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
- Do Nothing
- Get Boring
- Shift some Stocks to Bonds
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.
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.
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?
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.
I am no expert, but I don’t trust financial expert predictions anyway. And my opinion is better because I have no financial incentive either way. :) Every large downturn has a main reason to point at. With my understanding, the worry here for stocks isn’t inflation, IMO. It’s how strongly the fed will respond to the inflation. And I don’t expect extreme measures by the fed. But I think the party is over for the high flying speculative stocks. Maybe we continue down to -20% from the VTI peak but I feel that is max. It is probably closer to -15% than -20% if I had to guess.
But all bets are off if we go to war or something like that.
Lazy Man says
This is a great comment and I agree completely. For me, the Fed’s response to inflation is still based on the underlying cause of inflation, so I count it the same. It doesn’t really matter though, because I still see maybe a 20% drop from VTI’s peak. I would use that discount to sell some bonds, buy VTI, and rebalance back when VTI is at highs again. Rinse and repeat.
I moved a couple hundred thousand into my checking account to pay for the side of a mountain we are buying in an Arkansas wilderness area to build a cabin on. I pulled it out a few weeks ago when the market was nearly at the peak. Since then my portfolio is down over $300K, but at least I skimmed a little off the top, purely by coincidence. Once we have decided to buy something, like a car or a home renovation or, in this case, 25 acres of land we go ahead and pull the money immediately. I just do not want to ever liquidate stocks when they are free falling. We do not respond with anything be inaction when the market drops. We are retired and have a 55-45 stock/fixed income portfolio that is half cap weighted and half not.
Lazy Man says
Wow, buying a side of a mountain – that’s incredible.
I’d rather not liquidate stocks when they are free falling, but I’ve started to become more comfortable with it. I figure that stocks have given me so much wealth that I don’t mind losing a little if it’s just 50k.
With most of our retirement money in the company’s 401k, there are so few investment options. Quite a few funds, but in the end it’s a few stock, a few bonds, and cash. I’ve moved at least 20% into cash lately because everything is going down.
I’m hanging tight for now. We already have about 12% in bonds. I think that’s plenty.
I plan to pick up some tech stocks soon, mainly NVDA. I missed out on the run-up last year. And they should be okay in the long run with the metaverse and all…