Investment actions taken due to pandemic

Rocket J Squirrel · June 2020

Have you tactically changed your asset allocation due to the pandemic and the market's reaction to it? If so, what did you do?

I kept my core allocation pretty steady, but made 2 tactical changes: I underweighted small caps and overweighted health care.

I have cash on the sidelines, but did not use it to buy the dips. I'm keeping it as a safety cushion.

How about you?

smayer97 · June 2020

Moved to cash once there was enough of a rebound in April, so still locked in some loss but gained some peace of mind. Not adverse to risk but market is too heated, volatile, and at a high risk point and has gotten a little too complicated over the last few years that I don't have enough time to wade through looking for the safe or quality options or babysit this. Will wait it out for now.

Chris_QPW · June 2020

I'm a terrible investor, so I wouldn't suggest anyone doing what I do.

(But I'm a fantastic saver.)

But for the record what I did is at near the lowest point (looking backwards and getting lucky looking forwards) I took the only $3,000 in cash I had and bought some more of PTY. In truth this was "forgotten money" that I meant to invest months ago, and so when I found it while everything was plunging down I threw it in. So far that was a pretty good decision 32.47% increase. Of course a drop in the bucket in comparison to the full portfolio.

If I can help it I don't keep much cash in my investment accounts. First off they pay less than even at local banks, where I can get much better in CDs and high yield savings accounts. And second off that isn't the purpose of my brokerage accounts. They are just one of a number of different asset classes I have to round out my full financial picture.

I have watched my brokerage accounts drop 25%, and I have watched them rebound as of now to -7%.

So basically my plan was "do nothing different".

Boatnmaniac · June 2020

I'm a firm believer in having an allocation strategy and pretty much sticking with it though thick and thin. Over the last 40 years I've only changed my strategy to reduce my exposure to stocks as I aged and got closer to retirement. When it comes to mutual funds I'm pretty much a buy and hold kind of guy and will usually only sell a MF if it fails to perform well to its benchmark over a year or two. I also don't trust myself when it comes to personally buying individual stocks...just too much risk for me.

My current strategy is to keep 65% in stocks, 20% in bonds, 10% in alternatives and 5% in cash and cash equivalents (like money market funds). I manage about 50% of my investments (MFs, alternatives and cash/cash equivaltents) and about 50% is professionally managed in a SMA (focused on high quality dividend paying stocks) but my allocation strategy takes it all into account. About once a quarter I review where I'm at relative to the strategy and tweak my investments to bring the allocations back into alignment.

In Feb I did some reallocation from stocks (which were overweighted and locked in some profits) to bonds and alternatives (which were underweighted and were low priced at the time). I just reallocated, again, a couple of weeks ago, locking in some profits on bonds and increasing my allocation of stocks. Yesterday, I finally broke even for the year so I'm pretty happy right now. But this market volatility is quite unnerving and I have to wonder if the market is overpriced given the economy so.....

Chris_QPW · June 2020

BTW the reasons I don't "go to cash". If there is one thing I have learned about myself in all the years of investing it is "I know nothing about timing the market". And for this to work you have to time it correctly twice.

And the other reason is that cash in the brokerage accounts sinks as an investment, and the longer you wait for that "perfect time" the worse your investment gets.

Rocket J Squirrel · June 2020

It is good to have a strategy. But I was asking about tactics. It is all too easy to say to yourself, "I'll stick to my strategy and not react to wild market events." But some market events are too wild to ignore. Of course it is easy to do nothing and hard to do something. I just wondered whether anyone did anything when it became obvious the bull market was over for such an unexpected reason.

My tactical reaction was (a) sell small caps because they are more likely to fail and (b) buy healthcare because, well, look around. I have always avoided pharmaceuticals because they seem risky. A company can spend millions developing a new drug and then it doesn't work. I have always invested in health care equipment, not drugs. Now I am investing in all-around health care because I hope someone comes up with a cure or vaccine, and the reward suddenly seems worth the risk.

Boatnmaniac · June 2020

@Rocket J Squirrel - My tactics through this Covid-19/recession thing have been and continues to be to rebalance the allocation to stay the course with the strategy. It's a philosophy and practice that has served me well through Black Monday, the Dot Com Bubble Burst and the Great Recession. In my perspective, tactical changes done in deviation from the strategy is one of the riskiest things that can be done because it effectively makes the strategy moot. If one wants to deviate tactical actions from the strategy, then do it right and change the strategy so the tactics don't become simply knee-jerk reactions or trying to time the market activities, both of which greatly increase risk for short-term and long-term.

I did think of making the same type of changes as you did but decided that was too speculative for me. For instance, it's true that small caps might be more likely to fail at this time but that also makes them more likely to be buy out targets which can be very profitable...so which one wins out? And which small caps are most likely to fail and which are more likely to thrive? That's speculation. Healthcare stocks might logically appear to be a good buy now but many are also very revenue and profit stressed right now, especially hospitals, physicians, medical devices and medical insurance companies with many on the verge of needing to restructure or file for bankruptcy. Again, speculation.

Speculation is something I generally work hard to avoid and I do that largely by not buying individual stocks and instead buying MFs that are broadly diversified. While that strategy means I'm less likely to see huge profit events I'm also less likely to see huge loss events. I like that stability. It's something the makes long-term planning easier to do and less volatile which helps to ensure my portfolio will support me though the rest of my life...at least, that what I hope happens.

Rocket J Squirrel · June 2020

Thanks for the good thoughtful response, @Boatnmaniac . I don't disagree with your overall point. I consider my reaction a small adjustment to my portfolio based on major events. Part of a strategy can be "if a sector is making you nervous (e.g., small caps right now), underweight it," and the reverse also.

Boatnmaniac · June 2020

@Rocket J Squirrel - I understand. Please don't take what I said as criticism of you at all. I was only spelling out what I personally do and am comfortable with.

I do agree that small changes to allocations and investments can be a wise move as long as they are well thought out with a plan that identifies when to pull the trigger to move more or to pull back. And that can take a lot of monitoring and an ability to react quickly if the situation warrants it. I personally don't have the patience for that and don't want to put in the time and effort needed to do that properly. So, for me, the MF investments along with the SMA strategic investments account (kind of like a private mutual fund) and the "stick-to-it" philosophy works well and that largely defines my tactics in both good and bad times.

ps56k · June 2020

Here is another forum for financial discussions - mostly Vanguard followers -

Bogleheads Forum

Chris_QPW · June 2020

One thing that I have proven to myself several times in the past is that I can't guess when this or that is going to happen in the market. So any strategy based on that is off the table for me. So like @Boatnmaniac my strategy is trying to pick the proper diversification and stick to it.

I absolutely know that "I'm leaving money on the table", but I'm fine with that for two reasons. One is above, if I try chasing that money I will have less of it. Second is that I don't have "win" over what "might have been" or "what others might have done".

It is sort like looking at the articles that talk about if you bought Apple when it first went public, ... (Yeah and held it when it looked like it was going to go bankrupt!)

All I have to do is have enough money for the rest of my and my wife's life, not enough to start a dynasty. And my wife and I live (and like to live) a modest life style.

My greatest fear in the past was inflation. I think if I didn't have that fear I would have almost nothing in the market these days. It is supposedly to place to hedge against it.

Now that have been semi-retired for about 11 years I have lot less fear of it.

Then again the money got there through 401Ks and IRAs so that tends to be why most of it is still there, but I have move about half of what was there out to self directed IRAs.

Here is an interesting question. Could your portfolio invested in the stock market go to zero and still be OK for the rest of your life?

Rocket J Squirrel · June 2020

Chris_QPW said:
Here is an interesting question. Could your portfolio invested in the stock market go to zero and still be OK for the rest of your life?

Not if it stayed at zero and never recovered. That would be bad. I have a paid-off high-value home I could sell, but not if all potential buyers were also broke due to the market being at zero.

There's a reason stocks are called "risk assets."

Chris_QPW · June 2020

Good point, I also have a high-value home that is paid off, and it certainly would be a double whammy if I couldn't sell it if I needed to. It would probably also affect things like my investing in Lending Club notes.

Boatnmaniac · June 2020

Well, I still have an old tent and sleeping bag so I'd be OK.

Jim_Harman · June 2020

Like @ps56k I would highly recommend the Bogleheads forum.

All the attempts I have made to time the market and invest in individual stocks have been miserable failures.

I have been using the "opportunisitc" approach to rebalancing as described in this paper
http://resource.fpanet.org/resource/09BBF2F9-D5B3-9B76-B02E27EB8731C337/daryanani.pdf

Basically I set target allocations and check my current allocation frequently, only making changes when an asset class is above or below its target by more than 20% of the target. So if the target allocation for an asset class is 10%, I only buy or sell that class if it is above 12% or below 8% of the portfolio. As Daryanani shows in his paper, this leads to very infrequent trading.

Since this strategy is purely mechanical, it eliminates or at least strongly discourages the temptation to make portfolio changes based on emotions or hunches.

In addition, if you have the asset allocations for your securities set accurately in Quicken, the Investing > Allocations page makes it very easy to implement this strategy.

Rocket J Squirrel · June 2020

Jim_Harman said:

Basically I set target allocations and check my current allocation frequently, only making changes when an asset class is above or below its target by more than 20% of the target.

How quickly do you respond to such changes? My stock-based assets dropped over 20% in the crash. I thought the silver lining was that I didn't have to re-balance because the market just did it for me. But of course things didn't stay at that level.

Jim_Harman · June 2020

Daryanani's article recommends monitoring your allocations at least every couple of weeks and rebalancing whenever one of the asset classes is outside of its band.

In the most recent downturn, my US large cap stocks were above target at the start, so when they went down they never hit the rebalance point. Internationals started below the target so when they dipped they did go below the limit on 3/23, indicating I should buy more. As you might imagine this strategy takes a strong stomach sometimes and for a variety of reasons I did not buy.

It turns out this was the exact bottom of the dip and they have since rebounded by 38% so in retrospect it would have been a very good time to buy them. Of course there is no guarantee, the internationals might have gone down another 20% and then I would have looked dumb for buying too soon.

John_in_NC · June 2020

I haven't changed a thing, outside of moving some extra cash from a HSA into the investment side.

Sure, emotion always has me second guessing, but I stay the course. Granted I am younger than some here, I have always been glad I did in the end. Those that tamper are usually the ones who regret.

While I do have some Lucias Clay in me, I definitely am not moving everything to mason jars.

Investment actions taken due to pandemic

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