In high school, I developed an interest in investing by going over stock ticker symbols in the newspaper with my father. From there, I began trading stocks online in college and eventually parlayed my interest into a career in Institutional Equities at a couple investment banks.
For many people, investing in the stock market over a lifetime, has been financially rewarding. I know plenty of people who have retired early due to their investments. On the flip side, I know several people who lost their shirts during the dotcom crash and housing meltdown due to margin. They invested way too much at the wrong time.
The sooner you can start investing, the better. You’ll learn from your mistakes when you have less money, so you can make better decisions when you have much more. Always start small and work your way up!
INVESTING IN A DISMAL YEAR
Investing during a dismal year is a great way to learn about investing or hone your investing skills. Bull markets give people a false sense of invincibility, which leads them to do crazy things like quit their jobs to day trade their tiny portfolio for a living or go on maximum margin because they think they just can’t lose.
In Q3 2015 I went from 100% equities to a 80% equity / 20% bond split in my Motif portfolio. The thinking was that volatility would worsen due to China, Europe and negative signaling from the commodities market.
I was right, but I didn’t do enough to protect my portfolio from the violent declines in Q3. I should have gone 100% into cash or bonds to lock in my then, 3.5% gain. In retrospect, at least a 50/50 split would have been wise.
Take a look at my 30 position Motif portfolio as of October 8, 2015.
My overall return to date is an uninspiring 0.1%! I started my portfolio with a little over $10,000, and that’s where I still am today. The portfolio is neck in neck with cash.
My Motif portfolio is down 3.4% since I last rebalanced all 30 positions in 2Q 2015 for $9.95. The only bright side is that relative to the S&P 500 or Dow Jones Industrial Average, my portfolio is outperforming the two by ~3% – 5%.
If you look at the “Weight” column, you’ll see one big outlier at 21.3%. This is my municipal bond fund, MUB. The weighting started off at 20% in Q2, and has grown due to an increase in MUB and a decline in everything else. In a taxable investment portfolio, it’s a good idea to be tax conscience e.g. hold tax free muni bonds here instead of in a 401k or IRA, look into dividend stocks, and keep portfolio turnover to a minimum.
I’ve purposefully not contributed to my Motif portfolio so as to not obfuscate the returns. I’ve noticed some bloggers either quit updating their performance once it goes down, or they add to their portfolio without saying how much they added to make it seem like they are doing better than they really are.
I want to experience the embarrassment of underperformance or the glory of outperformance every quarter! My hope is to keep a pulse on the market and learn from any mistakes or wins to better manage my larger portfolios.
4th QUARTER STOCK MARKET RALLY?
As an investor, you’ve always got to be thinking ahead. In the short term, it’s good to be aware of seasonal variations in the year. In the long term, it’s all about expected earnings, execution, the competitive landscape, and other exogenous variables. Let’s look at the very short term.
October is generally one of the worst performing months of the year for the stock market, even if the previous months were pretty terrible already! In other words, don’t think for a second we’re out of the volatility woods yet.
Take a look at these charts Bloomberg put together about previous lower lows in 1990, 1998, and 2011.
After nasty falls in August and September (much like how we’ve experienced this year), we could be in for an equally nasty sell-off in October. Why the schizophrenia? It’s hard to say.
The good thing is that if you’ve come up with your investing game plan, you should have some ammunition to invest if the market starts tanking again. I have three more tranches ready to deploy if the stock market breaks its 2015 low by 2% or greater.
The other takeaway from the charts is that there were subsequent “Santa Clause” rallies into the New Year. Given the S&P 500 is at ~1,990 currently, if one held on during each of the years displayed in the charts, they’d have made a lot more money.
I don’t believe the Fed will raise rates in 2015, nor do I believe interest rates for mortgages and consumer credit will go up even if the Fed does raise in 2016. China has already corrected by 40%, and oil prices (Brent Crude and WTI) have probably seen their worst in the low $40s range per barrel. The S&P 500 is trading at 15x forward earnings, which is in-line with long term historical valuations. Given these factors, I’m comfortable with an 80% equity / 20% fixed income split.
IT’S WORTH GETTING STARTED
For those who do not currently invest in the stock and bond market, the only way you can get comfortable investing is by getting started. Cash can definitely be a good short-term investment, but over the long run, cash will get killed by inflation. Always try to at least get neutral inflation by owning enough assets that will inflate over time.
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In the long run, it is very hard to outperform any index, therefore, the key is to pay the lowest fees possible while being invested in the market. Let Betterment build a customized portfolio for you based on your risk tolerance.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He is aggressively investing in real estate crowdfunding to arbitrage low valuations and take advantage of positive demographic trends away from expensive coastal cities.
Updated for 2020 and beyond.