. I had screwed up. I didn’t really have a plan for this and underestimated the speed with which the window would close.
I had to face it: this is who I was. Someone without a real rebalancing plan. “I’ll do it when the market is down” is not a plan. The interesting thing is that I had the opportunity to change my mind and rebalance on the way up, too. It’s not like the market rebounded 25% in one day. There were plenty of chances, but without a clear plan, I didn’t do anything. I felt like I missed the bottom or that the market would go back down. After it was clear the drawdown was over, I changed how I would manage the portfolio going forward. Now I have a few levels where I’ll gradually shift out of cash/bonds and into stocks.
I hesitated to do this and was hoping for a smaller 10% drop to test out how it would feel. Nope. Full-on black swan pandemic bear attack. Great. My worry was that after rebalancing on the way down, I’d feel like I screwed up with the money I put to work early when the market continued to drop. So if the market dropped 15%, I’d feel dumb that I put some cash to work when stocks were only down 5%. It turns out that it has actually felt good. I’m not sure if it just feels like I’ve got more control or maybe it’s just knowing what my next move is, but I haven’t felt the regret I was afraid of.
This is Who You Will Be
How does this affect your positioning for the next bear market? And yes there will be another bull market which will be followed by another bear market. Neither of which will have anything to do with previous market regimes. The good news is that your financial plan isn’t set in stone. You shouldn’t change it on a whim, but it’s fair to continue to tailor it to fit better. It does you no good if you’re not going to follow it (or in my case, if it isn’t clear enough). If you’re not happy with how you’ve felt or how your portfolio has performed, it might make sense to take a look at why. That’s not to say you should be glad every time the market is down 5% in a day, but that your plan should meet your reasonable expectations.
This is Who We Are
One of the craziest things about America is how peaceful it is. We have peaceful transitions of power after our elections despite social media putting our worst sides on display. The quarantine is another miracle in how peacefully we’re dealing with things. Most of us have been following social distancing and other guidelines for a while, too. It didn’t take a military presence to enforce this, we just did it for each other. So no matter what, it’s worth taking a moment to realize that this is who we are, too.