My Personal Portfolio Four Months After Correction

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Long-term readers know by now that I only check my 403(b) account, which is similar to a 401(k) account, just twice a year. I take a look at the end of April and the end of October. The best six months for the stock market run from November through April (when returns tend to be higher). The worst six months run from May through October (when returns tend to be lower but are still positive on average). I use both dates as cues to see if my portfolio needs to be rebalanced.

I looked at my account for the first time since last October. No rebalancing was required. Of the five mutual funds I own, the Vanguard S&P 500 Index fund (VFIAX) accounted for the largest position of my portfolio at 22.8%. The Vanguard Intermediate-Term Investment-Grade fund (VFIDX) was the smallest position at 17.9%. If either had accounted for more than 25% or less than 15%, I would have rebalanced the portfolio back to 20% per fund. The position size of the other three funds: Vanguard FTSE All-World ex-US Small-Cap Index fund (VFSVX), Vanguard REIT Index fund (VGSLX) and Vanguard Small-Cap Value Index fund (VSIAX) were in the middle at 19.2%, 19.4% and 20.8% of the total portfolio, respectively. (These numbers are prior to my April monthly contribution being deposited into the account. The monthly contributions are allocated evenly to each of the five funds.)

What were the allocations on December 24, 2018, when the S&P 500 index was more than 24% below its current level? I don’t know because I didn’t look at the account. By purposely not paying attention to the balance, I avoid seeing the highs and—more importantly—the lows. It’s akin to being a moviegoer and avoiding horror flicks; such a person will never get scared at the theater. Plus, the current balance is meaningless. What truly matters is having a process in place to save and invest in a disciplined manner that will lead to having a significantly larger account balance at retirement.

While I strongly believe being disciplined is critical to investment success, I also believe that investing is messy and allowing for some flexibility is warranted. In mid-to-late December, I took the tactical step of accelerating the timing of planned contributions to my wife’s IRA and my own Roth IRA. These were dollars I would have contributed anyway; I simply combined them into a larger single contribution rather than having these contributions scheduled to be deposited on each payday. I also—barely—got a Roth IRA conversion completed before 2018 ended. I sent the paperwork in on December 26, 2018. (Those of you intending to do a Roth IRA conversion near the end of this year would be prudent to file the paperwork by mid-December to allow for a margin of error.) On January 1, I submitted the paperwork to do another Roth IRA conversion while prices were still low, but with the tax impact affecting 2019 instead of 2018 taxes.

I also benefited from the automatic monthly contributions to my 403(b) account being made near the end of each calendar month. This meant I knew I would be doing additional buying on the dip by simply leaving my 403(b) account alone. When things are intelligently set up in advance, the status quo can be a powerful force for investors who don’t act to change it.

Obviously, I’m talking about all of this with the benefit of hindsight. What if the market had continued to fall in January instead of rebounding? I was prepared to accelerate the timing of more contributions to our IRA accounts. I would have also considered rebalancing my 403(b) if even the lower allocation floor of 15% for any of my funds had not been breached. It would have taken a bear market drop of likely between 25% and 30% for me to have acted. Such drops are the bottom for most bear markets. Once the S&P 500 falls that much, the upside has historically been much greater than the downside.

It’s important to note that I have a long investment horizon, ongoing plans to keep contributing and a salaried job. The latter provides me with a source of cash flow to fund living expenses and other spending. An investor in or nearing retirement would need to consider their cash flow sources and requirements. An allocation to stocks could be left untouched if there are enough other sources that can be tapped to cover cash flow needs for up to four or five years, if needed, to ride out an extended bear market.