This morning when I logged into Mint.com, I was surprised to see that our investment accounts have now hit another financial milestone: surpassing $600,000 in value!Our investment accounts include money in our 401Ks, Roth IRAs, taxable accounts, HSA and 529. Index fund investing allows us to diversify our portfolio and keep our costs very low. This does not include money in our checking accounts, savings accounts, home equity or rental property equity.
The stock market has been on a wild ride this year, triggered by uncertainty with the coronavirus and an unexpected oil crisis. We had one of the steepest stock market drops ever: a ~34% drop from February 19th to March 23rd. It was scary watching the stock market take a nosedive. We lost over $50,000 in our portfolio within 2 weeks! This type of drop was more than I could stomach. This pullback tested our chosen asset allocation and made me realize that a 90% stock to 10% bond allocation was too aggressive. I couldn’t stop thinking about losing money.
I’ll admit it. I panicked. I panic sold.
When our portfolio was smaller, I never used to get worried about little drops in the market. Once our portfolio surpassed 500K, I was more focused on wealth preservation than aggressively growing our balance. On March 5th, when our portfolio was down about ~8%, I “cut my losses” and exchanged over $300,000 worth of stock index funds into a stable value bond fund yielding a guaranteed 2.5%. Stable value funds are accessible in some workplace 401Ks and can offer a much better place to store money in the short term than a bond fund or cash. This put our portfolio into a much more conservative asset allocation of 60% stocks and 40% bonds. At the time all I could think about was how hard I had worked to save and invest only to be faced with an imminent stock market collapse. I told myself that if nothing else, I could at least hold onto a quarter of a million dollars worth of cash in an ultra safe fund.
As the stock market continued to drop by another 25% after I had panic sold, I felt great about my decision. I gave myself a pat on the back, thankful that I had sold and “got out” just before the bear market. I seemingly got one part of market timing correct. By March 23rd, the stock market had hit the lowest point in the drop.
Then things started turning around. Stocks started to rapidly recover. The stock market has been on an unstoppable tear upwards since March 24th, resulting in the shortest bear market ever (33 days)! My 401K plan requires a 30 day hold on selling and buying into the same fund to prevent excessive trading. I was looking forward to April 5th to move money back into my stock index funds. The stock market was continuing to surge at this point and (in hindsight) this would have been a great time to get back into a 90/10 portfolio.
When April 5th came, I chickened out. I kept thinking that there would be another stock market pullback; it was only a matter of time. I knew this to be true! Research tells us that losses generally feel about two times as bad as wins feel good. Instead of moving all $300,000 over into stocks, I only moved a few thousand over. Over the next few weeks, I continued to nibble at the market, reluctant to move anything more than a few thousand dollars at a time. I kept telling myself that the stock market could still drop and that I would regret moving all my money from a stable and safe investment into a potentially volatile one.
To properly time the market, one needs to make 2 correct decisions. First, one needs to know when to sell. Second, one needs to know when to buy back in. I sold some stocks early to avoid the pain of the stock market crash. But I missed out on capturing all the gains of the stock market recovery. Very few investors have been able to properly time the stock market. I’m not embarrassed to admit that I failed at my personal market-timing attempt. My hesitation with fully investing back into the stock market will probably be the biggest investing mistake of my career. As the stock market has come roaring back, I’ve been missing out on huge gains.
Over the last few months, I am continuing to increase my investments into stock index funds regardless of which way the market is heading. I've learned my lesson on market timing - IT DOES NOT WORK. I didn't do too poorly, as I didn't sell everything. I was also able to move much of my funds back into the market as it was rising. Our portfolio is now sitting at about 65% stocks and 35% bonds. Long term, I will be aiming for 70% stocks and 30% bonds. This is a more conservative (less greedy) holding that I will be comfortable with long term. I hope to be more calm in the face of uncertainty the next time we have another stock market pullback.
Here is a look back at the timeline of our previous investment milestones:
June 2, 2014: 100K
March 12, 2016: 200K
June 5, 2017: 300K
July 15, 2018: 400K
April 16, 2019: 450K
November 5, 2019: 500K
January 18, 2020: 550K
November 6, 2020: 600K
In the long term, I expect that our investment account balances will continue to hit new highs - which I will share with you all.
I have to keep reminding myself that stock market volatility is normal. Repeat after me: “stock market volatility is normal!” Time in the market surpasses trying to time the market. We will continue to stay this new course with our investments on our way towards financial freedom.
|How did you feel during the recent stock market dip?