The holidays are a time for roaring fires and cozy Christmas dreams. Yet, the last few weeks have been far from that in the investment world as Wall Street grapples with big drops in S&P 500 value, a bond yield inversion, and global economic uncertainty. While I’d rather be writing about a ‘Santa Claus Rally’ – instead we are closing out the year in negative territory.
As this publishes on Monday morning (10 Dec 2018), year-to-date S&P 500 performance has dropped -2%, bonds have dropped -3%, and international stocks are down a whopping -14%. Most indices were holding in pretty well until 60 days ago, but October, November, and December have been particularly rough. Worse for me, the MegaCorp I am a retiree of has seen their stock a whopping -34% this year. That’s twice as bad as any year in the company’s last 30+ years.
That’s why I thought this quote about risk from Teddy Roosevelt was particularly apropos right now. Investments, particularly over the short term are very risky and have a way of biting you in the butt at an inopportune time. Yet, over the long-term, the risk can provide handsome returns and you are short-changing yourself if you take no risk at all.
I try to keep regular track of the risk balance within our investment bets and not get too extended in one way or another. I wrote earlier this year about our mix of equities, bonds, real estate, and MegaCorp stock options (which continue to be deflated). Once a year I make ‘rebalancing’ adjustments – usually sometime after New Year’s.
We also carry a good chunk of cash in money market accounts so that we can sit on the sidelines when the market has a touch spell. Most personal finance advisors suggest a 18-24 month cushion of cash, but we went into the year with 36 months. That gives us flexibility to weather storms that come through.
As I’ve noted before, outside of company stock options which I sell via a dollar-cost-averaging strategy, I keep speculative investments to a minimum. The angel investing and cryptocurrency (also having a tough run) investments I’ve made are less than 2% of our total portfolio mix.
Our thought process is ‘backed up’ with the help of our financial advisor, who we meet with at least once a year for an in depth look at where we are at. He keeps his advice to us pretty conservative with the caution that protecting our nest egg is a priority to growing it rapidly. They have a proprietary Monte Carlo calculator (similar to FIREcalc) that we can access online and play with assumptions as well. The more you run sensitivities, the better you can tease out the risk factors.
I’m not sure what 2019 will bring for investment performance (or even the next week), but we’ll continue to keep our portfolio mix as sensible as possible and keep our assets bucketed by time horizon. We can’t control the markets, but we can benefit from them if we keep objective about how we are balancing our bets.
Image Credit: Pixabay