Don’t Do Something, Just Stand There!

I actually wrote this post back in February 2019 but have been sitting on it for months.

I suppose it’s because I could sum it all up in one sentence that would read something like: during the next downturn I will largely ignore the markets and, if anything, look for an opportunistic time to buy more.

Market and Media Signs

I picked this post back up again after reading Vanguard’s monthly newsletter wherein they mention some current events. Specifically the inverted yield curve along with their take on the possibility of a forthcoming recession.

The yield curve inverted for five days in March, then again in June when the yield on the 10 year treasury note fell below that of the 3 month treasury bill.

It’s important to note that first, an inverted yield curve does not always precede a recession. Second the timing of a recession after an inverted yield curve has not been consistent. Meaning the timing of the recession can be accurately timed based on this event.

Here are just a couple random examples of what you’ll find on this topic online.

Is a recession coming in 2020? Here’s what most CFOs think (source: Fox Business News)

No US recession in 2020: Investment advisor (source: Fox Business News)

The first article shows the results of some polling where 67% of CFOs interviewed think there will be a recession by the third quarter of 2020.

The second link is a video of a panel discussion where Potomac Wealth Advisors President Mark Avallone doesn’t necessarily think there will be a recession, but rather (paraphrasing) “…a period of slow, muted growth, more of what we had during the previous administration…more incremental growth not exponential growth”.

Are these articles even helpful?

You Can’t Time the Market!

It’s easy to get drawn into articles or news programs that talk about the economy and where it’s headed.

If you’re looking for something more though, I highly recommend following Ray Dalio, the founder of one of the largest hedge funds, Bridgewater Associates.

I have probably watched this video from Ray Dalio a half a dozen times. After watching it I thought about market timing a little differently. Rather than mindlessly echoing the usual phrase “you can’t time the market”. I have to think there’s a better way to phrase it.

Perhaps…

You cannot accurately predict the timing or magnitude of the market as there are too many complex factors beyond your understanding. However, you can ask the question: has anything so fundamentally changed in the world that the economic cycles of the past will no longer happen?

My answer to this question is no, things seem pretty much the same to me.

I realize this is just nuance but with this perspective you can acknowledge that it’s inevitable a market correction of some sort is bound to happen. The good thing is that you can take the fear and anxiety out of the equation by stepping back and coming up with a long term plan.

Plan of Attack

My plan for a market correction…is to follow my financial plan. Pretty boring. I work, I save, I auto invest, and I periodically revisit my investment allocations.

If a correction or a recession comes along, my plan is to stick it out, keep doing what I’m doing but I’ll throw in the following caveats:

1. Buy more – this has nothing to do with timing a bottom, as much as it is just looking closely at my existing investments, deciding if they are oversold, and buy more.
   
   Just like in bull markets where stocks prices become inflated, bear markets can price stocks lower than their intrinsic value, offering good buying opportunities.
    
   I saw this opportunity in 2009 when Warren Buffett bought billions of dollars worth of Goldman Sachs stock in the depths of the recession….and made a killing.
   
   I’m no Warren Buffet, but by following his lead I made the biggest single stock gain in my lifetime.
   
   
2. New investments – look at investments I’ve considered in the recent past, but stayed away from because I felt they were too overpriced. My main thought here is real estate, but I’d also like to explore other options as well…which leads to number 3.
   
   
3. The known unknowns – in a correction or a recession, there will be opportunities that pop into existence because of hard times.
   
   I say known unknown because I can’t say what they are exactly at this time, but I know they will show up. I’m thinking real estate, vacation property, cattle, oil wells or other assets.

Current Status

We’re able to consider the actions above because we took deliberate steps to get to where we are after the 2008-2009 recession.

Here’s a quick breakdown of our current status:

• We have a little more than 25x annual expenses saved
  
  
• We are still employed full time and still saving and investing
  
  
• We are currently invested in about 70% equities to 30% bonds, in index funds and ETFs
  
  
• About 66% of our net worth is in the “market”, consisting of index funds invested in equities and bonds
  
  
• About 27% is in real estate
  
  
• About 7% of our net worth is in cash
  
  
• No debt

Overall not too bad, if anything I would like to increase my real estate percentage, and reduce exposure to ‘the market’.

If I were in a position where I needed to draw on investments in the near term, say five years or less, then I would be looking to reduce my risk exposure more drastically.

Reflecting back on old lessons learned

It would be a shame to relive the same lessons of the 2008 and 2009 recession all over again.  Especially since we’ve had 10 years to build upon!

During the 2008 and 2009 recession my main concerns were staying employed, saving up more cash….and staying employed.

Jack Bogle, Warren Buffet and all the other financial gurus write and talk about doing the hard thing. Buying when others are fearful and selling when others are greedy.

In hindsight, buying stock in 2009 was the hardest investment purchase I’ve made. If I had sold investments during that time it would have been the dumbest investment decision ever made.

I don’t know when the next recession will come, but taking deliberate actions based on my 2008 -2009 experience and assessing my time horizon and risk tolerance alleviates my concerns.

I’ll end this post with a Jack Bogle quote from that Vanguard newsletter I mentioned earlier:

The principles of sensible savings and investing are time-tested, perhaps even eternal. The way to wealth, it turns out, is to avoid the high-cost high-turnover, opportunistic marketing modalities that characterizes today’s financial service system and rely on the magic of compounding returns. While the interests of the business are served by the aphorism ‘Don’t just stand there. Do something!’ the interests of investors are served by an approach that is its diametrical opposite: ‘Don’t do something. Just stand there!

Jack Bogle, circa 2014