What I Learned About Myself After Taking A 33% ‘Avoidable’ Investment Loss

I am a member of a personal finance forum, and a spirited discussion has erupted this week among the participants – of course, the global markets are in freefall. There were many signs pointing to a market downturn – e.g., high P/E ratios unsupported by underlying economics, low and even negative interest rates. The moderator was emphasizing these signs (he’s big on taking a risk managed approach), but since he’s not a financial advisor, couldn’t directly recommend to Sell or Buy.

I became a member of this forum, in particular, because I took a course designed and led by the moderator in 2016 – so I have had over three years to jump on the risk management bandwagon. Beyond that course, I was seeing other support for managing our paper assets more actively — Daniel Amerman on the deficit; Financial Mentor on bubbles. I even signed up a couple of weeks ago for a tactical asset allocation information service so that I could re-balance our portfolio with a more risk managed approach.

Still, even as I was intuitively feeling that the economics of the world did not make any sense and that I should probably do something about our paper assets…I sat on the information and didn’t change our holdings. As a result, we are down 33% from the peak that was just 2 months ago in January 2020.

33% is a lot for us, and it feels avoidable since it occurred to me many times over in the last few years that I need to make some changes. And even with all that, I still haven’t made any moves! I wish I could say it’s because I am a diehard buy-and-hold, passive investor who won’t panic-sell in a bear market. But I think that makes me sound like I have much more conviction than I do. The reality is far less favorable.

I don’t prioritize our paper assets enough

I have a To Do list with our paper portfolio, which included getting up to speed on the tactical asset allocation program I joined. Yet, other things took priority. I don’t mean that I turn on Netflix or surf the Internet when it comes time to my paper portfolio tasks. I just do other work – consulting, real estate – instead of work on our portfolio.

Even my recent post on coronavirus and our FIRE plans made scant mention of our paper assets. My headlines were about travel, consulting and real estate. I included a short paragraph mentioning that our paper portfolio is not something we’re spending now, and that’s all she wrote!

Clearly, my investment goals aren’t clear enough

When I reflected on why I don’t work on our paper portfolio, it became obvious that I don’t have clear-enough (or compelling enough) goals for our paper assets. Without clear goals, I don’t have clear timelines, deadlines or urgency to act. The thought of spending any of our paper, even the gains which are currently reinvested, makes me nervous. It’s what drew me to real estate – an asset class I felt I could better understand and control. I just ignore the paper like a neglected child!

Right now, I look at our paper assets as a legacy for our kids and a back-up for us – i.e., we rely on the real estate and consulting for our day-to-day, and the investments grow in the background. If that’s true, then my investment horizon is 30+ years (our kids are both under 25 so a long way off from needing retirement income). If my investment horizon is 30+ years, then buy-and-hold is justifiable, and I shouldn’t care about the dip.

Long-held beliefs die hard

But I do care about the dip – not enough to panic sell, but enough to think I should have done better. The allure of buy-and-hold is how easy it is – you set it and forget it. But investing isn’t like making a rotisserie chicken. It doesn’t make sense that doing nothing is going to outperform doing something. Yet, that buy-and-hold passivity is so ingrained that it feels like blasphemy to even question it.

Of course, when I say Do Something, I mean something intelligent, not bad habits like panic selling or trading so much that your profits are eaten away by transaction costs. The tactical asset allocation program I joined shares strategies used by the most successful private managers (who have steep investment minimums that rule out a small-time investor like me).

These strategies are varied, so you do have to make your own judgments about who to follow, but what they have in common is that they take a deep dive into market data and make more frequent adjustments about what asset classes to hold. (The program I’m using doesn’t trade for you, but tells you which ETFs to buy, so I would need to execute these with my own broker.)

Tactical asset allocation seems like the right compromise

I don’t want to deep-dive into the market data myself – I don’t have the interest or the skill. It would be a recipe for disaster! Still, I recognize that blindly sticking to buy-and-hold has its limits. Picking a tactical asset allocation strategy that I can stick to seems like the right compromise.

I have already signed up for the system, and now I just have to put it into place with our investments. That was true three weeks ago when I had newly signed up, and that is still true now, even if we’re 33% down (and would not have been had I set up to follow the strategy). If it was a good idea then, it’s still a good idea now. So why am I writing this post rather than executing the system?

Even wrong ideas die hard

It’s hard to sell at a loss – of course, we already experienced the loss, but right now 33% is a calculation and selling the assets (to roll them into the system’s recommended holdings) would make it tangible. Hanging onto sunk costs is the wrong way to make any decisions, especially investing ones, but even wrong ideas die hard.

Add on top of that my lingering fondness for the simplicity of buy-and-hold – even thinking about moving to a different system makes me nostalgic for bygone days. It is very difficult to change approaches – investment or otherwise. I’m sure I’ll feel better once it’s done, but I’m feeling the inertia, and it’s hard to overcome.

Finally, even though we’re talking about monthly rebalancing and the asset allocation calculations would be spoon-fed to me, it feels like more work on top of the consulting and real estate I already do. Paper is supposed to be in the background, and now I’m moving it to the foreground. This is another example of a wrong idea I still cling to, as monthly rebalancing is not a lot of work. It will still be far less than the check-ins I do on real estate items. Why am I okay with doing more on real estate than I’m willing to do with our paper, when our holdings are almost the same (60/40)?

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I wish I could say that I’m prioritizing the revamp of our paper portfolio even now. As I look at my calendar for the upcoming week, it is full of consulting-related items….I’ll report back on my re-balancing adventures in a future post!