Long-Term Bonds Do Wonders When Times Are Right
Reader Ron reminded me of this blunder I wrote back in May: TIPS Price Up: Buy, Hold, Or Sell? Back then I wrote about a 30-year TIPS bond maturing in Feb. 2041 having gained 13% in short three months between February and May 2011.
I suggested investors might consider selling the 30-year TIPS, and buying a 15-year TIPS instead, because 15 years was the "sweet spot" giving the best bang for the buck between risk and expected return.
Save Aggressively, Invest Conservatively
Now we know the story that retail investors run for the hills whenever the stock market hits turbulence is largely a myth. Even during the serious financial crisis in 2008-2009, only 7% of the money invested in stock mutual funds were sold out of those mutual funds. However, even though most investors don’t sell, they do indeed become nervous when the market drops.
Buckingham Asset Management, the company that produces the Investor Radio podcast I wrote about last Friday, recently had to host not one, not two, but three conference calls to discuss the current situation with its clients: one before the debt ceiling deal was reached, a second one after the market fell sharply on Aug. 4, and a third one after S&P downgraded US debt. If clients weren’t worried, the advisors wouldn’t have had to do that.
While these events were unfolding, although the stock market is still down, I haven’t worried at all. All I thought was what I should buy. I attribute the peace of mind to having a conservative asset allocation, one that’s well below my risk tolerance. A conservative asset allocation keeps me calm.
Buckingham Investor Radio: Free Podcast Featuring Larry Swedroe
I started listening to the free Buckingham Investor Radio podcast recently. The podcast is produced by Buckingham Asset Management, an investment advisory firm in St. Louis.
The podcast has two hosts — Don McDonald and Tom Cock — but to be honest the real star of the show is Larry Swedroe.
Larry Swedroe is Buckhingham’s Director of Research. He wrote many books on investing. I’ve read all of them. They are all great. I also subscribe to Larry’s blog Wise Investing on CBS MoneyWatch.
Most People Don’t Sell Everything In a Panic
Speaking of not selling, I find this tidbit quite interesting: the vast majority don’t sell anyway.
Steve Utkus, Director of Center for Retirement Research at Vanguard, wrote in the Vanguard Blog that during the recent volatile days, between Aug. 1 and Aug. 10, only 2% of all 401(k) participants in plans administered by Vanguard made a change to their portfolios. During the volatile October 2008, only 4% made a move. The moves were of course not just one way. So the actual percentage of investors who sold stocks is even smaller.
It’s possible that Vanguard does a better job in educating the participants but it can’t be that much better. Allowing a 2-2.5x increase in the numbers, we are still talking about maximum 5-10% of people making changes to their portfolios in a panic.
+/- 5% Rebalancing Bands
When the stock market moves up or down, it can knock your asset allocation off your target. Rebalancing means selling the winners and buying the losers in order to bring a portfolio back to its target allocation.
When it comes to rebalancing a portfolio, the 5%-band method is a popular one. It says that you rebalance when the percentage of stocks is at least 5% off your target. For example suppose your target allocation for stocks is 60%, using the 5%-band threshold, you will rebalance when stocks become more than 65% or less than 55% of your portfolio.
What does it take to knock your portfolio’s asset allocation off by 5%? You may be surprised that it takes more than you think. It was a surprise to me as well.
Don’t Sell, But Don’t Buy Either?
During the stock market’s wild swings lately, I read many articles in the media telling people not to sell in a panic. Here are some examples:
- The People Who Should Sell Stocks Now by Ron Lieber in New York Times Bucks Blog
- Sometimes, standing still takes the most courage by Karin Risi in Vanguard Blog
- Don’t Panic About the Stock Market by Burton Malkiel in Wall Street Journal
The message is consistent across the board — don’t sell. However, none of the articles advised that people should buy more either. In fact some articles specifically tell people not to buy more. For instance, Jason Zweig wrote in the Wall Street Journal Stocks Are Cheaper, but They Aren’t Cheap saying it’s not quite the time to buy yet.
Buying Stocks On Sale
I was away for only a week, and look at what happened. After I came out of my seclusion, I heard we beat the clock on the debt ceiling but Treasurys got downgraded anyway. I was surprised to see that my limit buy orders were all filled last Thursday and Friday even though I didn’t expect them to execute when I entered them.
I entered another limit buy order on Sunday evening at a price about 5% below Friday’s closing price; it executed mid-day on Monday. Another order was filled at 3:58 p.m. Eastern Time, two minutes before the closing bell. I ended up putting more money into stocks in the last three days than I did in the last two years. I bought back some of the ETFs I sold in April.
Is there such a thing as buying stocks on sale?
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