What I'm doing with my Investment Portfolio

First: I hope that you are well, safe and implementing healthy habits during this unprecedented time. While of course our attention is on the coronavirus, I will focus the remaining of this article on the financial markets. With all that is going on nationally and here in MA, I want to provide you an update on what I’m personally doing with my investment portfolio.

Asset Allocation

Assets are simply things you own that have value: your house, cars, jewelry, business ownership, cash and investments (stocks, bonds, etc). When I use the term Asset Allocation in this article, I’m specifically referring to investments which include cash, stocks and bonds. Within each of those high-level asset classes there are further subdivisions. In Cash you could hold actual dollars (stuffed in your mattress!), savings accounts, checking accounts, and money market accounts. Bonds are “I owe you” loans that can be issued by the government (treasuries, bills, etc), municipalities or corporations. And finally Stocks (or Equities) can be investments in US companies, International companies, in large companies or small companies. There is a whole range of ways to break down the different asset classes into subclasses.

My investment philosophy is to use asset classes and allocate my entire investment portfolio into them on a percentage basis. The idea is similar to the pie chart shown here (though my actual ownership is quite different than this simple example).

Rebalance

When the market goes up or down, the percentages in the overall pie chart change because asset classes (typically) don’t move the same amount in the same direction. Usually this out-of-balance change happens slowly, but over the last month it has come about quite quickly. Say if my bond investments stays the same but my stock investments drop by 20%, then in order to bring my portfolio back to my target percentages, I will need to sell some bonds and purchase some stocks. This is automatically selling high (bonds did not drop in value) and buying low (stocks have lost value). This is exactly what I want to do as an investor.

Therefore, I am taking this market decline as an opportunity to rebalance my own portfolio. Obviously my stock investments are down as are everyone’s and so my portfolio allocation between stocks and bonds has skewed far enough that I can sell some bonds and purchase some stocks at these discounted prices. This is exactly why I recommend owning both stocks and bonds. By rebalancing I am automatically selling high and buying low: exactly what I want to do.

Adjust Risk

In addition to a rebalancing back to my target portfolio, I am also looking to adjust my goal allocation slightly towards stocks as they continue to become cheaper. The market is putting equities on sale, so this is the time to consider purchasing more.

Although I am personally considering this strategy as stocks continue to fall, two caveats:

Stocks are still not particularly “cheap” by historical standards. They are just no longer very overpriced.
I must be mentally and emotionally prepared for further declines: there is no way to predict the future.

It’s important to have a plan. My plan has always been “when the market declines, I will add to my stock allocation”. Although not set in stone, it roughly looks like this:

If the market pulls back 20%+, add 5-7% to my stock allocation (from say 70% to 76%)
If the market pulls back 30%+, add another 5-7%
If the market pulls back 40%+, add another 5-7%

It is absolutely worth noting that I am a risk-taker as you might know from my background founding two startup companies and starting my own financial planning business. You have to understand your own ability to take on the risk of further market drops.

Have a Plan

Like you, my emotions are telling me that this market has nowhere to go but down: the coronavirus fallout will continue to hit us personally and the businesses that we invest in. The news will get worse each day. With a solid plan, I have a way forward that will buy low, so I can eventually sell high.

If you are worried about your finances, retirement portfolio or the markets, please get in touch. I want to make sure that you are comfortable with your plan and a have a good path forward.