I’ve been writing a lot about the markets lately.
This feels like some combination of WWII, 1987, 2008 and 1929 all wrapped up in one so there’s been no shortage of topics.
I write to provide context and hopefully help people make better decisions with their money but I also write to learn what it is I really think about things.
Nothing about the future is ever certain but the current situation involves a known uncertainty in that we know things are bad and bound to get worse but we have no idea how much worse or how long this will last.
So writing is a cathartic process for me in all of this.
Money almost feels secondary during a pandemic but that doesn’t mean we shouldn’t pay attention to our finances at a time like this.
Context is great and all but decisions have to be made.
I can’t say if my thought process is right or wrong for you because I’m doing what works for me, my family, my personality, and my circumstances.
But hopefully, this provides some color into the way I view investing during a market crash.
Here are some thoughts on how I’m personally navigating this crisis:
Personal finances are more important than portfolio management right now. I’m as glued to the wild market swings as anyone but it’s impossible to take advantage of buying opportunities if you don’t have your personal balance sheet in order.
I keep 3-6 month’s worth of expenses in an online savings account. This account used to have a yield but now that the Fed cut rates to zero that should be all but going away shortly.
But I don’t keep money here for the yield, I keep money here to provide a liquid backstop should my family ever need the funds.
A high savings rate acts as a margin of safety. Businesses of all shapes and sizes are being impacted by this unprecedented shutdown. I’m confident Ritholtz Wealth will come out of this crisis in a much better position but the worst-case scenario could always make things difficult on the wealth management business.
For me, a high savings rate is even more important than an emergency fund because it offers flexibility if things get dicey.
And if they don’t get dicey, a high savings rate acts as a wonderful form of dry powder for buying shares in the stock market at much lower prices.
The majority of my portfolio is in stocks. My investments are in something of a barbell allocation with safe, liquid cash holdings on one end in my savings account and stocks on the other end in my retirement, 529, and brokerage accounts.
This allocation is more fun when stocks are rising but this is the trade-off we make for taking risk.
I also have roughly 25% of my investments in a tactical strategy we run in house at my firm, which has performed in line with my expectations. This strategy is completely rules-based so it requires no thought or willpower on my end, which makes it perfect for decision-making during the volatility.
I’m not looking at my balances. There’s no reason to look right now. I have a rough idea based on where stocks are trading. It’s not going to help to see current balances so I don’t bother looking.
I’ve been buying. I’ve been buying stocks periodically throughout this downturn but this isn’t anything new.
I buy stocks every month in an IRA for myself and my wife. I buy stocks twice a month in my company 401k plan. My wife buys stocks every other week in her 403b plan. We make monthly purchases into an aggressive allocation plan in our kid’s 529 plans. I also make monthly purchases in a brokerage account.
And if I earn any infrequent income, some of that goes into stocks too.
All of these purchases on autopilot. When stocks were rising that meant I was buying fewer shares. Now that stocks are falling it means I’m buying more shares.
I’ll be a net saver for the next 20-25 years. I’m not going to touch the majority of this money for decades. Stocks are on sale. This is a good thing for my savings. It’s painful for current holdings but wonderful for future balances.
If stocks go down more I’ll be buying more.
I’m getting ready to back up the truck. The U.S. stock market is currently down 32% from all-time highs. Stocks have fallen by this much or worse roughly once every 7 years going back to the 1920s.
Stocks have fallen 40% or worse once every 15 years, on average.
And they’ve been cut in half or worse an average of once every 18 years.
We’ve had an inordinate number of crises this century. Maybe that continues but it’s rare for stocks to fall 40% or 50%.
To get to a 40% drawdown would mean another 12% down from here.
A 50% decline would take further losses of between 25% and 30%.
Living through a 30% downturn hasn’t been easy. Another 30% form here would be brutal.
In preparation for this possibility, I’m putting together as much cash as I’m comfortable parting ways with. I’ll put a decent chunk to work if we reach the 40% level. At 50% I’m backing up the truck.
Buying stocks when they’re on sale at 40%-50% off is not a deal that comes around very often. In fact, from 1938 until 1973 it didn’t happen once. The worst sell-off was 36% over that 35 year period.
Then again from 1975 through 1999, no enormous crash. Over those 25 years, the worst drop was 34% in the 1987 crash.
If this happens I could always be early.
Stocks could continue to fall further. As a long-term investor, I don’t mind. I have plenty of time to wait and if I regret buying down 50% in 30 years we’ve got bigger problems on our hands than the stock market.
Charlie Munger once said:
If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.
The most important decisions you will make as an investor come during a market crash situation.
This would be the second one of my investment career if it happens.
I’m not hoping for a further crash from here but if it happens I’ll be ready.
My Evolution on Asset Allocation