It’s February 24, 2020, and the Dow Jones Industrial Average just dropped a little over 1,000 points. The coronavirus scare has created a worry in the financial markets that global growth will begin to slow. Someone asked me: “What do you do with your portfolio when the markets drop suddenly?” It’s a powerful question. You don’t have to be a client of my firm to hear my thoughts. These are for anyone and everyone. On days like these I am, first and foremost, CEO in terms of money management and then secondarily am thinking about my personal portfolio. As you can imagine, I care deeply about our client’s assets ($1.35 Billion to be precise) and how their portfolios perform in markets that drop suddenly. That’s what clients pay us to do – to be great stewards of their wealth. My investment team and I closely monitor how our portfolios perform when drops like these occur.
I also care about my own personal portfolio that ties into my personal financial plan. While client portfolios are custom designed to meet their goals and risk tolerance, my personal portfolio looks very similar to our firm’s clients’ portfolios and there is massive overlap in my analysis. So, here is my quick list of things I immediately do on a 1,000 drop in the market day.
I ask myself these 7 questions:
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Do I believe in the long-term economic outlook for the U.S.?
Warren Buffet stated THIS during the 2008 financial crisis. I believe it is the best question to start with:
“…I will tell you this. This country is going to be living better ten years from now than it is now. It will be living better in 20 years from now than ten years from now. The ingredients that made this country, you know, the miracle of the world…. So we’ve got a great system. And we’ve got more productive capacity now than we ever have…. We’ve got all the ingredients for a sensational future….”
Do I still agree with this? Investors who sold in 2008 were hurt even more when the market roared back and they missed the upside. I don’t want to be that person. I believe in America and its future.
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Where is my cash position?
Is this an opportunity or a threat? Should I invest more in the market now that it might be lower? Do I need a large sum of cash sitting in my savings? How much would I potentially need to access over the next 12 months? Could I stand to take advantage of short-term correction if I believe in Buffet’s quote?
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Is my portfolio set to rebalance (buying lower and selling higher) to take advantage of market sell offs?
I believe in a properly diversified portfolio. I don’t try to pick hot stocks. I allocate to different parts of the overall market. Our client portfolios are similar. Across my firm, the portfolio rebalancing software trades 1,000’s of trades when there is volatility and I know it will have probably automatically sold some positions that are overweight and bought into positions that have changed to the negative. Check out these auto-rebalance trades from February of 2018.
The combination of our people in implementation and technological automation is the key to taking away emotion from the trade. So even if I do nothing, I do something.
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When the investment team “stress tested” the portfolio(s) in the past, was the result what they predicted?
This might be more of a CEO move than just personal portfolio move because you or your advisor may not have this capability. My team stress tests our portfolios regularly attempting to predict how much a portfolio will rise or drop relative to the market. How did the portfolio do on this highly volatile day? Did the predictive modeling get close?
Volatility exposes the vulnerable parts of the portfolio. Hopefully the modeling already predicted it. If it did not, we assess why.
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Does my current portfolio reflect the goals and objectives of my personal financial plan?
This is very, very important for you to understand. Your financial plan should dictate how you invest money. So, ask yourself, did your financial plan change significantly? I ask myself: Did my wife or I change a goal or an objective? If so, then I need to assess my current allocation and risk tolerance.
Why? Because if nothing has changed, then no portfolio changes should be needed. Your best move is to stay the course.
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When do I need this money?
For every account in my portfolio I ask: When do I need this money? Do I need it in less than five years? Five to Ten Years? Fifteen or more?
Volatility is not necessarily a bad thing if I don’t need to get money for more than a decade and I still believe in Buffet’s quote. Again, what is my plan telling me?
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When is my next financial review?
If I have anxiety about the fundamentals of the market, my current positions or my overall financial plan, then I need to sit down and do a formal review before I make major portfolio changes. Let’s be honest: financial reviews are not the greatest thing to do, but it will help me reset my emotions and be rational.
A formal review will help take the emotion out of portfolio management. It reminds me of the purpose of the financial plan and why we save and invest money.
I started Krilogy in January of 2009. The market was still a complete mess. In fact, a January 12, 2009 article published in the Wall Street Journal, “Times are ugly. They will likely get uglier,” by Sandra Ward and Kobin Tan1 included the following graphic:
This was literally in the second week of Krilogy’s existence. We had just had a chaotic 2008 and 2009 was starting off just as crazy. But guess what? About 7 weeks later, the market bottomed out and started one of the greatest bull market runs in our history.
Bottom line? Make sure your plan is in place before the next 1,000-point drop. Make the decisions when you are in a non-emotional state. Emotion can get the best of anyone. Spend time with your advisor and craft a financial plan that can stand the test of volatile days in the market. With a plan in place, you’re ready.
1 Ward, Sandra. & Tan, Kobin (January 12, 2009) Dow Tumbles 4.8% for the Week, Wall Street Journal, retrieved from https://www.wsj.com/.
