Don’t try this at home. Unless you really know what you are doing.
The weeks of self-quarantine have caused all of us to do things we always thought of doing. Frankly, I’ve been so busy with my “day job” that I have yet to join the millions of folks finally tackling those “projects” they never had time for.
However, I did squeeze in something that was in some ways necessary, but with a 2020-lifestyle twist. I shaved my head. And, I guess since I am never too far from analogizing most things in my life to the process of investing, investment behavior and portfolio management, this “event” in my life brought some helpful perspective about investing in bear markets.
Now, you can see from my profile picture, I am quite “follicly-challenged” to begin with. But, like many men my age, there is still good reason to go for a haircut every month. However, barber shops are not “essential business” right now, for obvious reasons.
What’s a balding, middle-aged fella to do?
As my hair started to reach the point where a self-intervention was necessary, I had a “strategy planning” session with my wife. OK, that meeting took about 8 seconds. She said something that surprised me. “Just shave your head.” I responded, you mean shave it down to like a number one or two on the razor?” “No,” she explained. You should shave your head bald. There is no better time to do it, since we are not going anywhere for a while.” I couldn’t argue with that, so out came the electric razor.
What does this have to do with investing?
It occurred to me that this is not unlike a decision investors are making right now. Do you try something different because your ability to invest the way you used to us now restricted? I am referring to the dramatic changes in the investment markets that were already occurring for years before the current pandemic arrived on the scene.
Bond rates are pathetically low. The stock market had narrowed to a small number of iconic businesses producing all of the returns, while several hundred stocks essentially cancelled each other out. Ask a high dividend-yield investor, a small cap investor or a investor in non-U.S. stocks how they were doing before this past February.
The pandemic was new, but a risk-filled financial market was not
As I have highlighted here many times, what is happening to the stock market now has its origins not in the pandemic, but in the fact that the bull market was doing what bull markets do when they get very old. It was narrowing and deceiving investors.
The key point here: this was happening for years, but investors did not really “feel” it until now. Kind of like how you hold on to your dreams of still having a decent head of hair, when the best move is to shave it down and stop pretending its 2004.
At first you don’t succeed, consider giving up?
The first attempt at shaving my head was a mixed outcome. It was 98% awful, and 2% OK. Like an investor trying to learn a new style, it’s an education process. And, my family was, shall we say, not very sympathetic. That is because my head looked pathetic.
There were many different lengths, open patches, and some parts that were “not value-added” to the look. Thankfully, this was all done in “the lab” without any live meetings or even video calls scheduled for several days. So, like an investor learning how to adapt to new realities in the markets and tilt their portfolio in that direction, I chose a decent way to ramp up the new plan.
Round 2: She is, as always, my champion
As she has done for 28 years, my wife helped me change my look to something respectable, from Cabbage Patch Kid. We smoothed out the rough spots, and she was the great advisor and strategist I always aim to be. It was still not what I’d call “ready for prime time,” but at least it looked more coordinated.
Investors go through this as well. And they are probably going through it more right now than ever. This is the time when one of these things has probably happened to you:
- You realized you are not willing to take on as much investment loss as you thought you could. This has caused you to re-think a lot of aspects of your investment plan.
- You realize that the “diversification” in your stock portfolio is more window-dressing than an actual risk-management tool. In the toughest markets, nearly all stocks, sectors and styles get taken down. They also tend to bounce up sharply in unison. This makes it very difficult to determine what “long-term value” really is right now. That is part of the reason the stock market is hopping around so much. Call it “price discovery.”
- You have figured out that whatever role bonds played in “covering up” losses in your stock portfolio (like a comb-over with a guy’s hair), they are mathematically eliminated from doing that in the future. Just look at where yields are, and you will know what I mean.
The effort to re-grow your wealth
I knew my hair would grow back. Maybe not in all places, but in enough to form some type of “grand reset” on top of my head. A week later, it’s already happening. However, for investors, they may have seen a giant “haircut” to their portfolio’s value, but then some of it grew back very quickly.
That sharp bounce from the S&P 500’s recent lows was a relief. But, it only heightens the urgency for you to decide if the “shape and style” your investment portfolio should look different from what it was.
I have spoken to thousands of investors and financial professionals during the last 3 decades. I have also navigated through 5 major down market cycles for stocks (1987, 1990, 2000, 2008, 2020). I say confidently that the vast majority of investors DO have to do something different. In many cases, they may need to do something that is as different as replacing 1970s-style long hair with a crew cut.
Because hair grows back until you get old enough, and it doesn’t. That is not in every case, but in enough to make men like me in their 50s realize that today’s look may not be the same 5 or 10 or 20 years from now.
Don’t assume your portfolio will grow back like it did before
Markets are like that too. Just because your stock portfolio always grew back when the market cut it a bit (5% drop, 10% drop, even the occasional 20% drop), does not mean it will come back the same way this time. THAT is what every investor should be seriously contemplating right now.
In fact, as I will show you in an article later this week, there is chance you could wait as long as a decade or two to truly get back to where you were just two months ago. Am I predicting that? No. Am I allowing for the possibility, and setting portfolio strategy for a wide variety of outcomes in this new, crazy, mixed up financial world? Yes!
Time to use your head (and not for a shaving experiment)
None of this means you have to run right out and make changes for the sake of making changes. However, recent events do signal that this is the best time to take a fresh look at WHAT you are doing with your retirement portfolio, HOW you are doing it, and most importantly WHY you are doing it.
Related: How to Pivot Now That 60/40 Investing Just Got Even Tougher