Do you recall how you felt in March 2020? You felt terrible. How do I know? Everyone did. The news was bad, the future uncertain, the death toll rising and current events were spiralling downwards. The market had fallen 35% in 3 weeks. There were no bright spots.
With the news and environment unchanged, the stock market started going up. And it kept going. Why? The participants could see over the chasm of closed and failing businesses to more online shopping?
For every turn in the market, on a daily basis, the talking heads will give you a reason why. It’s always written after the fact. And the lesson I learned first-hand last year was this: there is no reason. Sure, maybe over years of economic growth and stability, the markets go up. But any given day, month or year - no one has any idea what the market will do.
So, what to do? That’s the important part: be ready for anything and take what the market gives you. It goes up? Rebalance back to bonds, be slightly more defensive. It goes down? Rebalance into stocks, be slightly more aggressive. Ignore the news, look at the numbers and take what you’re given.
[00:00:00] Mike: Welcome to financial planning for entrepreneurs and tech professionals. I'm your host, Mike Morton certified financial planner and chartered financial counselor. Today. I will give you a most valuable lesson that I learned in March of 2020, and Matt and I have a lively discussion about managing your investment portfolio in the face of an unknown future.
Enjoy the show.
[00:00:27] Matt: I'm Matt Robeson and you may have heard. Mere minutes ago, if you're listening on WK XL or maybe you're just going one podcast after another and Mike Morton's outstanding podcast feed investing for high tech entrepreneurs.
And what was it? Tech professionals. What is the name of your podcast? Mike
[00:00:46] Mike: who knows, who knows financial planning,
[00:00:51] Matt: People to go to whatever podcast platform you use and search for who knows.
[00:00:56] Mike: Hey Matt. Hint. They're already listening to it. They found it.
[00:01:01] Matt: No, they're listening on WK Excel. And now they're going to go check out your awesome podcast. We were talking in real time a few minutes ago about the concept of risk. And if people are listening to this on podcast, go back and check out that. It was a really interesting conversation. And you were pointing out to me something that I hadn't thought about of course, because I don't think about these things all the time, which is we're in an unusual environment for risk, the reset of interest rates by the fed over the last few years to these ultra low levels has changed the whole equation. the ground has shifted under our feet in terms of the risk profile of our investments. And there are other factors that weigh in. And so it's worth a rethink on risk. And by the same token, we've talked on this show before.
Portfolio investing. Of course that's investing one-on-one you assemble a portfolio. It's the way you manage risk. It's the way you hedge against some things go up. Some things go down. You were saying that you've recently, you've had a little bit of an insight about risk that I think connects us back to this topic of portfolios and maybe it's worth talking about and revisiting portfolio investing in the basic concept in light of what you were telling me off the air.
So what was that insight, Mike?
[00:02:22] Mike: Yeah, so it was a great episode around risks and that, like you said, changing them. what I learned recently, by going through it as humans, we often learn firsthand it's we try as best as we can to learn from others' experiences because that's the less painful way of learning, but going through things yourself really hits home.
So if we all remember back to March of 2020, So about 18 months ago and COVID was just a starting and the market's just tanked went down 35% in a matter of a few weeks. And then they quickly rebounded. If you recall, even though the news was terrible. So try to put yourself back in March of 20, 20 18 months ago, re COVID is just starting.
The kids are being sent home from school. Colleges are shutting down. Stores are shutting down. No one can go out. And the hospitals are getting full, it's terrible news every day and the unknown, the uncertainty, the unknown of what was going to come next. So the news was terrible. The media is terrible.
Our lives were not going in the direction we had expected at the start of that year and the markets tanked, but then they came roaring back way before any economic recovery or personal record. Okay. And here is the moral of the story that I learned because we're doing some rebalancing talking with clients trying to trade in that market, which was really tough, super tough to buy during that time, when that news was terrible was one of the hardest things to do.
But here's the lesson that I learned the stock market and the returns of your portfolio and the investments going up or down. I have absolutely no.
correlation to anything you're reading or anything happening in the real world. In other words, I look at portfolios purely as the mathematical, asset allocation and whatever it is, and it's chugging along doing its thing.
And I will adjust based on that portfolio in the client's goals or my goals or whatever it is, but I'm not going to ever. Adjust portfolios or investments based on news or economic cycles. I believe they're somewhat completely divorced, especially in the short term, 1, 2, 3, And so you take what you're given in the market and you readjust based on what you're given, if things are flying high and then your stocks are outperforming, maybe you pull back a little bit, sell high, buy something that hasn't been performing as well and rebalance.
And the opposite is true as well. When it goes down 20, 30%, you have a plan That's to rebalance or put more money into that market while things are on sale. And I don't know why they're on sale and the news could be terrible, but just playing that game in terms of whatever the market. Yeah, you take what it gives you.
[00:05:12] Matt: That's really interesting because we did an episode recently on bubbles. And this question of is the market overvalued right now. And I guess the connection I would make with what you were just saying is it does seem like, and people should check out that episode because you pointed out there is some evidence that maybe.
The way we think about how risky the market is and how much value is embedded in the market actually has changed over time. We may be perceiving these things differently. The market may be valuing things differently, but this basic insight of, maybe it's not tied to the news. for no other reason, then the kind of simple, the old joke of now, I know that this event has happened in the news now, you know that I know, and I know that, you know, that I know, and we could devolve down that pathway endlessly.
It's like a fractal. And at the end of the day, We're all trying to out-think one another and we could second guess ourselves literally ad nauseum, but it's not going to get us anywhere. You have to you sound like bill Belicheck here, Mike, you have to give what the defense is giving you and that's what you go after.
And so it's interesting in that regard and given your earlier point in the last episode about risk. So let's approach this question of portfolio. From that standpoint, because again, this is a one-on-one topic when it comes to investments, but I don't know if your insight or these issues of risk make us think about them right now about portfolios a little bit differently.
So just to refresh everyone, I know it's one-on-one but what do we mean by an investment portfolio?
[00:06:50] Mike: Before we dive into that, Matt I just want to highlight what you said, cause you said it better than I did. You never know like what the markets are going to do based on any kind of information and guessing, that I know that, you know, and all of that and being contrary to.
Sometimes good for you sometimes not good for you. Strategies are sometimes good. Sometimes not good. So I just think it's way easier to think of your portfolio is divorced from anything else and just, take what it gives you and to rebalance. And so here's my
[00:07:19] Matt: Well, that is, That is the point of a portfolio. Isn't it? It's the take the thinking it's that you don't second. Guess it, you don't try to over time. The market. Almost always goes wrong. It's just to say, you know what? I let go, John Maynard Keynes take the wheel here, please. We'll just see what happens.
[00:07:38] Mike: But you should, that being said, you should have a plan. All right. You should know, based on, one or two or three different scenarios, what am I going to do? This is just basic kind of life living like, oh, , if I'm on a road trip and this happens, I sorta know my game plan, like what I'm going to do.
So Matt, if the market does, we were talking before about this fall we're recording this September it beginning of September, this fall of 2021. I would not be surprised if the markets go up another 10% or if they go down 30. Neither of those scenarios would surprise me. Matt, my question to you is what are you going to do in your own portfolio?
If the stock market drops 25% this fall.
[00:08:20] Matt: I have two answers. The first answer for our listeners is Mike has never posed a question to me that I've answered correctly on this show before I always get them wrong. No matter what I say, Mike says not quite. So with that understood. I'll tell you what I'm going to. Absolutely nothing I'm going to do absolutely nothing because I take a long-term investment horizon approach.
I have, most of my own investments are in target date funds. I have a broad, low cost index fund, and I'm going to assume that, whatever is happening this year. There's going to be a random walk in the future. It's a random walk down wall street, right?
A gal and her dog. And it goes all over the pavement. But in general, if history is any guide, it's going to head me toward my goals in the right direction. The only thing I'm going to keep an eye on, because I listened to you on this show is my. Portfolio of investments getting out of whack with the target risk allocation that Vanguard says I'm supposed to have, or, I might call you and I might say, Mike Morton, how much risk am I supposed to have?
That's the only thing I'm going to check to see if, I need a little reset, a periodic adjustment, but otherwise I'm sticking to my strategic plan. All right. Tell me why I'm wrong.
[00:09:49] Mike: Yeah. So that's a pretty good plan. I actually, like your plan and I think that's great. Doing nothing can be a fine plan. It's knowing if this happens, I'm not saying to say comfortable with doing nothing because the stock market's gone down 25%. You're not going to feel particularly comfortable, but knowing that was your plan, you will have more likely to stick to it.
And because you're in target date they might rebalance for you, which would be great or stick with it and you have that long-term view. So that's a great option
[00:10:17] Matt: Can I tell you something though about this? You started this episode by, I don't know what you were thinking, bumming out our whole audience, by saying, imagine it's March 2020, everything is going wrong. Now I've done that, what happened actually was in February, 2020, I was working out with a friend of mine.
We were at the gym and he's hold on a second. It was in between sets. I'm like, you really need a break right now. He's yeah, I got to talk to my broker. I'm getting out of the market. Everything is about to go wrong. He got out of the. I didn't. I agreed with him that everything was about to go wrong.
I wrote it out and as it turns out, he got back into the market. He lucked out and got back into the market at a pretty good time. He didn't take a bath on all this. I wrote it out and I also did pretty well , anyway, I'm just saying I would take the same approach this time around. So go ahead.
You liked my plan. You kind liked my plan, but.
[00:11:12] Mike: No, I like that. And I also want to ask you who is feeling better, not better, but a better about their portfolio during those eight weeks.
[00:11:20] Matt: I can't say that I was feeling great. He was probably feeling better because it always feels better to be active than passive in anything you do once you've made a decision. Once you've taken an action, buyer's remorse aside, you tend to feel like I've taken control and the markets seem to be validating his strategy.
[00:11:41] Mike: Yeah, potentially. And everybody's psyche is really different, but I would say most people would be hard to sleep. When do I get back in a, I'm sitting on cash, it's gone down. Okay. I'm feeling good. It's, I'm sitting on cash and it's gone down so I can buy back in. But the member news was terrible.
When are you going to buy back in when it's down 10%, 20%. Is it going to get to 30%? What if it starts going back and listen, you look at a graph. Here's the problem that you look at a graph of that time and it's straight. It's eh, so easy. It just went straight down, but none. No. There were like 5% corrections going back up for two or three days in a row.
So do you jump back in? So therefore I would suggest most people in your friend's situation are going to be losing sleep at night, worried, stressed, talking to their family or their friends constantly about what are they going to do. And whereas you're reading the news and not feeling good.
You're not worried. You're not thinking about your portfolio. And so I think your strategy is pretty good.
[00:12:42] Matt: Look I guess it's a little bit of the feeling. If you ever have you ever quit a job where you went into your boss and you're like, stop it with this job. I've never done that. But I imagine that you feel pretty good for three days and then you're like, oh man, the paddock starts to said it.
Maybe that's how he felt. I don't know. Yeah. I'm going to call him and ask him. But I do agree. I do agree. I. I do take great comfort in having a strategic plan and having embedded within it, a point that you made on a previous show, which is that risk and volatility or. And I have embedded in my view of the future, that bad things are going to happen.
The market's going to go down, there's going to be volatility. There's going to be updates and down days, I do not look at my retirement. I don't look at the statements. I don't like wander online. Like maybe once every six months I wander online. And it's basically just to do this, like now I didn't have that kind of discipline in March and April.
Of 2020, I would go in there and I would do a little bit of oh my gosh, this is not great. I'd call my wife. So remember our retirement date. Let's rethink that. But yeah, in general,
[00:13:57] Mike: maybe you could sell one of your kids or something to make it up.
[00:14:00] Matt: What's really weird is that you can do that in the game of life. You can.
[00:14:05] Mike: you been? Where have you been looking on the internet?
[00:14:07] Matt: Right where to sell you.
So you can do that in the game of life. Like the board game, like for our younger listeners, the way you used to play games was OD boards made of cardboard, right? So you could actually sell your.
[00:14:20] Mike: room. You'd have to be in the same room as other people as Well, to
[00:14:23] Matt: That really feels creepy in the age of COVID. It's like when someone says let's meet face to face, you're like, let's not do that. I need, any other part of our body basically, but not face-to-face all right. We're way off track.
[00:14:35] Mike: me tell you, let.
me tell you what would be even a better plan, Matt? I like your plan. It's perfectly good. I recommend that plan, everybody out there listening, doing it yourself. You got most of it. And your portfolio and your target date funds in your retirement plan.
Your 401k is perfect plan. Love it, Matt, you get two thumbs up. The only thing you could add in there, if you wanted to is right now, we talked about this on previous episodes. I'm a kind of a defensive stance. The markets have been in all time highs. We've been on a bull market for a long time. It's great.
I'm not predicting the market's going to crash. I have no idea what's going to happen now. But it's, it seems more likely that the market's going to stay flat or go down over the next five years than it is to keep going up. All Right. That just seems more likely to me now. I'm not saying you make trades based on that, but what I would say is you're just a little more defensive and we talked about that in other episodes.
So if you're normally, if you're young and you're still working and for a long time horizon, most of it's in your 401k or. Then you want to stick, 80, 90% in stocks for that long-term view. Maybe you're at the 80%, and that maybe your target date fund is there anyway.
So that's what I mean about being defensive. You just look at the overall, you turn that dial just a little bit. I like to have 70% equities. Maybe I stick with 70, maybe 65, just 5% kind of change. So therefore. If you do that, if you're normally an 80 20, and you're like, oh, I'm definitely sticking with 80% and I don't want to go above that.
Then when stock market goes down 20%, you could become 85% of the stock. So when it goes down, you have, that's your plan. The next time that it crashes, I'm going to stick with an 80, 20 so year in and year out. If it's chugging along, I stick with 80% in stocks, 20% in fixed income. And then the next time it goes down 20%.
I'm already shifted. Like my 80% in stocks went down by 20%. So I'm already at 75%, I've got to rebalance buy more stocks. They're on sale by 20%. Maybe I rebalanced to 85% in stocks and 15% in fixed income. If you can take the risk, if you have the risk, capacity and tolerance that it could keep going down from there.
So that could be a little nuance to a plan that, Hey, when it goes down to 10%, 20%, 30%. I've got a plan. Okay. In order to readjust rebalance, my portfolio may be overbalanced right now. I'm being defensive. We're overbalancing to the fixed income, just very slightly 5%, just being a little more conservative.
And you could overbalance the other way, just a little bit
[00:17:06] Matt: That's clever because of course the nice feature of these target date funds, their index funds. We've covered this before. There are index funds that automatically for you adjust your risk profile. As you approach the target date. Now it could be a target date around college. It could be a target date around retirement, but the point is you get it automatically gets more defensive for you.
What you're saying is, Hey, you could push the slider a little bit more because , you could just say strategically, this is my plan. I want to be more defensive. Here's a quick hack question for you. Let's say. I'm someone who really is in a kind of, you heard my approach a few minutes ago.
I really don't want to do a lot. I don't want to muck around. I don't have a lot of individual stocks. I have no individual stocks. I'm all in an index right now. If I want to adopt a more defensive stance is the easy way to do that. To buy more of the same kind of target date index funds. Just with a sooner target date.
[00:18:14] Mike: Yes, but here's what I'll say to that. I love target date. They are great invention. I highly recommend them, especially in your 401ks and individual time record and towns. They're great. They can be a little bit too defensive for my liking. Okay. If you're in your thirties, forties, fifties, if you have more than 10 years of career ahead of you, you're still growing your portfolio, a target date fund that if say you're where are we?
2020. Say you're going to retire in 10 years. So 2030 target date funds. That's going to be more conservative than I like for most of my clients. That might be a, almost a 60, 40, 60% stocks, 40% equities. And I just told . You if you have 10 years or more, you could be like an 80, 20.
Okay. Now, personal risk tolerance in every. Taken into account. You have to understand yourself because I'd rather you stay invested in the market. I definitely don't want you panicking. Oh, it goes down by 15%. I'm selling everything. No definitely don't want that. Okay. But I just find them to be slightly already on the conservative end.
Okay. For a lot of people, if you want to talk to the nuances of those products,
[00:19:14] Matt: That's interesting, you know what? We should talk nuances of it. And we should actually, I think we should do a future episode on this very topic because look so many people are like me. Although probably smarter. So many people are like me and that they really.
[00:19:29] Mike: not many people like you met.
[00:19:30] Matt: Oh, boy, look moving on, and there, and in terms of the market , they really are availing themselves of these index funds of these target date funds.
And , it actually would be worth following up on this point of, are they a little too defensive? Because it is a pretty easy hack to, I. Hey, you don't need to be truthful about when you intend to retire, you could pick a different target date. It's not like Vanguard is going to come back and audit you.
And also it sounds like it's worth doing a little bit of math and just reading the fine print about what are the allocations? What is the risk that is embedded in that target date progression?
[00:20:08] Mike: Absolutely. And we'll have a whole episode on this because it is really important. I will say this most of my clients, I recommend a target date fund far in the future, 20 40, 20, 50. Just use those ones. If you're 10 plus years from retirement those are great and we can get into the nuance.
Remember that target date funds by definition have to appeal to the mass. Okay. So they're just an average. And we talked about averages and all her stories about averages. But they're an average for just everybody out there that makes them great. That's why I love them because they're a one stop shop.
They keep you invested. But remember they're just for the average. So the more you know about your situation, the more targeted you can use those products and auxiliary things around them to help you out.
[00:20:50] Matt: Let me ask you. This though the big take home that I have here from the discussion is. Listen to the earlier episode about risk, recognize that we are in an unusual risk environment and also recognize that look, all things being equal, no crystal balls here, but flat or down is a more likely trajectory for the market over the next five years then up and up, given that we've just gone up and up.
And maybe we're overvalued. Maybe we're in a little bit of a bubble right now. One thing you can take away from this is just do a little checkup, maybe a little glance. If you are like me and you're in an index fund, a target date fund, just look at what your risk profile is and ask yourself, or talk to a financial advisor about your risk profile and think about whether it's appropriate for you and whether that progression is right.
Maybe you do want to be slightly more defensive. It sounds like a pretty easy hack here. If you want to. Invest a little bit more in a different target date. Anything else that people should think about doing any differently in this environment or in regards to portfolios?
[00:21:59] Mike: No, I think that's the biggest thing. And I would say this if you're going to spend five or 15 minutes looking at things, people are more defensive than you think, because put in your savings account, your checking account, your brokerage account, your 401k accounts, everything, and how much is in, versus, the target date funds and in, within those target date funds, how much are, cash and bonds and stocks, you will probably find most people are more defensive than you think.
And that's just natural, cause we're scared of losing money more than we appreciate earning it.
[00:22:28] Matt: yeah. That's loss of version right there in a nutshell for you. That's a really good piece of advice and you know what probably a show we should also do in the future. We teach defensive driving. We should probably talk about how to really think at a detailed level about defensive investing.
All right. We're just spitballing a ton of great ideas here with Mike Borton, Morton financial advice, the host of a podcast that you can look up under, who knows. Thanks for being with.
[00:22:56] Mike: Thanks, Matt.
Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at email@example.com. Until next time thanks for tuning in