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Making the Most of a Not Very Festive Market

Making the Most of a Not Very Festive Market

December 20, 2018

A Lump of Coal in Your Christmas Investment Stocking?

No way to sugar coat recent stock market action – markets have been entirely un-festive this year. 

Today we hit a fifteen month low for US stocks – which are rapidly catching up to the international stocks which have been sliding for most of the year.

Meanwhile, bonds have been doing ok.  When investors sell stock en masse as they have been lately, the money tends to flow to bonds – pushing prices up and interest rates down.  That is kind of an interesting twist – even as the Fed is trying to push up interest rates – the market is pushing down even harder.   A topic for another post perhaps.

Do Nothing?  Run For the Hills?  Or Take Advantage of the Opportunity?

We entered the current period of volatility with a lighter than normal allocation to stocks across almost all our portfolios.  The market seemed just too richly priced to be fully invested in stocks this past spring and summer.  In fact, we entered this crisis with a fairly heavy allocation to some pretty boring, low return investments like Treasury Inflation Protected Securities, Short Term Bonds, and Investment Grade bonds.  The idea behind such positioning is that if (or when) stocks fall, we would have the ability to increase our stock exposure at a more favorable entry point.  

Through market volatility in October, November, and well into December, we pretty much took the role of observer.  Yes, the market was down but by historical standards it barely registered.  In fact, until recently the S&P 500 was still positive for the year.  So stocks were a little cheaper – but we didn’t see it as that big of an opportunity.  So we did nothing. 

But now, as we near the end of the year, we are starting to smell opportunity in this volatile market.  US stocks are now 15% cheaper than they were at the beginning of October.  Small company stocks and international stocks are even cheaper.  So we are starting to take some action.  We have just started to rebalance portfolios, and have begun to add positions in some beaten up but potentially profitable assets like preferred and convertible stock funds.

Does this mean that I expect markets to turn around soon?  Well, I have no crystal ball.  Not knowing what is going to happen next, I don’t try to call “the bottom” or predict what will happen next.  What I do know complete certainty is this:  I will get a better return over the long run on the stock fund I buy today, than on shares of the same fund I might have bought 4 months ago, at the market peak.

Investing in Challenging Times is Not for the Faint of Heart.  This is where good investment discipline can be very, very difficult.  Anyone can throw money in an index fund when the market is going up, and go straight to sleep at night.  But it is very difficult to invest money into a market when the financial news media is filled with doom and gloom, everyone is talking about how bad the stock market is, and you see stocks going down sharply on an almost daily basis.  But generations of investors have learned this lesson over and over again:  The best times to invest are the times when you really really don’t want to. 

Bill Cosby fans may remember his skit about learning to drive on the snow and trying to make sense of the advice “you should always steer into the skid”.  “So I’m going off the road, and you want me to steer the car – off the road?  That makes as much sense as leaning into a punch to minimize the pain!”  Well, its exactly the same with investing.  It just doesn’t feel right to buy stocks when they are falling.  As Warren Buffett famously quipped – Always be fearful when people are greedy, and always be greedy when others are fearful.  Now is time to keep a calm mind, ignore the noise, rebalance your portfolio at a minimum – and begin to think really hard about adding stocks (within the risk tolerance indicated by your financial plan). 

Past performance of course does not predict future results.  Investing in stocks and bonds is risky, investments can lose value.