My investing career has spanned some incredibly interesting timeframes – the Internet bubble burst of 2000, the Great Financial Crisis of 2008, the beginning of the COVID-19 pandemic… each unique, but with one strong commonality – in every one of them I lost what felt like a great deal of money.
But this time it truly is different in one regard… this is the first time I’ve been able to say,
“Huh, so that’s what it feels like to lose one million dollars.”
The past 2-3 months have been pretty wild. With a significant portion of our net worth invested in global stock markets, our portfolio plunged downward with one of the steepest market declines in history. Volatility has been insane.
At the March bottom we were down more than $1 million, nearly triple what we lost in 2008.
A core tenet of asset allocation is to invest in a way that let’s you sleep at night. “Don’t be too aggressive!” they say.
Another core tenet is to reassess your risk tolerance if something happens that causes you to lose sleep. Like, say, a pandemic.
But let me tell you, sleep isn’t the problem. It’s the days – watching your portfolio drop $100,000+ in value day after day after day after day is not the most fun I’ve ever had.
I did not like it. No sir.
This time around I don’t have a steady paycheck from a benevolent employer. With 2 kids and a long-term lease we are less flexible. And for extra fun, income has mostly disappeared – blog revenue has collapsed and dividends are being slashed.
Actions (speak louder than words)
I wish I had taken the time to write down my thoughts in mid-March rather than after a massive (but partial) recovery – it would have been great for my own self-edification. But the truth is at the time I just didn’t feel like writing or thinking. A protection mechanism maybe? Perhaps I’ll get the chance again soon.
But what I can honestly assess is my actions.
Thanks to previous exposure therapy I recognized the anxiety and gnawing feeling in the gut that comes with watching your wealth casually disappear.
This experience is so important that I even tried to relive the worst market moments of the past.
Even though I was aware I shouldn’t be doing so, I would spend time checking stock prices when the market opened each day (9:30 PM my time.) The pandemic was the main conversational topic on my thrice weekly bike rides. It was always front and center – you can’t turn your eyes away from that major accident.
Because emotions are by definition impossible to control, it is important to have a written plan to follow when things go sideways.
My plan for a market crash was to sell bonds and buy stock.
What I did: sell bonds, buy stock, and accumulate cash.
Not perfect adherence to the plan, but the direction was right and panic free.
Or in other words, we had already reduced our exposure to risk.
So what went wrong? Why did I succumb to food cravings and only partially follow my action plan?
I believe my elevated stress levels were based on 3 things:
- I had viewed blog income as an additional safety net. Even though I expected income to drop towards zero in a recession, I didn’t like it when it happened.
- Bonds are supposed to go up when stocks go down. But they went down too! “In a market crash, the only thing that goes up is correlation.” I didn’t like that either.
- I didn’t like that the recovery was so rapid, rising before I had a chance to buy at the bottom. The market waits for no-one.
I think worthy of mention here is that our net worth collapsing isn’t what bothered me. And actually, our net worth is higher today for having sold bonds and purchased stock in March (but would be higher still had I followed the plan to the letter.)
Another way of stating this: changing our asset allocation to have more bonds / fewer stocks wouldn’t have helped.
Is this a pretty story? No. But it is an honest one.
I hated losing $1,000 in 2000.
I didn’t like losing $10,000 (amongst other things) when those planes flew into the World Trade Center.
I was somewhat OK with losing $400,000 in 2008 – life just continued as normal.
I did not enjoy losing $1 million in the COVID-19 collapse of 2020, but I appreciate that I was able to have the experience.
I am certain I won’t be pleased about losing $10 million many years from now in a future market event, but since our portfolio continues to have a high equity allocation so it will probably happen.
- Having a written plan is good.
- Following it is even better.
- More exposure therapy was not fun (is it ever?) But it is important.
- Change to target asset allocation: none.
- Carbs are delicious