Even before I retired, I'd been keeping notes on my investments, and afterwards, I've continued, every year or two, to review what has happened and record my current thinking. To me, this is a great learning tool, and I thought it particularly interesting to review at the end of last year.
Our memories are malleable. You may think you remember your worries and your expectations of a few years ago, but your memory is probably not completely accurate. Re-reading what you wrote years ago is likely to make you cringe, but it can be useful.
We have to remember our mistakes if we ever hope to learn from them. And even when you made the right decision, it's helpful to remember how difficult it was, how fearful you might have been, how uncertain you almost certainly were. Well, that's my opinion, anyway.
After I retired, I reorganized my investments - consolidating some of them, rolling over my 401-k and deferred compensation plans into an IRA, and moving my holdings to a fund supermarket. (When I was working, I invested directly with individual mutual fund companies, but retirement meant that I needed a simpler system to move money around.)
So this note was written almost a year and a half from when I retired, but only a year or so from when I got all that settled:
Nov. 1, 2007
So far, so good. The market has done far better than I expected this past year, even including the increasing volatility. I really don't expect this to last (I'm getting increasingly pessimistic), but my net worth has increased by xxx over the past year. Can't beat that! My biggest fund, xxx, has been my top performer, but even xxx has continued to do well. Oakmark Select is the only real dog this year, though I still have faith in the manager (xxx Real Estate has been weak, but that was entirely expected).
[Note that I'm censoring all of the financial details, and even the names of funds which did well for me. But I'll leave the ones which did really poorly, since I don't suppose you'll take that for a recommendation. :) ]
I spent more than xxx in the past 12 months, including taxes. That's considerably more than I'd expected, especially considering there were no big-ticket items this past year. I spent almost xxx on xxx, which had not been budgeted. This might slow down in future years, but it seems that this is an expensive hobby. Considering how well the stock market has done, income taxes (more than xxx) might tend to average less. But I'd rather make more and pay the taxes. Nothing else really stands out, but it feels like I've been spending money like water. It's hard to cut back, when you get away from pinching pennies. We'll see what happens when the stock market turns down.
My financial plan below still looks good, though I'm more concerned these days about the risk of a real meltdown, unexpected or otherwise (black swans, fat tails on the probability distribution, or however you want to put it). Bush has really been a disaster to our country, and it won't get better any time soon. I took my taxable dividends in cash last December, so I've been keeping almost xxx in my Internet savings account (interest rate has dropped to 4.75%). Though the market has gone up, I can't really feel that this was a mistake, and indeed I plan to do the same this year (hoping like crazy that the market stays high that long). Is that timing the market? Or just being prudent? I'm expecting huge mutual fund distributions again this year.
OK, this is exactly as I wrote it, emphasis and all, in 2007 (except where I excised the details, of course). I also added an addendum to my investment plan then, but that's not what I want to talk about here.
I was lucky. The first year and a half after I retired went really, really well. But note that I was already starting to stray from my investment plan, at least a bit. I'd told myself that I wasn't going to try to time the market, but only to take advantage of any irrational behavior.
But I was taking cash out of the market, not because of "irrational exuberance" - although prices had increased considerably - but because of my general pessimism. At least, that's how it seems to me as I read this now.
As it turned out, that was a very good thing. But was it a wise thing to do? I wasn't sure then, and I'm not sure now.
My next note was less than three months later:
Jan 28, 2008
Stocks have dropped considerably (though I suspect there's plenty more to come), so how do I feel about my plan at the start of a bear market? First, it's tough to see my net worth evaporate like this, even though I expected it. It's not easy, and it's never going to be easy. When I was working, I could at least figure that I was buying cheaper stocks during a downturn, but I don't have that consolation now. All I've got is my conviction in my strategy - a thin reed, indeed.
After taking dividends in cash again in December, I'm holding a lot more cash than usual (about xxx, not counting xxx in I-Bonds). The interest rate has dropped to 4.3%. I've still got the vast majority of my money in stock mutual funds, so if the market goes right back up (the least likely scenario, I'd say), then I'll be quite happy. If the market continues to drop, I'll be very glad to have cash (wishing I had more), though it will be difficult to know when to invest it again. And if the market goes sideways, I'll probably make as much income holding cash (though, admittedly, the tax treatment isn't as favorable). Some of America's best money managers hold cash for opportunity purchases, but I'm not sure I'm willing, or able, to give it that much attention. We'll see. So far, taking my dividends in cash hasn't been a bad move. And actually selling funds would really be trying to time the market.
My net worth increased by about xxx in 2007 - not bad, though down considerably from October. But I've dropped another xxx since then, wiping out most of my gains since I retired (though I've paid living expenses out of that, too). My mutual funds are down more than xxx in the past four weeks,... Most of my investments are quite volatile, and they've shown it. And as I say, I suspect we haven't seen the half of it yet.
For now, I'm sticking with my original plan, though I should make a few observations. My 'diversified' portfolio hasn't made the slightest difference, with stocks everywhere crashing at once (as I should have expected). And my hedges were far too small to have any impact. (Note, too, that Morningstar's Risk Analyzer is completely bogus. Just before this, it was showing a gain as my 25% risk chance in a down market.)
Going forward, I should feel more comfortable holding cash. You just never know. But I'd like to put more money in xxx, in particular, and really, nearly all of my funds still have my full confidence. Over the long term, I'm sure they'll do better than average. Nevertheless, I'm expecting this year to be bleak, indeed.
Heh, heh. I hadn't seen anything yet. The year was going to be far, far bleaker than I expected!
But I did expect that this was just the start of a bear market, and I was prepared for further losses (just, maybe, not such big losses). I was glad to be holding extra cash, and I was beginning to consider that as a deliberate policy.
But note the problem with timing the market, that you have to be right twice, once when you sell and then when you buy back in again. And if you're selling in a taxable account, you'll probably have to pay taxes on your gains (certainly if you're buying low and selling high). So you have to be very right to make it all worthwhile.
If I thought January was bad, how about October?
Oct 12, 2008
OK, things have become REALLY nasty. I've lost massive amounts of money - more than I made in most years - in each of the past two weeks. My portfolio has dropped to xxx, which means that I've lost nearly xxx,... so far. Except for xxx, which has been almost fully hedged, my mutual funds have lost between 21% and 55% YTD. Quicken shows a -38% average! And that doesn't include what I lost at the end of last year!
As I noted in January, everything has dropped at once. Value funds have been particularly bad this time, since banks are failing. (Washington Mutual, among others, went completely bankrupt, and 15% of Oakmark Select was in that stock, at one time.) xxx was a nice hedge (it's down only 4% YTD), but I didn't have enough in that fund to matter much. And xxx has done what it was supposed to,... but it's still down 21% YTD. My extra cash is the only thing that's saved me.
So,... now what? This has been worse than even I expected, and I have no idea how much longer the market will drop. The whole financial system is melting down, and there's panic everywhere. Well, I can understand that. But it's time to start buying more, I think. I'm transferring xxx to xxx, and I'll try to do that a couple more times over the next few months. (But I've got to live on something, so I'd better not be too eager.)
It's also a good time to move funds around, since I don't have to worry about taxable gains! Actually, I'm still happy enough with my selection of funds, though some have performed much worse than the market lately. But I think it makes sense to concentrate my picks. Spreading my investments around too much will tend to give me average performance, and I'd like to beat that. Of course, as we've seen this year, I will be risking underperformance, too. But I can't think that my managers have lost their abilities, even if they've made some big mistakes this year.
Bottom line: as bad as things look, companies are cheaper now than they've been in years. True, the near future looks horrible, and prices may continue to drop (and companies even go bankrupt), but that's why the prices are low. And at this point, what choice do I have?
PS. Note that deflation might be more likely than inflation right now. Yeah, energy prices are still very high (though much less than they were), but we're looking at a severe recession, if not a depression. And also note that my foreign holdings have crashed even worse than the domestic stuff, though they've both been disasters.
This was shortly after Lehman Brothers went bankrupt, and everyone seemed to be panicking (for good reason, no doubt). As I noted above, for two weeks in a row, I'd lost more money in the stock market than I'd made in most years. I'd known my portfolio was risky, but still, that was a shock.
But still, as Warren Buffett has said, be fearful when others are greedy, and be greedy when others are fearful. I had absolutely no idea if the stock market would keep falling, but with most people trying to sell, the price of stock looked cheap to me.
And I had my plan. I had enough in cash and other secure holdings to live for several years, at least. I was lucky enough to have some additional cash, and if I wasn't going to invest it then, when would I? Well, it sounds reasonable now, but it's harder when there's blood in the streets.
Mar 31, 2009
As planned, I transferred xxx on Oct 13, 2008, and another xxx ten days later, as the market continued to crash. I also sold three funds ... to concentrate on my favorite picks. (Note that all three funds had some taxable gains, but I expected to pay no taxes on long-term gains in 2008.)
I added to my holdings in xxx, but I put the bulk of the money into Fairholme, making it one of my largest funds. [Fairholme has been a disaster this past year, so I don't have to censor that one, I think!] It had done quite well YTD and over the long haul, and I didn't want to get too concentrated in my top holdings. In my roll-over IRA, I sold xxx (my holdings were too small to matter much), and added to xxx. Again, just concentrating my picks.
Without trying to "time" the market, I rather thought that things were oversold, and I expected that forced selling might abate at the end of the year. Well, the market turned around almost immediately and had a solid advance by the first of January. (Barack Obama was elected president, too, which probably helped.) In November and December, I took my dividends (no removing cash this year!) and another xxx in cash (getting mighty low now) and added to my holdings in xxx.
[Sorry, but my notes are full of details of individual funds - so I could remember exactly what I was doing - and I really don't want to share that. So I'm cutting a lot here.]
No big surprise, but the market turned south again almost immediately at the start of the year (so much for my idea about forced selling) and dropped back to the October lows - or even lower - by early March. I was really running short of cash, but I took the last of it and bought more of xxx. (This means that I'll have to sell [some of my emergency stash] to live on this year, since my bank accounts are completely depleted.) I also sold xxx, my most conservative fund and one which has weathered the crash better than anything but xxx, in all of my accounts, and bought more xxx. I like the balanced fund, but I figured it was time to be really aggressive.
I made my last purchase March 9, and the market has boomed in the three weeks since then - up more than 20% (it had dropped more than 25% in the first two months of the year - this is a volatile market). It could easily be a bear market rally, of course, just like at the end of 2008. I hope not, but it wouldn't surprise me one bit. I can't ever hope to time the market in the short run. I doubt if anyone can, not reliably. And really, I've done surprisingly well (relatively-speaking) the last few months, generally buying at the very bottom. I've got no cash left at all, just xxx. That's about xxx years worth of living expenses (I'm cutting my spending to the bone), but it's probably not wise to invest any more money in stocks. Since I'm happy enough with what I've got (though Fairholme has done rather poorly since I bought more - just reverting to the mean, no doubt), I'll simply be sitting tight and seeing what happens now.
Currently, my biggest holdings (top down, 11% to 8% of my portfolio) are xxx. So I'm positioned VERY aggressively right now, even more than I have been. And I'm much more concentrated, with 64% of my portfolio in just these seven funds. We'll see.
I expect that the incredible volatility will continue this year, and we might even set new lows, but I think that the worst is behind us. I don't expect much, though - certainly not a quick recovery. But I should be able to live for about xxx years without taking anything out of the market, and I really do expect to be in better shape by then. The near-term danger is the backlash against "bailouts" and deficit spending. Well, most people are economic illiterates, if not [oh, that really wasn't a nice thing to say!].
I cut a lot of this, but I hope it gets the general idea across. I continued to buy as the market (for the most part) dropped, until I reached the point where I had nothing left to invest. I still had my emergency stash, of course. I expected that I could still survive until the market recovered, but I was about as aggressive as I could possibly get.
I had no idea that early March would be the market bottom, and certainly not that the market would scream upwards from there. That was pure luck. I was simply positioning myself more and more aggressively as stocks got cheaper and cheaper. If you're going to buy low and sell high, you've got to buy when no one else wants stocks.
Yet, it's easy to forget now (I think all Republicans have forgotten it), but when Barack Obama took office, the economic collapse seemed to have no bottom. And the stock market collapse, likewise. There was no telling just how far we'd drop or how bad things would get. It's not easy to buy at a time like that.
I'm not trying to pat myself on the back here, but just to point out that I was following my investment plan. And I had enough confidence in that plan to continue to follow it, even when things looked bleak. Maybe that was foolish. I mean, yes, it worked this time, but will it work the next time? There's just no way to know.
I was lucky. I was very, very lucky. I can't count on that luck the next time. So what I really need to ask myself is if my investment plan still makes sense. That's always what I need to ask myself, year after year. I can never stop asking it.
It was almost two years before I added another note (well, I did say that I was bad at consistency), and that was just recently:
Dec 31, 2011
OK, it's been a long time since I updated this. Briefly, my previous investments, in October, 2008 and March, 2009, were among the best investment decisions I've ever made. March was the absolute bottom of the market crash. At that point, my net worth had dropped in half. Well, I've always known I was taking a risk. But within a year and a half, I'd made it all back up and then some. It's been a wild ride!
I've been much less successful this year, so I've dropped back nearly to the net worth I had when I retired five and a half years ago. (Considering everything, that's not so bad, though.) The S&P 500 ended the year about even, but my holdings have done far worse than that. Partly, that's because I'm well-diversified globally, and international stocks have recently done much worse than American companies. And partly, it's because I'm still heavily overweight in small-cap - and especially micro-cap - stocks, mostly the result of xxx being so astoundingly successful for years.
But my biggest problem was owning so much of the Fairholme Fund, which really blew up this year. It ended the year down 32%, far and away my worst performing mutual fund. And it was one of my biggest holdings, too. Adding money to that in 2008 seems to have been a big mistake (admittedly, it did well until 2011). Well, that's nothing new. I'm used to making big mistakes. In fact, I've come to expect it. I seem to do OK anyway, or I have so far. One of the problems with concentrating my holdings is that when one blows up, it really, really hurts. Of course, when one does well, it makes a big difference, too. That's the same trade-off I accept when I invest in volatile funds. They tend to go down even faster than they go up - just, hopefully, not as often.
The combination - concentrated investing in volatile funds - requires an iron stomach. But, so far, I don't see any reason to change my investment plan significantly. I would never recommend it to anyone else, but it seems to work for me. On the other hand, my holdings are even more volatile now than they were when I retired. I took on more risk at the bottom of the stock market crash, and I still haven't managed to revisit that.
Going forward, I'm very pessimistic. I have no idea what the stock market is going to do, but I'm pessimistic for my nation. We don't seem to have learned anything from the mistakes of the Bush administration. But I have no idea what that means for my investments. I can't be optimistic, but I'm going to stick to my plan. In general, I think that stocks are relatively cheap right now, but not screaming buys. Given that Republicans are deliberately trying to sabotage our economy for their own political advantage, we could see another huge collapse in 2012. There is that risk. So holding a little extra cash might be prudent.
But interest rates are at record lows, so cash is making nothing right now. And bonds would seem to be extremely risky. Everyone is scared of the volatility in the stock market, so they're buying Treasuries like crazy. Following the herd is almost always a recipe for disaster. But I'm not sure if anything looks really cheap, either. Maybe I'll punt.
So that's it. As usual, I don't have a clue what's going to happen next. I don't see any especially good places to invest, but bonds and cash are paying nothing. I couldn't give you any advice if I wanted to, because I just don't know.
But what I do know is that following an investment plan has worked for me, so far. And being able to go back and read my notes (I've got notes from further back than this, and I keep excerpts from what other people are saying, too) has been very interesting - to me, at least - and valuable, too, I think.
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