I’m sure we’re in for more stock market volatility.  For example, I checked the MSNBC app last night, and stock market futures were plunging.  The Dow was down 900 points. As I type this, however, the Dow is up over 400 points.  That’s a huge swing. If the market closed with a 1000 point gain today, or a 1000 point loss, neither would surprise me at all. 

Ultimately, I think the market is heading down, as a recession seems inevitable. People who are still working can take advantage of the market downturn by continuing to contribute to their 401ks and IRAs.  When the market is up, your weekly or biweekly contribution buys a smaller number of shares. When the market is down, that regular contribution now buys relatively more shares, and this leaves you sitting pretty when the market does rebound.  

As a retiree, I am no longer contributing to my portfolio.  This leaves me few opportunities to turn this plunging market lemon into monetary lemonade.  The only real option I have at this time is to consider rebalancing my portfolio.

As I mentioned in a recent post, my financial advisor and I agreed that a 60% stock/40% bond portfolio was very suitable for an early retiree like myself.  The recent drop in the market has altered that balance now. The stock portion of my portfolio has dropped a lot; I’ve gone from a 60/40 allocation to 50/50.  

Last week, I spoke to my advisor, and we talked about rebalancing.  This is where you sell shares of the funds that have gained, and buy more shares of the funds that have lost.  In my case, I would sell some bond fund shares and buy some stock fund shares. I read an article the other day that said that people who rebalanced their portfolio after a big decline earned more during the first five years after a recession than those who just waited for their portfolio to rebound on its own.  

There are lots of issues to think about regarding rebalancing.  Most people recommend looking at your portfolio once a year, or once every six months, and if the allocation that you’ve chosen has drifted 5% or more, you sell some of the gainers and buy some more losers to get things back into balance.  My advisor looks at my portfolio every three months. So far, we haven’t had to rebalance because the allocation has never changed drastically enough to warrant it. One issue we need to consider, however, is the current volatility. In normal times, it might take a few years of  steady, bull-market growth to change your allocation enough to warrant rebalancing. With this pandemic, however, the market can go up or down drastically in just one or two days. My 60/40 allocation can become 55/45 in a week, and then bounce back to 58/42 a few days later, then down to 56/44 a few days after that.  With this kind of volatility, it would be hard to figure out exactly how many bond shares to sell and how many stock shares to buy. Another issue is psychological. Although it makes sense to sell winners and buy more of the losers, it’s sometimes hard to sell winners because they might keep up this winning streak, and selling means you’re reducing the number of these winning shares.  A bigger psychological hurdle comes from buying shares when the market is diving. The market is diving because people are panicking, and it’s hard to invest when people are so worried about stocks. The thought that you might be buying stock just to watch it continue to decline is distressing, even though it puts you in a better position when the prices begin to go up again. My father used to use the expression “throwing good money after bad”, and it fits the bill for this situation.  

My next phone call with my advisor is in mid-April.  At that time, hopefully the stock market picture will be a bit clearer, the markets will be less volatile, and we can get a better sense of whether it makes sense to rebalance my portfolio at that time.

If you’re planning for retirement and you have an interest in matters regarding investment, feel free to check my blog now and again.  I am not a financial advisor and I have zero training in these matters.  I’m muddling through it all just like you.  But any time I read something helpful or receive what appears to be sound advice, I’ll likely be posting something about it here.  With any luck, we’ll all have a larger nest egg waiting for us down the road.

CONTINUE TO PART 6