Adjusting the plan

Although the recent events were not (yet) a crash, rather a correction of about -12pct, it is weird to see what all the side action. This is the first real correction that I observe from close by. The past corrections or crashes, I was not into personal finance as I am today. I was therefore curious to see how it would impact me.

One of the things I noticed is that I stayed calm. This came as a surprise to me. I managed to sleep, I was not blaming myself or the Chinese or the capitalists. This was a pleasant surprise. The question is, how come?

Understanding long term investing

I believe it helps to understand that investing is for the long term. I am convinced that with a long enough time horizon, you have a very very good change to succeed. The studies that I read show it all. Invest for a long enough time frame in a well diversified stock portfolio, and you can expect a positive return, but it will be a bumpy road.  A good place to read about this yourself is the intelligent asset allocator book.

I am in my accumulation phase right now and my time horizon is at least 15 years until FIRE. This should be a enough time to have positive results, if I can stay calm when it gets bumpy.

By coincidence, I prepared an article in July on what the effect of a correction could be and how to accept it when investing for the long term. There are some principles and best practices you need to put in place to be prepared. In a certain way, I prepared myself. Let’s call this the perks of blogging!

Benefit from the community

On of the things that actually helped is to read what others have to say. Of course, I do not mean reading the horror stories from the mainstream press, but I refer to reading blogs from people that believe the same as I do: investing is for the long term, so have a plan and stick to it. It was really helpful to read the same message over and over again. It added to my calmness. It puts events in perspective. It gives ideas on what to do if the correction becomes a crash.

What have I done?

As far as I look at it, being in the accumulation defines your ideal situation: Try to buy as many assets as possible with your investments. It is clear that a market crash is than better than all time highs. In an ideal world, you can invest more money when the stocks are low. There is one but: I do not believe in market timing. I have no idea what will happen tomorrow or the day after. I believe that therefore regular investing is the right thing to do.

  • Invest less than normal to build up cash

Yet, in July I decided to adjust: I would invest less than normal. The rest of the money will be parked for deployment after a crash. I know, I know, it smells a lot like market timing. But to me personally, it makes sense

I still invest each month, so for the majority of the money, I do not time the market. Let’s say that 75 pct is invested each month.

The principle should only be applied if the markets trade well above the long term valuations. For that, I look at P/E of certain markets. I agree it does not predict a market crash, but it indicates I start to pay a lot for the assets I buy. At that time, I build up cash in order to benefit from a real crash.

The money can only be deployed if there is a real crash and the valuations are below the long term averages. This means that in the current situation (written on Aug 28) the money needs to be parked.

If the markets seem to be in line with the long term averages, I just buy each month with all I have that month.

Will this work? I do not know. It all depends how long it will take before we reach these real low valuations again. It can be next month or 5 years from now.

  • The need for cash

Due to the sudden drop, I also started to think in terms of cash flow. How can I avoid to sell in case of an even bigger drop? Of course, We do have our emergency fund. And there are other things to take into account. Like holiday plans with the kids. How Are these bases covered? To be honest, today, they are not covered enough. But we have time: part is in guaranteed products. That should cover the first trip.

Defining a plan and approach for that is something for the 2016 goals.

Did you adjust your plan to the recent events?

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11 thoughts on “Adjusting the plan

  1. Hi Ambertreeleaves,

    I’m actually happy that prices are coming down since it means I get more bang ( dividend) for my buck.Since my cash reserve( for investing) was pretty low I did only one purchase. So I’m hoping the prices drop some more. As long as you invest in quality stocks you can’t do much wrong in the long run but you could see some serious volatility in the short run.

    I haven’t changed my strategy.

    Have a good weekend!

    CHeers,
    G

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    1. Prices have indeed come down, but as an index investor, I can not do stock picking. If I look at my major tracker that I buy, It is still priced at levels of the start of the year. It is a nice drop, but not a big drop.
      With my play money, I will pick up some stocks that are now 30pct below their 1 year high.

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  2. Hi ATL – I have not changed the plan and I’m actually waiting for a more severe crash!
    When are stocks going on sale? Those prices aren’t sustainable.

    As you rightly point out, it does help to have a strong FI community that remains calm during these events, because TV news are all over it.

    No change to the plans on my side. Automatic investments still set on automatic 🙂

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  3. Hi ATL,

    I agree that the market is expensive right now and that certainly there is a crash somewhere in the future. But, for now at least, my automatic investing every month stays the same. I would really like a good sale though 🙂 Maybe prices will go down a bit in 2016. Cheers!

    -TBD

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  4. I’ll be curious to see how your approach works over the long term! Our investments are fully automated and are made twice each month, so there’s no thinking on our part — which we think is good! If we had to push a button each month to make the money leave the bank and go to our investments, we might hesitate, which is the opposite of what we need to do. Slow and steady wins the race…

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  5. Hey, nice to see your long term focus. I feel that we need two things to build wealth: at least two crashes in our (investing lifetime) lifetime i.e. crashes when we have income to take advantage of. and having cash to invest when the market is down to take advantage of reduced prices.

    I did change my investment strategy to take more advantage of the dropping market. I used to invest on two days for all of my mutual finds. For example, if I purchased fundA on the 1st and 15th, I would purchase fundB on 3rd and 18th say. But, with the dropping market, I decided to make the same amount of investments in 4 smaller money bundles and spread them over 4 purchases per months instead of two. This has allowed me to get some better prices.

    I also purchased some mutual funds in $500 increments whenever the DOW fell more than 200 points. Two of my purchases were on days when the DOW fell more than 300 points. I would buy when there was roughly an hour or so for closing bell when I felt that the DOW would not climb back up to no loss. This method also also allowed me get cheaper prices.

    My recommendation would be to set a criterion on when you will re-enter the market with the saved up cash. Like always buy when DOW drops more than 200 points, etc. And monitor this criterion and be ready to invest right away.

    Hope that helps.

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  6. Interesting blog. I am a fellow Belgian looking for similar minded people. Glad I found someone who is in a comparable situation (I am 38, three kids, and looking to save responsibly without too much disruption for the kids and family) and I am looking forward to discovering your blog.

    On this topic: I also avoid market timing, but I am not convinced yet of blindly investing without regard to valuations. I like your idea of adjusting the plan considering high market valuations. I have been doing the same since about August 2014. I did miss some gains but I sleep somewhat better. The one million dollar question is though when valuations can be considered high. It seems that everyone has a view on this, but never the same view. I got hooked on the view of John Hussman who publishes for free a weekly market comment since early 2000. He has thus covered two big crashes and all his weekly views remain publicly accessible since then. Easy to verify and check. (https://www.hussmanfunds.com/wmc/wmc140714.htm for example). His method seems reliable, well calibrated, time-tested and very robust; although he admits that it is hard to pursue when the market still advances despite very high valuations.
    On the basis of his method and my understanding of the whole plethora of elements scattered in his comments, I decided that now (half 2014) was not the time to go all-in and I am still generally in that position.

    That being said, being completely on the sidelines is pretty boring (you know what I mean). I am a member of an investment club (beleggingsclub) since almost 20 years, so I know what buying selling losing means, but that doesn’t really count (limited play money). So I do some investing along the following lines: buying my pension funds up to the tax limit, buying active mixed funds according to the Mijn Kapitaal method (you know that) and I hedge 50% of the equity exposure of these positions. Hedging is pretty simple: I calculate the equity position in euro’s (pretty straightforward via MorningStar) and I buy a short ETF for 50% of the amount. Every quarter I check whether the ETF is still about 50% of my equity exposure. I will continue to do this until the markets are no longer in the 2% “highest valuations ever” bracket according to Hussman.

    For now, my hedged position has an aggregate loss of 5% which means that my equity exposure has gained about 10% over the same period.

    Excess cash in the meantime goes to a simple savings account, ready to be deployed once valuations are less extreme.

    Anyway, I am just sharing this to compare notes

    M

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    1. Welkom. We do have a similar situation…
      The hedging is an interesting thought. Curious to see how it plays out. I will look at that link.

      In case you are free on Feb 4, feel free to join us in Antwerp

      Like

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