Jonathan Clements's Blog, page 331

School’s in Session

ALTHOUGH THE 2020 market plunge isn’t even six weeks old, there are already lessons we can learn from this financial crisis that can help us better manage our investment portfolio. Here are six takeaways from the current downturn, which has left the S&P 500 off 25% from its Feb. 19 high:

1. During a financial crisis, you often hear the phrase, “Stay the course.” It’s meant to encourage investors to stick with their financial plan during difficult times. This is crucial: You don’t want to panic and lock in your losses in a down market.

But it’s just as important to stay the course in good times. Investors who grew too exuberant during the last bull market—overweighting stocks and buying individual company shares rather than funds—are the ones who have likely suffered the most in this financial crisis.

Takeaway: Becoming complacent in a bull market can be as big a threat to our investment portfolio as panicking during a bear market.

2. Just as it takes a global effort to fight the coronavirus, it takes a globally diversified portfolio to survive a bear market. Since we don’t know which stocks and bonds will hold up best in a tumbling market, it’s prudent to own all of them.

Takeaway: The best way to execute this global strategy is with broad-based index funds.

3. Doing nothing is doing something. You hear your friends talk about buying more stocks during this financial crisis. Can’t make up your mind what to do?

If you do nothing, your allocation to stocks—as a percentage of your total portfolio—will shrink as share prices fall, hurting your portfolio’s recovery when the stock market turns around. On the other hand, even if you think you’re doing nothing, you may be buying because, say, you automatically reinvest your dividends or you own a target-date fund that rebalances for you.

Takeaway: Putting your investment portfolio on autopilot, so you automatically invest in stocks, is a good way to prevent irrational behavior and to stay on track during a bear market.

4. When you own an individual stock, you take on specific company risk. In effect, you’re doubling the potential danger: You’re not only taking on the risk that affects the overall stock market, but also shouldering the specific perils that can affect any one company’s shares.

Boeing is a prime example. The stock has suffered because of the overall stock market decline—but it’s also suffered because of the problems with its 737 Max airplane. The shares have been bludgeoned in this bear market, falling from above $340 in mid-February to below $100, before partially bouncing back, thanks to the stimulus legislation passed last week by Congress.

Takeaway: One way to reduce specific risk is through diversification. By owning a slew of different companies in different sectors, you reduce the risk that a few troubled companies will badly hurt your portfolio.

5. If you own stocks, it’s hard to escape a bear market’s wrath. For instance, you might imagine that companies that produce nondiscretionary items would be performing well right now. With the panic buying and long lines at the grocery stores, consumer staples should be a bright spot in this stock market.

Yet Vanguard Consumer Staples ETF, which tracks companies that sell consumer products considered nondiscretionary, is down 15.9% in 2020. Yes, that’s better than the 22.2% loss for Vanguard Total Stock Market ETF, but investors have still lost a heap of money.

Takeaway: A bear market spares very few stocks. If you want to limit your losses, your best bet is to reduce your stock market exposure—by holding more bonds and cash investments.

6. Risk is often hidden during the euphoria of a bull market. But in a bear market, our shortcomings are quickly exposed.

Takeaway: We should take this time to assess not only our portfolio, but also our own behavior. This could be a valuable learning experience—one that could help us improve both our investment portfolio and how we handle future financial crises.

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. His previous articles include Be Prepared, Bearing Up and Time to Shrug. Follow Dennis on Twitter @DMFrie.

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Unpleasant Surprise

BERKSHIRE HATHAWAY Chairman Warren Buffett, in his most recent annual report, described an event that occurred at a Berkshire subsidiary last year. Late one night, a fire spilled over from a neighboring business, resulting in significant damage to the Berkshire facility, forcing it to shut down.

Fortunately, no one was injured and, as Buffett notes, the losses will be covered by insurance. Problem is, one of the company’s largest insurers was, as Buffett put it, “a company owned by . . . uh, Berkshire.” The lesson: Even the most well-managed enterprise—and a company in the insurance business itself—can find itself the victim of unintended consequences.

In recent weeks, I’ve been thinking a lot about this story. While we all understand the importance of diversification to manage risk, sometimes things go wrong in unexpected ways. Indeed, I’d argue the most unexpected aspect of this year’s turbulent financial markets is what’s happened to bonds. Traditionally, stocks and bonds have exhibited negative correlation, meaning that when one goes down, the other goes up. That’s what makes them such a powerful combination in a portfolio.

But this year, when stocks went down, most bonds went down with them. It was like finding a hole in a life raft. While this has since started to reverse, I think it’s worth pausing to understand what happened, why it happened and what lessons we can learn.

What happened? Let’s go back to Feb. 20, when stocks started to falter. At first, bonds were behaving in character, rising as stocks fell. In fact, for the first few weeks—between Feb. 20 and March 6—the bond market rose, just as expected. But then, over the following week, as the stock market’s losses deepened, the bond market started to decline, too. In all, the bond market lost nearly 9% in just that one week.

Certain areas of the bond market fared especially poorly. Between Feb. 19 and March 19, short-term corporate bonds lost 12% and high-yield “junk” bonds lost 19%. Even municipal bonds lost 16%. This was probably the biggest surprise. During this period, the only winners were U.S. Treasury bonds, with short-term Treasurys up around 2%.

Why did this happen? A number of factors came together at once. The first two are typical of any stock market downturn, while Nos. 3 and 4 are peculiar to this year’s situation:

Liquidity needs. Even in normal times, there’s some number of people who need to withdraw cash from their portfolios. These include retirees and university endowments, among others. When the stock market started to drop, these investors did the rational thing and sold their bonds instead of stocks, putting downward pressure on bond prices.
Margin calls. One of the ways brokerage firms make money is to let investors borrow against their portfolios. When the market is going up, this may seem like a good idea. But when the market turns south, some of these investors receive a dreaded “margin call.” This is a demand from their broker to pay down their loan. Faced with this problem when the stock market is down, investors normally opt to sell bonds instead of stocks. This, too, contributed to selling pressure on bonds.
Fear—some justified, some not. When broad-based quarantines went into effect this month, many bondholders began to worry about the impact on companies and municipalities. This also contributed to the bond market’s selling pressure.
Tax law changes. The 2017 Tax Cuts and Jobs Act had the effect of raising taxes for many people, especially high-income individuals in states with high state and local taxes. The result was to drive many of these folks into the municipal bond market, where they could earn income free of federal taxes. As a result, many municipal bond funds swelled in size over the past few years. That was fine until the aforementioned fears arose. That caused an unprecedented stampede out of bond mutual funds, forcing bond fund managers to unload their holdings at any price. The selling pressure was literally off the charts, as shown in figure No. 2 of this report.

While it’s difficult to quantify the relative contribution of each factor, it was the combination that caused the bond market to seize up in ways that, according to one analyst, hadn’t been seen in 40 years. Fortunately, the Federal Reserve, using its ability to effectively print money, has since stepped in. That has led to a significant, though not complete, recovery in most areas of the bond market.

What can we learn from this? I see three useful lessons. First, there’s nothing wrong with a belt and suspenders. I often talk about the danger of recency bias, which is our natural tendency to extrapolate from recent events. It’s dangerous because, until this year, the stock market had gone up nearly every year for 11 years.

The result was that many people got lulled into a false sense of security. This year’s market turmoil is a good reminder that it’s okay to build a little paranoia into your portfolio. That might take the form of a money market fund or short-term Treasury bills. There’s no science to this, except to be cognizant that risks exist in categories that we may not be aware of.

Second, remain diversified, even when it feels unprofitable. Another truism about investing is that every crisis teaches us something new—usually the hard way. In this case, it was that unique combination of four factors—two old and two new—that caused the bond market to come unglued. Next time, it will be something else.

All this is a reminder that our best and only protection is broad diversification. One investor asked last week whether he should move his entire portfolio into Treasurys, since those are what have held up best this year. It was a good instinct. After all, in finance textbooks they characterize government bonds as a “riskless” asset.

But my response was that nothing is guaranteed—not even Treasury bonds. In fact, you may recall the government shutdown in 2011 that caused U.S. government debt to be downgraded. Do I still feel very comfortable with Treasury bonds? Yes, absolutely. They’ve certainly been star performers this time around, but that may not always be the case.

The third and final lesson: Measure twice, cut once. If there’s one company that suddenly everyone knows, it’s Zoom, the videoconferencing company. It’s a great product and the stock (ticker symbol ZM) has enjoyed strong gains this year, up 123%.

But there’s another Zoom that has done even better. It’s an obscure Chinese company with no revenue that happens to be listed on the U.S. market and with a much better ticker symbol: ZOOM. As a result, this other Zoom’s stock, which in the past typically traded for about a penny a share, has shot up nearly 900% this year. The lesson: If you’re making changes to your portfolio in this environment, go slowly and be careful when making decisions under stress.

Adam M. Grossman’s previous articles include Keeping Busy, Harder Than It Looks and Manic Meets Math . Adam is the founder of  Mayport Wealth Management , a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter  @AdamMGrossman .

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Money and Me

IT’S BEEN A TAD over five weeks since the S&P 500 hit its all-time high. Five weeks have never felt so long.

It isn’t just all the articles that I’ve been writing and editing. I’ve also been busy with my own finances. I was on the verge of closing on the sale of my apartment here in New York and moving to Philadelphia. But then my buyer’s business collapsed amid the coronavirus slowdown and, with his income gone, he longer qualified for a mortgage.

My apartment is now back on the market, but I don’t expect to find a new buyer any time soon. My realtors are currently barred from showing properties—one of the restrictions now in place, as New York State looks to slow the spread of COVID-19.

Meanwhile, earlier this week, I updated my will. What can I say? It seemed like a prudent step to take. I even updated my letter of last instruction. If something happens to me, I hope it’ll make my kids laugh.

But like everybody else, my big focus has been my investment portfolio. I came into the decline with maybe 66% in stocks and 34% in bonds and cash investments. (This excludes the private mortgage I wrote for my daughter, which I consider part of my bond holdings and which, if counted, would boost my bond allocation by some 10 percentage points.)

Today, I’m at 72% stocks in my investment portfolio. How did I get from 66% to 72% over the past five weeks? I’ve been focused on four main issues:

Rebalancing. You know how the cobbler’s children have no shoes? Sometimes, that also applies to the cobbler. I’m usually pretty lax in how I manage my portfolio. In recent years, I’ve rebalanced periodically, but I don’t calculate my asset allocation with any regularity.

All that’s changed over the past five weeks. Every four or five days, I’ve been checking my portfolio’s split among U.S. stocks, foreign shares and high-quality U.S. bonds, and then incrementally rebalancing to get closer to my target allocation, which is 35% U.S. stocks, 35% foreign shares and 30% bonds. Thanks to this week’s rally, I’ve overshot a little and now have more in stocks than my written targets call for. And for now, I’m fine with that.

Trading over the past five chaotic weeks has felt, well, chaotic. I only own Vanguard Group mutual funds, which means my trades don’t get executed until the end of the day—an issue that HumbleDollar contributor Bill Ehart has also struggled with. Many folks have suggested that this is a reason to favor exchange-traded funds instead, so your orders get executed right away.

But I’ve resisted buying ETFs, because that introduces both trading costs and the risk you’ll get executed at a bad price, something that’s lately been a problem with bond ETFs. To be sure, I’ve put in mutual fund trades, only to find that the price at day’s end was much higher. But I’ve also ended up purchasing at far lower prices than I expected.

Still, to reduce uncertainty, I prefer to put in trades in the final 30 minutes before the 4 p.m. ET market close. Lately, that’s been a nail-biting experience, because Vanguard’s website has become excruciatingly slow, especially just before 4 p.m.

Some of my recent fund purchases have been at prices higher than yesterday’s close, but that’s the way it is in a bear market. You don’t know where the bottom is, so you just grit your teeth and keep buying, knowing that—five years from now—you’ll be happy you did. What if you rebalance and the stock market falls further? You can always rebalance again.

Simplifying. My portfolio’s core building blocks have long been total U.S. stock market index funds, total international stock index funds, short-term corporate bond index funds and inflation-indexed bond funds. But I’ve had a bunch of smaller positions that tilt my stock portfolio toward emerging markets, value stocks, small companies and real estate stocks.

As stocks plunged, I pondered whether to simplify things. I decided I was happy with what I owned, except my allocation to U.S. and foreign real estate funds. I sold both.

Why? Real estate companies are already in my total market index funds, and I’m no longer convinced I should overweight them by also owning separate real estate funds. Real estate stocks are very sensitive to interest rate changes, not something I want when the 10-year Treasury note is below 1%. On top of that, my foreign real estate fund is fairly closely correlated with my total international index fund, so it’s not giving me much added diversification.

Taking tax losses. Almost all of my money is in traditional and Roth retirement accounts. I own two stock index funds in my taxable account, but they’re far above their cost basis.

But my 80-year-old mother’s portfolio—which I oversee—is all taxable money. I’ve used the decline to take tax losses, unloading funds with unrealized losses and buying others that offer similar market exposure. She hasn’t been happy with her recent market losses, but I think she’ll be pleased when she does her taxes early next year.

Overweighting. Two of HumbleDollar’s contributors, John Lim and Sanjib Saha, have written about their plans to boost their stock allocation if the market falls further. This might look like market timing, which is frowned upon. But to me, market timing involves going from all stocks to all cash, or vice versa.

I consider overweighting stocks during severe declines—what some call countercyclical rebalancing—as more akin to exploiting temporary market insanity. I believe that, most of the time, markets are highly efficient, with rational investors easily offsetting what academics call “noise” traders. But sometimes, noise traders take center stage.

What if that happens? I’ve told friends that, if the stock market averages fall more than 40% below their Feb. 19 high, I’d consider taking my stock allocation as high as 80%. I’ve overweighted stocks like that once before. In early 2009, when I was still working fulltime and thus better able to shoulder risk, I boosted my stock allocation to 94% or 95%. At the time, many talked as if the world were about to end. I figured that, if that happened, it wouldn’t much matter what I owned. And if, perchance, the world continued to turn, stocks would rocket higher.

Today, I don’t sense that end-of-the-world pessimism. Indeed, we might have seen the market bottom last Monday. Still, there’s a chance this buying opportunity will get a whole lot better. If it does, you won’t hear me complaining.

Latest Articles

HERE ARE THE NINE other articles published by HumbleDollar this week:

“It’s not about buying at the bottom,” says Bill Ehart. “It’s about buying when the market gives you opportunities. And 25% to 30% off the high is a good opportunity.”
You’re stuck at home. Now what? Adam Grossman offers a slew of suggestions, financial and otherwise.
“There’s a vaccine available for every investment portfolio,” writes Ray Giese. “It won’t eliminate all symptoms, but it can lessen the degree to which you suffer emotional and financial stress.”
Owe taxes for 2019? You may be able to nix that tax bill with a simple fix, says Rick Connor: Make a retroactive tax-deductible contribution to a retirement account.
“Since starting this relaxing cruise, I’ve given up tracking my net worth after the losses hit $500,000,” reported Richard Quinn on Tuesday from somewhere in the Pacific.
Richard was back with another report three days later—one that put his investment losses in perspective.
The financial markets may come roaring back, but daily life will recover much more slowly. Richard Connor considers the financial implications—and says it’s time to think like a retiree.
What if the stock market suffered a far steeper decline? Sanjib Saha ponders at what level he would overweight stocks—and where he’d find the necessary cash.
John Yeigh has been using the time at home to empty closets, do the taxes and scour the internet for used cars: “We checked out one vehicle in person. The typical dealership glad-handing had disappeared.”

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include 27 Things to Do Now, Fear Not, Bad News and Don’t Lose It.

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Barely Afloat

YES, I’M STILL at sea. Confinement in our cabin is wearing thin. But unfortunately, with ports closed and politicians opposed to us docking in Florida, the end isn’t in sight.

Have you ever wondered what it would be like to be totally dependent on someone who you can’t see and have no contact with? Me neither. But now, I know.

Bottles of water show up at our door, the last one a full gallon. Bags of clean towels also appear. Every other day, the bag includes tissues and toilet paper: There’s no shortage at sea. I even received a little card asking me to check the drinks I’d like. For the heck of it, I checked brandy. The next day, there it was.

But we still can’t leave the cabin. Yesterday, I attempted humor. I asked my wife what she would like to do today. She suggested I take a walk.

I had heard of Pavlovian conditioning during my mediocre education, but never imagined being an active participant. Now, three times a day, when I hear the clang of trays in the hall, I salivate. Then the big moment arrives. Three knocks on the door. It’s feeding time. A tray of food lays at my feet, put there by invisible hands. I have newfound empathy for zoo inhabitants.

My walking is limited to a 24- by eight-foot space—assuming I want to stay dry. My access to the world is limited by the very slow satellite internet. What should take milliseconds actually takes seconds. Sometimes, I feel like I’m accessing an eight-inch floppy disk. I tried buying an iBook. I may finish the book in less time than it took to download. All this wouldn’t be so bad—after all, it’s not like I’m going anywhere—except such delays can play cruel jokes.

I open my Bloomberg app and the home screen shows good news: Markets are up. But by the time I click on “indices” and they finish loading, everything has changed. Funny how the down-to-up scenario seems less frequent. But there is good news: My investments have been showing up in green for a change. And it seems the bond funds are doing their job and offsetting some stock market losses. I torment my son-in-law, the Wall Street wealth manager, by telling him how much I have lost. He used to reply, “You haven’t lost anything.” Now, he just chuckles. Or so I assume.

Our captain has started a limited release program aimed first at those poor folks with an inside cabin. Three knocks on your door and you can proceed to deck three for a 30-minute stroll. My advice: If you can’t afford a balcony or at least a window, you can’t afford to cruise. I remember friends telling me, “What’s the difference? How much time will you spend in your cabin?” Ha!

Any humor that may have accompanied this adventure is gone. We learned this morning that four passengers died in the last 24 hours. That news really put everything else in perspective. There’s more to worry about than investments.

We are, as they say, abandoning ship. Healthy passengers are being transferred to another ship, as we lie at anchor in Panama still seeking permission to reach Florida, with no doubt more quarantine once we get there.

I just want to be home, even if I’m locked in my condo. At least I can watch my recorded episodes of Burns and Allen.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Seasick, At Sea, Know Your Demons and Brain Meets Money. Follow Dick on Twitter @QuinnsComments.

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While We’re Waiting

IN RECENT WEEKS, my wife and I have seen scheduled activities for the next few months come crashing down. Two long-planned vacations with friends, our various volunteer work and our son’s college semester have all been cancelled.

It appears we’ll be effectively quarantined at home for the next two or three months. That means plenty of time to worry about—and work on—our investment portfolio. But it’s also a great chance to bring greater order to our household assets:

Every year, our neighborhood rents a couple of dumpsters for spring cleaning. In years past, I was an occasional dumpster patron. But over the last few days, I’ve divested years of junk-room accumulations. The cleaned-up room felt even better than a market rally.
As part of this divestment exercise, I listed four dust-collecting assets on Craigslist, including a carpet and some sporting equipment. Two have already sold. Taking huge losses never felt so good.
We have three cars, including two that are 15 years old and in need of repairs that would cost far more than their scrap value. Our home quarantine has allowed us to start internet shopping in earnest. We checked out one vehicle in person. The typical dealership glad-handing had completely disappeared. The other good news: Right now, quality used cars aren’t likely to sell out so fast.
Closets and drawers, need I say more? If you need an incentive to get going, book a charity pickup for a week from now. You’ll then have a forced deadline to donate those 1970s paisley shirts and bellbottoms.
Our rear deck is 40 years old and has long needed replacement. We finally got around to shopping for materials and colors on the internet, while also arranging for contractors to visit to give us estimates. One contractor volunteered that his future docket was light. We’re hoping his pricing reflects that.
Who doesn’t have house, car or yard maintenance that needs attention? Being tethered to the home front just might provide the perfect time to attend to that check engine light, overdue oil change or dead tree. We tried to book car maintenance at a local garage. We were advised that no appointment was needed, just drive in but please keep your distance.
Been meaning to put together a photo montage of the family trip, kids’ life or parents’ anniversary party? Challenged to scroll through your phone to find certain information? Got an app that needs refreshing or a password update? Everyone has digital records that could benefit from some caretaking or indexing.
We’ve also started early on the tax return this year. We even calculated and submitted our quarterly estimated tax payment long before it was required.
Another year has passed, so it’s time to shred those financial records that are more than seven years old. Whoever said that we’re moving to a paperless society hasn’t seen the dead trees deposited daily in our mailbox.

These activities can all be performed with appropriate social distancing. Only time will cure our investment portfolio’s ills, so we might as well use our sequestration to catch up with family and attend to our household. It’s more productive than watching Netflix—and less stressful than watching CNBC.

John Yeigh is an engineer with an MBA in finance. He retired in 2017 after 40 years in the oil industry, where he helped negotiate financial details for multi-billion-dollar international projects.  His previous articles include Bankrolling Roth, Losing My Balance and Our To-Do List.

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Think Like a Retiree

I’VE BEEN TRYING to imagine what the immediate future will look like. How do we make sense of a situation where we seem to have so little control? You hear estimates of a few weeks to 18 months before things get back to normal.

I’ll admit I’ve lately had many sleepless nights worrying about all of this. How can we think about the financial implications in an organized way? It strikes that maybe we should ponder the financial issues we currently face in the same way we think about retirement.

Cash flow. As part of a solid retirement plan, we should identify the income available to sustain decades of not working. But today, instead of decades, we need to focus on the months ahead.

Unemployment is rapidly becoming a reality for many people and it’s highly likely for lots of others. What short-term income sources are available to these folks? Possibilities include unemployment benefits, savings, part-time or temporary work, home equity loans, family loans and selling possessions.

The other side of cash flow is expenses. What’s necessary and what isn’t? Many families will need to make tough choices. Could you delay or negotiate down some expenses, such as rent, mortgage and car loans? It’s best to be proactive with your lender or landlord if you think you’ll have trouble paying. It also looks like some government support will be coming, plus the tax-filing deadline has been extended until July 15.

Health care. Many early retirees, until they turn age 65 and become eligible for Medicare, struggle to find adequate and affordable health care. If you’re forced out of your job in the weeks ahead, you may be able to enroll in your former employer’s health care plan, thanks to COBRA. But be warned: The premiums could be steep. There are also health care plans available through the state exchanges, short-term (or gap) plans, and Medicaid and other government-sponsored programs. Check out VeryWellHealth.com for a comprehensive list of the options available.

Housing. Retirees spend a lot of time considering where to retire and what type of housing they want. Today, you might rethink your housing situation based on government actions (business shutdowns, shelter-in-place rules), local conditions (access to health care and groceries) and your own finances.

Can you work from home? Would it make sense for distant families to combine? My wife and I discussed going to our vacation home for the duration. But we realized it wasn’t equipped for a long stay. We feel we need to be in our main home, which has basically everything we need for the long haul.

Daily activities. Retirees need to think hard about what their days will look like. The transition from a long and meaningful career to not working is often difficult.

Similarly, being told to shelter in place is a huge transition. But we aren’t getting much time to plan, so we’ll have to figure this out in real time. Many of our best-known and beloved routines have come to a halt. It’s really hard to plan long-term when we don’t know how long the situation may last. But we don’t have much choice.

For instance, you may be struggling to work from home, while suddenly being responsible for homeschooling your children. My son and daughter-in-law are self-isolating. Each day, they put an agenda on the chalkboard for their two young sons. It includes school subjects, projects, outdoor time and activities. It gives the boys much needed structure, as well as plenty of time for play, and the kids are handling the situation well—so far.

Richard Connor is  a semi-retired aerospace engineer with a keen interest in finance. Rick enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. His previous articles include Not Too Late, Cheat Sheets and Choosing Life . Follow Rick on Twitter  @RConnor609 .

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Ready or Not

THE PAST FEW weeks have brought back memories of the 2008 financial crisis. Back then, stocks were at bargain prices, but I had little money to invest. Today, my financial house is much stronger—and I want to be ready to buy if stocks get dirt cheap.

I’ve already made some portfolio adjustments. But from here, my plan is to keep an eye on stock market valuations. A large percentage drop by the market averages might—by itself—create the false impression that stocks are cheap, so instead I prefer to watch valuation measures such as the market’s price-earnings multiple, price-to-book value and dividend yield.

What are these metrics saying? Despite a 27% drop from its peak, the S&P 500 isn’t exactly cheap. For instance, the cyclically adjusted P/E ratio, or CAPE, is still above its historical average by a large margin. Most other valuation measures paint a similar picture. At these levels, the odds of superior market returns are still low.

I’ve decided to wait to overweight stocks, at least until valuations are closer to normal. I’d put a normal valuation for the S&P 500 at around 1800—a 47% drop from the Feb. 19 all-time high. That size drop has happened just five times, including two occasions since 2000. That’s when I’ll start shifting my asset allocation to overweight stocks. Until then, I’m fine with dollar-cost averaging my ongoing savings into my current asset allocation.

Meanwhile, I’d consider stocks dirt cheap if valuations fall 25% below their historical averages. That would require a whopping 60% drop from the peak, taking the S&P 500 well below 1400. A drop of that magnitude, which would motivate me to bet big, hasn’t happened since the Great Depression. Even at the depth of the 2007-09 bear market, the fall was smaller.

Think I’m daydreaming? Perhaps. The stock market has rallied over the past two days, so maybe I won’t get the chance to load up on stocks that I’m hoping for.

Still, I need a plan if the black swan presents a rare opportunity. For starters, how do I get the money to invest? According to my written asset allocation, I’m already fully invested in the stock market. A normal rebalancing will have limited effect. I need a different plan, one that involves taking more risk.

When I was planning my early retirement a few years ago, I played it safe. I leaned on bonds more than I normally would. If this bear market became a great buying opportunity, I would rethink that choice.

I need bonds for two reasons: to provide diversification and to cover my essential expenses for a decade. I want to keep that 10 years of bare-minimum spending money to weather a prolonged market downturn. As long as I have that cushion, I figure I can invest the rest of my bond-market money in stocks, assuming compelling valuations present themselves.

Next, I may turn to an unloved part of my portfolio: gold. In a halfhearted move, I’d put 5% of my assets in gold. Lately, it’s proven its worth as a safe haven. But I’m dubious about gold’s long-term investment merits. If the right time comes, I won’t hesitate to switch to something more promising: stocks at bargain prices.

My last resort is what I call the nuclear option: tapping the home equity line of credit, or HELOC, on my primary residence. I paid off my mortgage early and have stayed debt-free ever since. But I still have a HELOC as a backup source of emergency money. It cost little to set up and I never thought about using it—until now.

I consider myself risk averse. But if the market got cheap enough, I might use the HELOC to buy stocks. I’m not committed to this plan. But it’s a possibility.

A software engineer by profession, Sanjib Saha is transitioning to early retirement. His previous articles include Spring Cleaning, Working the Plans and Got Gold. Self-taught in investments, Sanjib passed the Series 65 licensing exam as a non-industry candidate. He’s passionate about raising financial literacy and enjoys helping others with their finances.

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Different This Time

I’M DETERMINED not to repeat my mistakes of 2008-09. I was ruined by that financial crisis or, more accurately, I let it ruin me. I led into it with my chin.

I’ll spare you the details of my personal situation in the years leading up to the crash, but the upshot is I was egotistical, financially reckless and looking for a big score. As the crisis unfolded, I piled risk upon risk, mistake upon mistake. I bought 2008 all the way down, loading up on many of the beaten-down financial names: Goldman Sachs, Morgan Stanley and even Lehman Brothers.

Unfortunately, I purchased Goldman and Morgan Stanley with borrowed money, using my margin account. I had been using such leverage for years—within prudent limits, I thought. I calculated potential downsides but, of course, it was the potential gains that seized my imagination.

The hard lesson for me? It wasn’t that margin investors can be forced to sell stocks in bear markets, particularly the worst and most sudden ones, leaving them no means to buy back in. I knew that. What I didn’t know is that brokerage firms can decide overnight that some securities are no longer marginable and hence they don’t count as collateral. E*Trade said I couldn’t borrow against my Goldman and Morgan Stanley shares anymore.

I was forced to sell. Probably less than two months before the low. Then I was laid off at the end of 2009 and missed about a year of potential 401(k) contributions as the market recovered.

I entered 2020 much poorer for my folly. But I have no debt today. The car is paid off and has many miles left on it. My big risk is getting laid off again—unfortunately, a real possibility, as it is for so many.

But unlike 2008, I’m not picking the hardest-hit stocks and trying to beat the market. I’m not hanging on the words of CNBC celebrities. My investments, largely in target-date retirement funds, are a mix of stocks and bonds appropriate for my age. I have targets for my exposure to U.S. shares, foreign stocks and bonds, and rules for rebalancing to stay near those targets.

How am I handling the fastest bear in history? So far, I can only grade myself a B, with a B+ for planning and preparedness, but a C+ for execution.

Why? I got emotional. I entered a perfectly well-reasoned buy order on Friday, March 13, with the market down 25% from its high, as I said I likely would. That was my first buy order of this downturn. But mutual fund trades don’t settle until the close. Not only did I end up buying after the “Trump bump” late that day, but the bump slumped all the way back down the following Monday, March 16. I’d unintentionally bought higher than I wanted, only to see prices immediately tumble.

I said I wouldn’t get upset, but I was. I wasn’t going to let that happen again. My two subsequent moves were rushed, even though they were limited and kept my stock exposure within target. I also made a modest trade on March 16 in my mother’s account, selling a tax-exempt bond fund for the Vanguard Total World Stock Index ETF. With my “Trump bump” experience in my mind, I insisted to her financial advisor that we buy the exchange-traded fund, not the regular mutual fund version. I wanted that price, that minute. No need to call me back. Just buy it. In fairness to me, Mom’s stock exposure remains reasonable and she might benefit from a bit more foreign diversification.

You’ve heard the cliché about fear and greed. But one component of greed is Fear of Missing Out and, last week, I caught FOMO like a virus. Mom and I were almost immediately underwater on all three trades, though yesterday’s big rally undid a lot of the damage. But such short-term losses aren’t a big problem or surprise. I know it’s not about buying at the bottom, it’s about buying when the market gives you opportunities. And 25% to 30% off the high is a good opportunity, just not necessarily the bottom.

Maybe I should add a time element to my rebalancing plan. Last week, a smart investment advisor told me that he rebalances client portfolios when their allocations get too far out of established ranges, but that he only considers such rebalancing once a month. Similarly, a Vanguard Group wealth management executive told me they rebalance client portfolios quarterly.

There’s discipline in that. A discipline that tames the FOMO virus. Markets may be higher or lower by the end of this month or the next or the one after that. There’s no way to know. But when you’re in the throes of FOMO, you are thinking markets are more likely to rise than fall in the near term. And none of us has any business making assumptions like that, any more than we should sell because our gut tells us markets are heading lower before they head higher.

The market being the cruel beast that it is, I suspect that until FOMO gets beaten out of me, the lower we go. So I need to slow my roll, but not make the opposite mistake of being afraid to buy when called for under my plan.

Am I beating myself up too much for rushing some trades? Maybe. I’m still prudently invested. Unless I lose my job for an extended period, I won’t be forced to sell, like I was 11 years ago.

This pandemic is a horrible tragedy, as well as a financial and economic crisis, unlike anything we’ve ever seen. But we have a responsibility to invest wisely and opportunistically. In wealth management terms, this almost certainly is a great buying opportunity. This time, I want to be able to tell my family that I bought.

William Ehart is a journalist in the Washington, D.C., area. Bill’s previous articles for HumbleDollar include Luck of the Irish, No Sweat and Resolve to Rebalance. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart.

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Seasick

I ATTEMPTED to check the markets the other day and everything was the same as the day before and the day before that. Had the world really stopped? No, it was Sunday. The fact is, I have no idea where I am or what day it is. I’m still in the Pacific on a ship full of senior citizens who outwardly have few concerns, except when the restaurants will open. But we are famous, because no South American port will let us dock out of concern some passengers may have the coronavirus.

A few days ago, we completed sailing the Straits of Magellan in such a fog we couldn’t see past the deck railing. Being in a fog pretty much describes my mindset, too. The mournful sound of the ship’s horn didn’t help. Our journey continued after sitting off the coast two days and then being refused entry into Punta Arenas, Chile.

Since starting this relaxing cruise, which cost me hundreds of thousands of frequent-flier miles, I’ve given up tracking my net worth after the losses hit $500,000. That includes major drops in municipal bond funds, a vehicle I thought would deliver gains to offset my stock market losses. Since January, my conservative dividend-paying utility stock has gone from $65 to $37. Where did I go wrong? For me, the real pandemic isn’t a virus, but rather some excruciating form of obsessive-compulsive disorder.

We got to see penguins. They just stood there, looking at us. We were there for the penguins’ amusement. They seemed unconcerned with the world, while perhaps thinking about their next fish. I’m thinking whether or not I can afford my next fish.

For days, we cruised north in the Pacific, seeking fuel and supplies. No port in South America will let us dock. Could it be the markets will start recovering before we find land? I feel like Charlie on the MTA, the song made famous by the Kingston Trio. Will we ever return?

Finally, we were allowed to refuel and take on supplies while at anchor off the coast of Valparaiso, Chile. That meant more than a two-day delay. The captain announced we would head through the Panama Canal to Fort Lauderdale, or perhaps go to Mexico, or head to San Diego. Sort of like the markets. Where are they going?

There’s a lot to do on the ship: mahjong, checkers, puzzles, scrabble, playing cards with your spouse or listening to the history of colored diamonds as told by people trying to sell them. All things I had managed to avoid until now, age 76.

Some days, when we aren’t in a port begging for food, we can go to the casino. There, my luck shines bright, $900 net on a 10-cent slot machine over three days. But alas, if we’re anchored off the coast, they can’t open the casino, or the sundry or gift shop, or thankfully the jewelry store. The word bracelet was being floated in our stateroom.

Should I have anticipated this mess, cancelled the trip and lost my money? My stress level would be lower. But in the end, we are going to get most of our money back. Let’s face it, if I were good at anticipating bad events, I would’ve made an early January switch in my 401(k) into the stable value fund. Instead, I moved money into stocks upon the dip, but I may have selected the wrong dip. What are my chances of getting that money back compared to, say, getting the trip money back? Within my lifetime, that is.

There are bright spots in the world. Back in the continental U.S., tattoo parlors are closed, so lots of extra money to invest. On the other hand, beauty salons are also closed, so I may get to see my wife of 51 years—whom I love dearly—with gray hair for the first time.

“Keep calm and carry on.” Sounds like sarcasm. Friends are on a ship off Brazil. They’re quarantined in their cabins for two weeks. Imagine solitary confinement with your spouse. Imagine if you had an inside cabin.

Hold everything. Breaking news.

Just as I finished that last sentence, it was announced we’re now confined to our cabins indefinitely. At least we have a balcony, plus I have my newfound South American friend, Mate. I’ve got all the official supplies—and, it seems, plenty of time to give it a try.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include At Sea, Know Your Demons and Brain Meets Money. Follow Dick on Twitter @QuinnsComments.

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Not Too Late

WE OFTEN PREPARE our taxes, only to learn we owe a substantial sum to Uncle Sam. Most of us believe we can’t do much about this—and yet there’s one simple fix available to many taxpayers: Make a tax-deductible retirement account contribution this year for 2019.

Indeed, thanks to the stock market’s decline, this is a great time to shovel more money into your retirement accounts—and you may discover you can add to more than one account.

Retroactive contributions. Typically, the IRS allows taxpayers to contribute to qualified retirement accounts—think IRAs, 401(k)s, 403(b)s—up until the tax-filing deadline and still claim a deduction for the prior year. For instance, you might add to an IRA today and deduct the contribution on your 2019 tax return. Some employers also allow retroactive contributions to their 401(k) or 403(b) plans. In addition, you might be able to make prior-year contributions to a health savings account.

Because of the coronavirus, the filing deadline for 2019 tax returns has been extended from April 15 to July 15. It appears the deadline for retroactive contributions to tax-favored accounts has also been extended, though the IRS hasn’t yet issued guidance.

Worried that you may owe taxes for 2019? Contributing to a qualified retirement account will reduce your taxable income and thus trim your tax bill. This is true whether you itemize your deductions or claim the standard deduction. Don’t currently have an IRA? No problem. You can open an IRA today and have your contributions apply to the previous year’s taxes.

Spousal IRA. To fund a qualified retirement account, the person contributing typically needs earned income, meaning income from working, as opposed to investment income. One exception is the spousal IRA.

This is a great opportunity for couples where one spouse has little or no earned income. In effect, the working spouse provides the earned income required to make contributions for both spouses. To qualify, the couple must file a joint tax return.

Sometimes, if the working spouse has a retirement plan at work, this can prevent a couple from deducting their IRA contributions. But in all likelihood, both spouses can still claim the deduction, because the income limits are fairly generous: For couples, the ability to fund tax-deductible IRAs phases out for 2019 at modified adjusted gross incomes of $193,000 and above.

Tax-rate arbitrage. I volunteer for AARP’s Tax-Aide program, where I help older Americans do their taxes. The program is on hold right now, because of the coronavirus, but I hope it’ll return before the tax season is over.

While working at Tax-Aide earlier this year, before the shutdown, I had a client who works in a local school district and has a 403(b), but didn’t maximize her 2019 contributions. She has a nice salary and ended up in the 24% marginal tax bracket. She plans to retire in June. Her federal tax return showed a tax bill of about $1,000.

We pointed out that she still had time to contribute to her 403(b) or an IRA. For each $1,000 she contributed, she would save $240 in 2019 federal taxes. A $4,000 contribution would nearly wipe out her tax bill.

Moreover, since she’s planning to retire this year, her marginal tax rate in 2020 and beyond is likely to be lower than her 2019 rate. The upshot: She could deposit the funds now, get the tax deduction for 2019 and then withdraw the money later in the year if she needs it. The $4,000 withdrawal would be taxed at a rate that’s lower than the 24% rate at which she’s claiming the deduction—a nifty piece of tax-rate arbitrage.

Richard Connor is  a semi-retired aerospace engineer with a keen interest in finance. Rick enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. His previous articles include Cheat Sheets, Choosing Life and Step by Step . Follow Rick on Twitter  @RConnor609 .

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