Bad, bad, bad Market!
Can’t I even go on a little vacation without you tearing up the place while I’m gone?
I turn my back for one second (well, OK, maybe two months) and you start sliding?
And then that 1000 point drop? What’s up with that? Yes, yes, I know. It was only about 5% and not anywhere near your worst behavior. But still. You knew full well that 1000 figure would drive the pundits bananas!
Since I’ve been gone, you’ve managed an ~11% decline from your record close back in May. Just over the 10% needed to be called a correction. Happy now?
At least you’ve given the media something to obsess about other than Donald’s latest remark or Hillary’s email server.
And now I’m back and you’re up ~2%?* You think this makes the mess you left me OK??
I’ve got readers asking what my take on your bad behavior is, and I’m still just moved in to the new place yesterday and haven’t even begun to unpack. Bad Market!
OK. Here’s my take:
Wake me up when it’s down 25%+ and it’s worth doing a little rebalancing to buy more stock
I have no idea what the market is going to do next. Nobody does. Not even (especially not!) those “experts” popping up all over telling you they do. The principles of Investing in a Raging Bull apply equally to investing in a Raging Bear.
As we’ve discussed through the Stock Series, Mr. Market always does the right thing over time. But he’s a drama queen and an attention whore. Periodically he’s going to have these hissy fits. And as with any temper-tantrum throwing little monster, we can just ignore him till he settles back down. No matter how long and loud he wails, settle back down he ultimately will.
Or, we can take advantage of him.
If you are in the Wealth Building Stage we introduced in Part VI and talk about throughout the Stock Series, you are already aggressively saving and investing on your path to financial freedom. Your regular investments, which hopefully you have automated, will have you buying on these pull backs. Anyone in this Stage should be rooting for corrections. You’ll be taking advantage automatically.
If you are in the Wealth Preservation Stage you can take advantage simply by rebalancing your portfolio. But I wouldn’t bother unless we get more of a pull-back.
Personally, that’s what I’m rooting for: A nice fat plunge.
I’ve always regretted not taking advantage of the crash in 2008 to move to all stocks. I’ve never really liked holding bonds all that much and in these days of low interest rates I see them as pretty risky. I’ve kept them for three reasons:
- They smooth the volatile ride of stocks.
- They provide a pool of money to draw on to buy stocks on market dips.
- They provide interest income.
My pal Go Curry Cracker has a plan to unwind his bond postion and move into 100% stocks which I rather like and might well follow:
“If a 25% drop happens, then I’ll move 1/2 of our bond position into VTI**. If the market drops another 25%, I’ll move the other 1/2”
**VTI is the ETF version of VTSAX, both hold the Vanguard Total Stock Market Index portfolio.
How would this effect my three points above?
1. The volatility of the stock market really doesn’t bother me anymore. Those who’ve read my Stock Series won’t be surprised at this. Partially this is attitude, partially that I’ve been thru enough plunges not to be fazed and largely because even a major crash would have little effect our lifestyle.
We live well below our means and are flexible in our spending. Plus the prospect of geographic arbitrage (moving to a less expensive part of the world) would be an adventure rather than a hardship.
2. While this pool would be gone, it would be gone buying stocks at a 25-50% price discount. Mission Accomplished.
3. VBTLX is currently paying 2.46% interest. So I’m not giving up all that much income.
So, come on Mr. Market. Show me what ya got!
Meanwhile I’ve got boxes to unpack and pictures to hang.
*Oh, so now just to spite me, you’re going to close down today 1.35%? So that how it’s gonna be…
If after reading this you are still agonizing over the drop in your holdings, think of it this way. Last I checked Warren Buffett was worth ~72 Billion. So in this 10% correction he has “lost” $7,200,000,000.00
I’d still trade net worths with him.
Addendum II: Or get yourself some Exposure Therapy
Addendum III: Or take solace in the fact you can be the worst market timer ever and still make money. (Thanks to Elephant Eater in the comments below for this link)
Addendum IV: From just about a year ago… Nightmare on Wall Street