But if anybody has any modicum of sage advice, cares to opine of my current strategy, or even of consolation for a guy my age, this close to retirement who’s messed up this badly, I more than welcome any insights.
Hi spoondog. I’m just a lurker here, so I’m guessing this post will be deemed OT, which it is, and deleted in short order. I’m emailing it to you as well. I’m doing both because, coming from unfamiliar addresses, emailed replies from TMF boards generally end up in my spam folder. If I don’t know to look for them, they get cleaned out before I do. So posting here is basically to alert you to search your spam folder for a version you can read at your leisure. Saul, if you could leave it up long enough for the OP to reasonably have time to get the spam folder alert, that would be kind of you.
Like you, spoondog, I’m a 60-something to whom all the great advice about long horizons and continually contributing new money, in good times and bad, no longer applies. There is no more new money and the distance from the horizon is anybody’s guess. You can always act on the basis of a distant horizon, as Messrs. Buffett and Munger still do as nonagenarians, but it’s easier if you’re already insanely rich. You are in better shape than me in that you still have a couple years of income remaining.
A little advice about attitude: Don’t beat yourself up. Being down 35% YTD is far from the worst performance around. The Nasdaq 100 is down more than 25%, the S&P 500 approaching down 20%. Your performance reflects a higher weighting in the big cap tech and SaaS sectors you described, but is not nearly as bad as that of the Ark Innovation ETF (ARKK), down 60% year to date. If somebody tells you they’re not down painfully this year, they’re either prescient energy investors, too wealthy for it to matter, or, most likely, lying.
Rule No. 1 at our age is to hold enough cash that you’re not forced to sell stuff at terrible prices just to cover living expenses. This should be rule No. 1 at any age, but it’s especially important if you can’t count on new income to cover living expenses. You’ve done this with your recent liquidations. Perhaps belatedly, perhaps not, doesn’t matter. Water under the bridge. One advantage of being old – there aren’t that many, so you need to keep track – is you’ve seen a lot of water flow under the bridge. You know it’s a waste of timing worrying about it.
So my second bit of advice is to determine how much of that 75% cash position you will need to cover living expenses for the next five years. If your income for the next two years will cover those, maybe you can afford to set aside three years’ worth. Whatever you decide, take that out of your investment portfolio. A short-term treasury fund should soon pay a couple points of interest. Not enough to keep up with current inflation, it’s true, but only cash is cash. It insulates you from market gyrations.
With your remaining cash, assuming there is any, you’ll face two important questions over the next little while: when and where.
By way of example, let’s consider March 2020. That was the first market plunge I experienced with no new money coming in. My portfolio was crushed. It turned out to be a rather short-term crushing, but that was not obvious at the time.
First, I did what you just did. I wish I had set aside ample cash before the crash, but I hadn’t. I was selling enough for six months at a time because everything was going up so I was selling from profits, paying my expenses and watching my portfolio balance rise at the same time. This seemed to make sense in a rising market; not so much in a falling market.
So I liquidated a substantial portion, mostly the stuff that had held up relatively well, emphasis on relatively, and set aside enough cash to see me through a typical bear market. Then I looked at the stuff across the market that had been hit the hardest. The problem was an exploding pandemic, so anything that required humans to congregate – cruises, casinos, shopping malls, air travel, you know the litany – was taken out.
Unlike tech, these things were generally not trading at extremely high valuations to start with. When the market capitalization of big, established companies was cut by half, or two-thirds, or three-quarters, Mr. Market was clearly signaling they would never be the same. So an investor had to make the call: did that make sense, or was Mr. Market reflecting the manic nature Ben Graham described?
I looked up the history of pandemics – there have been a lot of them – and found humanity always recovered eventually and, importantly, always resumed the social activities it had pursued prior. So I chose to put what investible money I had left into one of those sectors left for dead. Those bets were rewarded, although many of the gains have vaporized again here recently. That’s the way it goes. It’s a roller-coaster, you have to be ready to ride. As many here have attested, those invested in leading SaaS names early in the pandemic did even better, although the damage to those names of late has also been greater.
The catalysts for the present swoon are more numerous and complicated than two years ago. First, there are rising rates and their implications for valuing future sales and profits. Second is inflation and its implications for the business environment. Third is the burst bubble of stocks that benefited from the pandemic. Fourth is the war in Ukraine, both its contribution to inflation through shortages and embargoes and also the possibility it metastasizes into a wider black swan event.
Each investor must look at the landscape and draw their own conclusions. Personally, as in 2020, I believe Mr. Market is reflecting manic depressive tendencies and overestimating the likelihood of disaster. Even at 3%, the current doomsday scenario for the Fed’s near-term target, interest rates would not be high enough to fundamentally change investing incentives. Inflation is rampant, to be sure, but the deflationary forces of technology are still humming along in the background, so it seems to me quite likely that after a period of rebuilding supply chains closer to home, price equilibrium may again be achieved. The bubble in pandemic stocks – Zoom, DocuSign, Roku, etc. – was just that, so the amount of decline from their highs is not, in my opinion, reason enough to wade in there. The war in Ukraine has been deeply destabilizing, but Ukraine’s heroic resistance has greatly reduced Russia’s ability to pursue much more adventurism. It is true that a madman’s act of desperation is still possible, but in that event where you’re invested is probably the least of your worries.
These are all just personal opinions, worth exactly what you’re paying for them. You must form your own. I would only urge you to keep in mind the human tendency toward emotional extremes – euphoria when things are going well, fatalism when they’re going badly, and our weird conviction that current circumstances will never change – even though they just did.
Market crashes/corrections give you the opportunity to select from a wide array of investment choices. Things you might have loved but thought too expensive before the crash might now be back in a zone of reasonableness, however you define that. In other words, you get to pick your best ideas.
As to when: In the flush of an ongoing collapse, with the market falling virtually every day, my suggestion is to remain on the sidelines. Catching falling knives is hard. You never know how much farther they have to fall. When capital preservation is your first priority, as I gather it now is for you, better to be a little late than too early.
As to where: Choosing where to eventually invest your remaining capital depends on your analysis of what’s been taken out and why, but also your own temperament. How much do you worry about this stuff? Does it keep you awake at night? When you do deploy the capital you won’t need for five years, put it mostly in stuff that won’t drive you crazy, meaning stuff you feel you understand. If you need a moonshot or two to keep your dreams alive, limit position sizes to losses you can handle. A good test of this is when something you own drops in market price, is your first instinct to buy more or to run for the hills? Buy stuff you understand well enough to want more at cheaper prices.
When I was younger, I took more chances on moonshots, knowing I was still earning, still saving, and could make up for my mistakes. Today I lean toward more predictable stuff, knowing I’m not and can’t.
Accept reality as it exists today and do your best with what you’ve learned. That’s a pretty fair definition of sanity in a world as rife with delusion as this one. Spend as little time as possible regretting past decisions. It doesn’t help.
Personally, I’m looking to invest in that elusive miracle arthritis cure . . .