Grading My Actions

As I look back on the past two months of insane markets, I feel both shock and relief at what we’ve been going through. March 2020 was the most volatile month in stock markets history. 2 of the 6 worst days in DJIA history happened in March. We saw the fastest bear market in history and at the low on March 23rd it felt like the wheels were coming off. Looking back on it now it was easily the scariest month I’ve witnessed in my career (and I was an institutional trader through 2008-2009).

Then April followed and proved to be one of the best months in history, a +12.9% gain. Horrendous crash, relief bounce, quite a one-two punch. I wanted to use this space not to talk about why the market fell in March then rose in April but to analyze my own actions during those months. I am a market strategist in Baird’s Private Wealth Division. I spend my entire life embroiled in the ups and downs of markets and investing. I thought it would be interesting to examine what I did as the pandemic rocked global markets because if I’m going to talk to advisors and their clients about investing, I should be willing to share my results and thought process. 

To set the stage I am a married 46-year-old with two children ages 14 and 12. My advisor and I have decided on broadly diversified mix of equities and bonds (this is not investment advice, nor is my asset allocation a model for every investor). I’m going to use a chart of the S&P500 as a proxy for when I made my decisions because I have no great benchmark given the complexity of my holdings. When the pandemic got going in March, and the stock market fell, I made the decision to start moving some of the bonds into stocks, essentially upping my equity weight. I made two buys, you can see the area where I made a decision on this chart, and where the market is today (May 7).

How do I grade those two decisions? Hindsight is obviously 20/20 and the first decision now looks early, but stocks had fallen 7% from their highs. A 7% drop in a huge bull market looked attractive to me. Unfortunately, the market started to fall apart as the news worsened. My second buy was early March, down 18% from the highs. Better for sure but still appears early. This was my thinking as market fell – I’m 46, I have decades of time in front of me and I am finally getting a chance to buy at lower prices after a ten year bull market….why would I pass that up?

Then things really came unglued and my nerve to buy stocks evaporated. At the low on March 23rd I could think of nothing but the worst-case scenario unfolding. I was frozen. Everything made me think the market was going even lower, my mind filled with darkness, muttering to myself “I can’t buy here”. I called my advisor so they could bring me back from the ledge, to remind me why I’m investing and why planning is so important to my success.

While I took no action close to the lows, look what happened on March 25, two days after the low.  

That’s right, my dividends reinvested like they always do. Dividends can play a significant role in investment returns and, in this instance, they did a better job of buying near the lows than I did though obviously I did get lucky on timing here.

So how did I end up doing? How do I view my actions in hindsight?

First, that may not have been THE bottom, we might retest it or go lower, but for now I want to grade my actions while they are fresh in my mind. I think my first buy was clearly way too early. I didn’t know how bad it could get, I just assumed it would be a temporary blip. The second buy is certainly better but I learned a painful lesson about bear markets, when stocks are in free fall they can accelerate to the downside. The dividend reinvestment reminded me that the automatic portion of my investment plan has no emotions, it just sticks to the plan. If I had to grade myself I’d say B-, what I do know is that I need to work with my advisor on a rules-based plan for how I react to selloffs going forward.

No joke I had my finger over the sell button near the lows, I had seen scary markets before but the added worry about a health crisis rocked me to my core. I remember leaving my basement, walking around outside and thinking about how bad it could get, what I would do, what my family would suffer if the market kept imploding. Thankfully I had an advisor there to remind me one thing:  that my plan, my investments, my strategy, is built SPECIFICALLY for me and no one else. He reminded me that “the end of the world isn’t a plannable event, it’s best to think of the most likely outcome rather than the worst case”. What was that? That continuing to be a long-term optimist is true to who I am and my strategy. The key to success, especially with investing, is being able to ride out the inevitable declines.

Investing can be much more emotional than we want and March 2020 reminded me that having someone outside my brain is incredibly valuable. I may not have bought at the absolute low but I honestly don’t care and neither should you. It’s entirely possible that WASN’T the ultimate low, only time will tell. Let me end with this quote by Howard Marks:

“The Investors goal should be to make a large number of good buys, not just a few perfect one’s.” 

I didn’t make a few perfect buys, no one does, but that will never be my goal. My goal is to keep making “good buys”, be optimistic about the future, get through scary selloffs when they happen, stick to my investment plan, and allow time and compounding to do its work.