According to Google Finance at the time of this writing on 28Mar2020, the S&P500 has decreased 25% from the market peak in mid-February, with the lowest point being a 34% dip going to 23Mar2020.
These are truly the times that test our abilities to stick with our financial plans, both short and long term.
For me personally, this is likely the first true market decline I’ve experienced as a first-hand investor since starting to receive “real paychecks” upon entering the workforce in 2008. As such, it’s a test for me as well.
The Importance of a Reality-Checked Asset Allocation
I’ve written many times on this blog about how having and MAINTAINING a realistic and appropriately-selected asset allocation is one of the most critical parts of personal finance.
There are great sections and tables (some of the key information reproduced below) in Larry Swedroe’s book, “The Only Guide to a Winning Investment Strategy You’ll Ever Need,” that I used close to 10 years ago to select my asset allocation.
Based on my asset allocation of 70% equity / 30% fixed income, I have to be able to tolerate a 30-35% decrease in portfolio value in a single year. In the midst of the current decline, I still feel this is appropriate and tolerable.
With the asset allocation you use, can you tolerate the corresponding possible loss listed below?
Maximum Equity Exposure Maximum Loss
20%……………………………..05%
30%……………………………..10%
40%……………………………..15%
50%……………………………..20%
60%……………………………..25%
70%……………………………..30%
80%……………………………..35%
90%……………………………..40%
100%……………………………..50%
I Fear The Majority of People Are Over-Exposed to Equity and Risk
Based on my personal, family, and financial interactions over the past 10 years, I fear that the reality is that most people invest too much in stocks for their age and investing lifecycle.
One of my pet peeves is that target-date retirement funds (run apparently by “professionals”) seem to overweight to equity.
For example, in my 401k retirement plan at my work, I invest in the Vanguard Target Date 2030 because it delivers my target 70/30 asset allocation split and is the best amongst the choices.
But wait, I am 34 years old. I’m more like 30 years from retirement, not 10 years from retirement as the name suggests.
If I invested in a fund “appropriate” to my age (Vanguard Target Retirement 2050 Fund), they would have me at an asset allocation of 90% stocks, which would be overweighted from my asset allocation determination calculations.
I Intend to Continue “Business-as-Usual” With My Personal Finances
So, what do I intend to do right now? Basically, I just plan to continue running my personal finances/investments as normal.
Since I usually tabulate my net worth each month and re-balance to maintain my asset allocation targets if outside my set banding, I continue to do so in the next few days.
It’s likely that I’ll need to sell some fixed income and buy some stocks….
So, how is everyone feeling right now? Did you all have a well-selected asset allocation?
