Volatile markets are the new normal, thanks to the COVID-19 outbreak.
This creates some opportunity for investors in a time of real concern. I don’t mean to diminish the incredibly awful specter of this virus, but I’m certainly hoping we all emerge from this unhurt. And maybe with better leverage in the stock market too?
For most of my working life spanning a few decades now, I’ve done what many have when it comes to the stock market: Ignore it. I have a 401k. My paycheck automatically dumps money there every two weeks, and that’s that. Dollar-cost averaging. Yee ha.
Where I’ve Been Putting My Money
When we’ve had fortune smiling upon us, and extra resources to invest (not very often – since paying off a mortgage and student debts takes years) it’s gone into real estate. In truth, those “extra resources” didn’t involve $30 grand lying around in a savings account. I used our home equity for down payments on our rentals and Airbnb condos for each purchase.
Nothing like putting the roof over your head on the line to make a quick buck, right? Well, it worked, dammit.
I have certainly had moments of dumbness where I thought I could outsmart the market and create my own little Magellan fund of individual stocks. I had a winner with Netflix – bought in its infancy and took a healthy profit. But then I misjudged BP’s recovery after the gulf oil spill. Whoops.
I called it a day. Went back to the haven of the venerable 401k. Peter Lynch, I am NOT.
The basic rundown of money plays I’ve made, is summarized:
- Pay off debts and invest in 401k simultaneously
- Grow in career, use leverage (home equity) to invest in real estate
- Pay off mortgage and cars. Use freed-up income to save for early retirement gap years. I.e., invest in Vanguard Index funds (VTI or VTSAX – doesn’t make a difference!)
But as I’ve written about recently, I need to move on to a new money play – specifically, my retirement gap year fund.
Knowing When to Belly Up to the Wall Street Casino
A volatile market presents opportunities for aspiring early retirees. Stocks have been on an upward climb for years, with a few corrections here and there. But we haven’t seen corrections like this since, oh, 2008? I’ve lost track, but the Dow has plunged over 1,000 points multiple times in recent weeks.
As an investor, you’re never quite sure if you’ve timed the dip just right, to make your bargain purchase. You ask yourself, “Is this the lowest the market will go?” I rarely care or follow the market in “normal” times, but with the new Coronavirus in the headlines, I can’t help checking in several times a day.
This trains your brain to pick up on floors and ceilings of the market. There are psychological (and maybe even functional) levels of “resistance” in the market. The Dow could dip below 25,000, but it appears resilient, for now,*…
As a newbie at throwing extra dollars into the market outside the bounds of dollar-cost averaging, I’m now the Gambler. Queue up the Kenny Rogers, kids. I’m using my own rule of thumb for throwing chunks of capital at the market. Strapping in…
Seems reasonable?
My Favorite Investments (VTI or VTSAX?)
I love my Vanguard ETF (exchange-traded fund). Specifically, VTI (Vanguard Total Index). What does VTI consist of? Here’s a snippet from Vanguard:
The Fund employs an indexing investment approach designed to track the performance of the CRSP US Total Market Index, which represents approximately 100% of the investable U.S. stock market and includes large-, mid-, small-, and micro-cap stocks. The Fund invests by sampling the Index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield.
VTI is an index fund that you can purchase intra-day — which during these times of fast market movements, is important. For example, if you’re eating lunch at your desk and all of the sudden VTI drops down to $148 a share, you just might want to pounce! Since VTI is an ETF, you can snap up shares using all the standard intraday trading rules. Nifty…
Contrast that with VTSAX, another Vanguard investment fund that carries the same S&P500 index holdings. The big difference is that VTSAX is NOT an ETF (it’s technically a mutual fund), and you can’t trade a mutual fund intra-day. You put your order in and hope for the best price when your confirmation notice arrives the next morning.
Moves I’ve Made During Volatile Periods
So I like VTI. It’s my latest investment darling. At its peak, just before the COVID-19 dilemma started to take hold, VTI traded at $171 a share. It’s now hovering around $150 a share. Now, I’m not a certified financial planner or fortune teller, so I’m not going to declare that YOU should do what I’ve just done.
I’m taking a risk, as with any speculative move in a market, particularly one not governed or mitigated by averaging out the risk with consistent contributions.
To date, I’ve used the big dips in VTI to buy a few $5K blocks and one $10K block in our standard, taxable brokerage account. It’s high time we started pumping dollars into our early retirement gap year fund. Additionally, I’ve maxed out my 2019 and 2020 IRA in VTSAX (I use VTSAX for the IRA because it has an auto-invest feature. ETFs do not.)
The IRA is where the kiddos’ college fund resides. Here’s to hoping this market correction is a springboard to higher education success in about 12 years or so…
Alright, gang, let’s see how this experiment plays out! I’ll share updates every so often. We’ll pull together to beat back this virus first of all, then (throwing in as much optimism as I can muster) feel rewarded by taking a bargain position in the market.
Even as of this post going live, the markets look poised to take even more hits as the oil market crashes and more cases of COVID-19 emerge. It would appear the president was overly optimistic about 15 cases being our ceiling here. Shocker. *sigh*
As a practice, I’ll keep watching and waiting, and looking for the opportunity to “lay more brick” in the ever-correcting market. VTI could dip as low as $125 a share (or lower!) But we’ve also seen markets rebound at an incredible pace over the last 11 years. The bottom line is that the old advice about buying low and selling high remains. It’s all about “buy low” right now.
Observations About Capitalism in America
What’s striking about all of these choices, is how much our society in the U.S. loves to speculate. It’s part of our national DNA. Consider just how much personal wealth and prosperity (even at a horrific cost of slavery) played key roles in the Declaration of Independence and our nation’s founding. We want to be free, and rich, and we don’t like to be taxed.
I’m not about to throw shade on the capitalistic nature of how we roll as Americans. But it’s clear that if you want to generate significant wealth and mitigate taxation, you had better have a high tolerance for risk and a strong knowledge base about how to invest.
Many of our best and brightest doctors, lawyers, and scientists are devoid of financial literacy. And of course, see all of the professional athletes as “exhibit A” for spendthrift habits that lead to bankruptcy.
I feel incredibly fortunate that I’ve got the basics about compounding interest understood. And then, especially fortunate that I’ve learned about administrative fees, index funds, and diversification with Real Estate. But it took a while to reach that point. What about folks that simply don’t have a proclivity for this incredibly important topic?
As much as I love our system, we need to make it easier to access, so that the pursuit of happiness can be enjoyed by everyone, not just the savvy few who learn this stuff on their own time. Our school systems don’t teach JL Collins and Mr. Money Mustache 101, last time I checked…
My kids are already learning about the power of saving because mom and dad preach it at home. Many kids don’t have parents willing or able to share financial acumen with them.
Remember to wash your hands and stop touching your face. If you’re on the front lines, Godspeed!
*Epilogue: It’s been only a week and the global situation has changed significantly. The market has shown it can go A LOT lower than 25,000. VTI can (and will likely) go lower than 125 per share. There are a couple of keys to surviving this tumult: One is patience. Be mindful that “this too shall pass”. We could enter into a recession, but we will also learn from this event, recover, and move on. Let’s return to this post in 12 months and see how things stand.
Two is love. Take the time to talk to your elderly family members. Call your friends overseas. Be a good neighbor, and keep your social distance! It will save lives. And don’t hoard hand sanitizer and toilet paper. This is no time for idiocy and selfishness!
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we stopped funding most accounts outside of my 410k a couple of years ago except for my 401k. that was part of the glide path when mrs. smidlap went part time. however, we have a few bullets we can fire although i haven’t fired any yet. i’m getting a bonus this month, we have come art sales and a couple of huge tax returns due to a preservation tax credit. we’ll have some dry powder this month. we also have 15% cash in our asset allocation that feels pretty good at this point. we only have it that high as we’re relatively close to retirement but i’ll reblance into some equities with some of that cash if this sell-off gets very deep. asset allocation matters and so does liquidity.
we’ll all come out the other side fine, cubert, and those are good moves to consider those gap years.
“Dry Powder” – Excellent description, Freddy. I feel like I’ve finally got some of that play with after all this time, all these years of paying off debts. It is NICE.
Thanks for the vote of confidence! It was pure tragic comedy to hit “publish” only to see the market short-circuit two hours later. D’OH!!!
For those of us that are accumulating, just keep investing. Riding the high feels good, but watching your dollars buy less and less over time doesn’t. Now is the opportunity to make some of it back
Right on, Benny! This is the time to regain some leverage before the graph line works its way back up, for sure.
I’m glad I learned about all this during the past year. Today was another drop. Rather than freaking out, I increased my auto investments and was able to buy a VTI in one of my UTMAs as the price came down. I may also increase my 401k contrib to front load a bit more. I didn’t even think of maxing out the Roths so that was a good tip!
Nice work, KR! Definitely consider maxing those IRAs if you’re feeling like we’ve come close to a low for the year. It took me a bit to realize I should go after those too.
Ah some level headed thinking while everyone is losing their minds over the coronavirus! A good read.
Thank you, Shaban! Level-headed, but I see the line of resistance for VTI has hit 125, and I’m about out of “powder” for more buys. Sigh…