The day-to-day market volatility to begin 2022 has been a wild ride. I have no idea what’s moving markets on a day-to-day basis or to what extent, and nobody really does to be honest. As a financial advisor, here’s what I’m doing about it for myself.
Okay, just kidding – kind of. I’m not changing my portfolio strategy and I’m certainly not trying to pick specific stocks or a certain strategy to position myself better based on any geopolitical, economic, or sector based current events – actively managing a portfolio like this is overwhelmingly expected to do worse than just picking the benchmark. You can read more about my thoughts on this on this earlier blog post.
But, I have to do something, I can’t just sit back and let the headlines dictate my portfolio experience (…and emotion).
Here are the four things I’m actually doing:
Confirm My Cash Buffer
This is the cash I’ve set aside in case of any financial emergency. Stocks are volatile, we’re seeing it now. My cash buffer lets me ride out the market cycles without having to pull stocks at a trough in case of an emergency. The compounding effects of reducing investment during a trough is incredibly harmful to your future value. It’ll take a much greater comeback for me to recoup the money I’ve lost if I pull out during a trough. Think about it, 10% returns on $100 and $50 are not the same.
If my cash buffer is below its target, I’m only going to sell as much of my portfolio as it takes to get that back to target. Anything more and the opportunity cost of the future value is too high.
Regardless of what the textbooks tell me about benchmark investing being elastic as long as I can ride out the cycles, I’m a fearful person and I always think worst case scenario (that I lose all my money). I know if I saw my portfolio’s actual balance drop over the last few months, I’d be much more likely to take out my money and wait until things settle down. Theoretically, seems like a great idea. Never (incredibly, like incredibly-incredibly rare) does this work and the opportunity cost is too high to justify it.
I still keep my eye on the market, just not my own account. Delete the app, delete the shortcut. Volatility is a lot more bearable when you just see it on the news. I’ll check every couple of weeks when I get my paycheck and need to invest some extra money.
Invest Any Excess Cash
Buy low, sell high. I’m trying to buy low with any extra money I get, I just never know when the actual low is (nobody does). Invest as much as you can and as often as you can; this is a much better strategy than trying to predict the low.
This is another way to build up that cash buffer back to target. If you know you’re going to be expecting some cash, no need to sell assets. As long as the cash comes in within the month, contribute it toward your cash buffer then instead of selling some assets and then reinvesting the cash income later.
Rebalance and Tax Loss Harvest
Another way of managing risk is by sticking to my target allocation. This increases the chances of me realizing the expected return and protects my downside risk to the point where I’ve decided I’m comfortable having. If anything is overweight, sell it. If anything is underweight, buy it.
I’ve written about tax loss harvesting before. It’s a great, easy strategy to try and boost your after-tax returns. Watch out for the wash-sale rule!
That’s it. That’s all I’m doing. Nothing fancy, nothing cool, but it’s a sophisticated way of managing my own portfolio.
Just remember, I’m not your financial advisor so the information may or may not best apply to your situation and you should get formal advice prior to doing anything. The information/data that is shared should be double checked by you and any conclusion that is driven based on past data is not to be interpreted as my advice for your future. I will do my best to only write what I think is true and right, but mistakes happen and we’re all learning together – this is meant to be an informal conversation.