I was on a business trip in Asia when the call came through from my wife…
Are we OK?
The markets had come off 5% and the news media had cranked their fear machines to full throttle. You can see the dip below. I got the call at the bottom of the “U.”
The next chart shows why everyone freaked… memories are short. Here’s the one-year view of my US Equity Fund…
Looking at the chart above, I got the call at the bottom of the right-hand “V.”
So I opened up my tracking app to see how we were doing.
Despite the 24/7 coverage of the impending financial apocalypse, our family net worth hadn’t moved.
I opened up my Vanguard app to see how our financial investments were performing. Down about 1% in total – not bad considering the financial pundits were acting like we’d plunged off a cliff.
Why so little movement in my life?
1 – I focus on the total portfolio position, not the elements inside the portfolio, which are constantly changing. I check in on the portfolio monthly and rebalance the asset mix quarterly.
2 – Aside from a modest 30-year fixed rate mortgage, there is ZERO debt in my financial life. Leverage magnifies the impact of changes in asset prices.
NOTE – If you have a financial advisor in a Big Bank then I bet they’ve been trying to sell you margin loans on your portfolio. The cost of your margin loan is greater that my expected rate of return for my portfolio – therefore, I view your margin loan as a direct wealth transfer from your family to your adviser’s firm and bonus. I have pals that make a living selling these products – my choice is to send my kids to public school and make less money.
Know that you can get better advice from Vanguard for far less money – plus Vanguard products cost you less than a tenth of what the Big Banks charge.
3 – I’m exposed to more than US Equities. The key components of my family’s balance sheet are:
- US Equities (VTSAX)
- Int’t Equities (VTIAX)
- US Intermediate Bond (VBTLX)
- US Short-Term Government Bond (VSBSX)
- Boulder Real Estate
When the equity markets freak out, sometimes my bonds appreciate due to people swapping into US government securities. This is nice but I don’t really care because…
I hold the bonds to reduce the volatility of my total portfolio and to provide capacity to buy more equities when the market tanks.
After checking things out I told my wife that we were OK and she said…
So, I guess the lesson is not to panic?
My reply, “Actually, I panicked when the market was down 2%.”
The difference is my capacity to act on my plan, rather than my emotions.
The lessons are:
- Make a plan that fits your personal risk tolerance
- When markets blow up, pull out your plan
- Do what the plan says
If you can’t do the plan then it’s the wrong plan!
I’ll end with the five-year chart for an index of 500 large stocks that are traded in the US.
If you thought October was a rough ride, you ain’t see nothing yet, it wasn’t even a blip.
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