Flight to Safety

Many of you may not follow the markets day-to-day. That’s a good thing. However, if you are like me, you watched Monday as most major indexes were down 3%. It doesn’t seem like a lot, but usually the market moves in tiny 0.4%-ish increments back and forth. It’s very boring. Yesterday’s drop felt very different. By the end of the day, the markets recovered. Unless you followed the drop, you wouldn’t have even known it happened. Yesterday, the drop stayed most of the day, but at least got a little better towards the end.

Nonetheless, these drops feel like a warning to me. Outside of the quick drop and recovery due to the COVID news in March of 2020, the markets have mostly had a great 11 year run. I’ve written quite a few times during that run how stocks have starting to look expensive. My last article on stock getting too expensive was just last November. I make Chicken Little seem confident about the sky. I still feel justified with the Shiller P/E is through the roof – an indicator of just about every preceding crash.

Well, maybe I’m not that bad. I’ve simply reached the point where my priority is shifting from “growing money” to “protecting money.” It’s a gradual shift as I get older and have more money. I also started from a place where I was investing in powdered water that could sent over the internet. Well, once again, I wasn’t that bad, but I was an aggressive investor. So the shift that I’m doing just probably brings me closer to a normal investor.

If you feel the same, here are some things to consider:

How to Invest with Safety in Mind

1. Do Nothing

I’ve got years before I use my retirement income. You may too. If so, maybe just be lazy and do nothing. Even when the markets have dropped over the last 20 years, they’ve come back in a year or two. However, if you need that money to live on right away, you may want to make some changes, so you’ll have enough cash to get you through a potential downturn. Unfortunately, no one know can tell you how long that may be.

2. Get Boring

I love investing in Google, Snapchat, and even a little Lyft. I even bought a few hundred dollars of a penny stock, Super League Gaming (icker: SLGG) on a whim. Only Google would be considered a mostly safe bet of any of these.

A lot of people have boring index funds. I do too. They are great and perfect for a time like this. During yesterday’s drop, my Snapchat stock lost more than 10%, while my index funds were mostly down 2%. Index funds are great, but some are weighted by company market-capitalization. That means that big tech companies like Apple, Google, Amazon, and Microsoft can control a lot of one of the biggest indexes, Vanguard’s Total Market Index (VTI). If something bad happens to tech, the whole index could considerably.

Because of this focus on potentially volatile tech, I looked for a different way to hold a lot of great U.S. companies. I found that high-dividend ETF tend to focus on very boring companies that make good profits year-after-year. I went with HDV, though I don’t feel strongly about it over other high-dividend ETFs. The top ten holdings have sectors like energy (Exxon/Chevron), healthcare (J&J, Pfizer), and consumer staples (Proctor & Gamble, Coca Cola). While VTI is down 10+% from its highs, HDV is just down ~2%. Vanguard’s small business index (VB) is down ~15%.

Of course, a high-dividend ETF (HDV), pays about a 3.5% dividend – money that I can use to buy the other cheap indexes. I should mention that HDV, like any stock ETF, isn’t completely safe – it simply seems safer than an all VTI holding. I’m always going to own a lot of stocks, so at this time I want them to be boring ones of companies that make money and give me their profits.

3. Shift some Stocks to Bonds

It’s better to do this before the stock market starts going down. I usually like to be 100% invested in stocks – especially since most of my money is in a retirement that I won’t use for years. However, when the market just kept going up and up, I got nervous and started to shift money into bonds. I did it gradually – moving a 0.5% at a time as the market kept going up. Once I got to about 15% of my portfolio in bonds, I stopped.

As the markets started to sell off the last couple of days, I sold very small amounts of those bonds and bought dips. Realistically, it’s probably not going to move the needle too much. I’m not making big enough moves. Nonetheless, psychologically, it feels good to be able to buy in at lower levels. It also helps me feel that I have some control.

If you are 100% into stocks now, it may feel tough to sell them now that they are down to buy bonds. Despite that, I feel it is best to get your portfolio in a place where you feel comfortable. Perhaps holding more bonds will do that for you.

I hope you are able to the #1. That’s probably the best. I’m not built that way. I am enjoying how my #2 and #3 plan is working for me now.

Do you have any strategies you use when the market gets jitters?

P.S.

Several personal finance bloggers were asked about how to adopt a frugal lifestyle. Each was given their own question. Fortunately my question was about passive income and frugality. I inherited my frugal lifestyle from my mother, so it would have been tough for me to explain how to acquire a frugal lifestyle.