I’m De-Risking My Portfolio
The VTSAX Total Stock Market Index Fund went up 20.99% in the crazy year called 2020. So far in 2021 as of this writing it’s up another 18.3%. That makes for a total increase of 39.29% since Jan 2020, two short months before all of the madness of the pandemic.
My net worth has gone up about 28% in that same time frame. I’m behind the market because I had a portfolio allocation of approximately 75% equities, 20% bonds, and 5% cash during that time. I’m long past the point where I care about lagging market returns overall. And like you I’m getting older every darn minute.
So it’s time I start locking in my gains and de-risking a bit. Recently I did just that.
No I’m Not Market Timing
“Are you trying to time the market AF?” you may be asking. No, I’m not. I would never pretend to be able to do something that no one can reliably do, and that would be piss-poor form for a personal finance blogger.
I am, however, trying to time my life. By that I mean I’m thinking about my age and my allocation, and I’m not feeling as comfortable with it as I did a year and a half ago. And that discomfort has nothing to do with thinking the market is too high, or that it’s due for a correction. I have no clue, nor do you.
That discomfort is entirely based on my age and my associated risk tolerance given my current net worth. I keep looking at my spreadsheet and reminding myself I have 28% more now than I did in January 2020.
More money doesn’t make me happier, I’m way way past that point. But it does make me feel more secure, at least somewhat. I don’t disclose my net worth, but compared to some personal finance bloggers I follow the thought of feeling insecure with my net worth would make them laugh out loud.
I’m clearly more risk averse than they are, and my childhood and background make me a cautious investor who will invariably have some level of insecurity. There’s always a chance it could all go to shit in a heartbeat. Thanks Baltimore for giving me a wonderful mindset in life!
What I Did
Not long ago I took my equity allocation down to 70% and upped my bond allocation to 25%. Wow, big deal you might think. I agree it’s not drastic, but this is just a first step in what will likely me more changes. I’m a numbers guy, and I’d like to let the new allocation sit for a while so my gut can digest it and help me make the next move.
I highly suspect I will be de-risking more once I adjust to my new allocation.
To make the adjustment I also opened up a new fund, the Vanguard Inflation Protected Securities Fund, Admiral Shares (VAIPX). This is a bond fund that is intended to protect investors from inflation by investing in Treasury Inflation Protected Securities (TIPS) which are backed by the full faith and credit of the U.S. Government.
I’m not trying to time the market, but I am concerned about inflation. And to be clear I have no more ability to predict that than anyone else, but I have the right to be concerned about it.
I opened the VAIPX fund inside of my Roth IRA and simply transferred money from my VTSAX fund in the same Roth, so the transfer has no tax consequences. It’s best to own TIPS in a tax advantaged account like an IRA or 401K because they are taxed annually.
If you want a great breakdown of TIPS and a comparison to I-Bonds, I recommend Chris’s recent post on Can I Retire Yet.
De-Risking Is A Head Game
You know me, I focus my blog more on the psychology that drives our money decisions than the ins and outs of the investments themselves. I frankly don’t think the latter is all that complex, but the former is a quagmire of life’s messiness and how our brains cope with that messiness.
If the market goes up another 15% this year and another 20% next year will I feel stupid for doing this?
No, I’ll sit around lamenting that I cannot afford that spare Rolls Royce Ghost for $315,000 because my portfolio under performed. That will be a dark day, but I’m pretty sure I’ll survive.
In all seriousness I’ve been contemplating de-risking a lot, probably too much. In a recent post I mentioned how I’m doing two things that I should perhaps reevaluate. The first is continuing my part time W2 job, which I work at 20 hours a week and has been my career. And the second is my portfolio allocation, specifically my heavy weight in equities.
As quoted in that previous post, when you’ve won the game you should quit playing. I’m far from quitting the game but the time seems right to play the game more cautiously. De-risking just feels right at this stage in my life.
Here are a few of the thoughts that helped me make the move:
- Standard advice is to adjust asset allocation by age. I think it’s better to do it by the stage of life that you’re in. I’m semi-retired at an age when most folks are still facing about 15 more years of their career. So while the average person my age is still in their heaviest earning years, I’m winding down.
- I have enough money to do the things I want for the rest of my life – even though the degree of confidence of that opinion waivers up and down on a daily basis. Most days I’m 90% confident.
- Even modest market returns on an annual basis will net me way more than I spend in a year.
Conclusion
There are readers who will get to this point and wonder what the big deal is. I cut my equities exposure by 5% and added to my bonds – “big deal”. I realize many folks, especially those who are younger, would treat a move like that as not even worth mentioning or thinking about. And they might do many of those adjustments in a given year, or even month.
Not me. I’m a buy and hold guy and to me time is money. Spending tons of time on investing or playing the market costs way too much time, a cost that most do not subtract from their returns. When I look back at my spreadsheet this de-risking move is the biggest change I’ve made in my investments in over 4 years.
Besides the time spent thinking about it on my runs and bike rides, the actual mechanical process took about 15 minutes. I have a minimalist portfolio that made me rich and costs almost no time to manage. And that’s how I like it. Life is short, I’d rather be doing cool stuff outside.
But as a numbers guy and someone who habitually over analyzes things, I did not make this change easily. And I’m sure the next one will be the same.
It sometimes boils down to what you fear most. For me, it is inflation. If not for inflation i probably never would have invested in equities.
Yeah it’s a real fear and if you look at a time as recent as the 1980’s you see how bad it can get. It could be an unwarranted fear, but who knows.
Inflation is what scares me the most too. Especially with all this money printing going on and stimulus packages.
I don’t trust the reported rate of inflation either (using the CPI which I feel underestimates things by a factor of 2-3).
The governments money printing machine seems to be stuck on print, it is scary
“ the biggest change I’ve made in my investments in over 4 years”
This habit alone will make you a successful investor.
Some years I think I spend less than 10 minutes total on investing, that usually amounts to making my Roth IRA contribution. Most of that 10 minutes is waiting for the website to update and digging out my password. Time is money…
Sticking to your risk tolerance is important, so good for you! Preaching rebalancing and actually doing it are two separate things and takes determination. I rebalance every 6 months or 5% fluctuation, whichever happens first. Definitely disliked doing it initially as my winners were doing so well, but having a plan and sticking to it is key.
Yep, have a plan and stick to it unless circumstances make it that you should alter your plan. The latter hasn’t happened yet.
good for you, dave. a 5% change is not insignificant when you’re talking about a large pile of investments. i still struggle with the balance between trying to get really rich and enjoying the fruits in the present. there’s nothing wrong with just playing a little defense and capital preservation.
So true dude, it’s a chunk of money. I can’t let my net worth make me treat certain sums of money as inconsequential, it’s a lot of money.
I also increased our bond allocation by about 10% recently. It won’t make a huge difference, but it made me feel better. Mostly psychological, IMO.
The psychological aspect is huge, I wanna enjoy life and not have to think about it
It certainly has been a crazy couple of years. I’m up 58% in the last 1 year alone! That seems bonkers to me! A few well placed investments during the pandemic have certainly paid off. But as you say, it could all turn to sh*t in an instant.
I don’t blame you for de-risking. If taking less risk feels better for you, I say go for it!
Crazy indeed, makes me wonder what the next chapter has in store for us
makes sense to de-risk. Can you tell us why you did this in a Roth IRA as opposed to a pre-tax account like an IRA, 401k, 457? As I understand it, you always want to take the biggest risk in Roth because that has the longest time to grow as that’s the money you should use last. Seems to me that you should increase bonds in pre-tax rather than Roth. This would also lower your RMDs (because bonds will appropriately limit the growth in pre-tax accounts) when that time comes.;
I don’t have a regular IRA, only a Roth. More accurately I have an empty IRA that I used to use to do a backdoor Roth when I made too much to do a regular Roth contribution. But I kept the IRA empty because the backdoor Roth becomes a massive headache when you also have a regular Roth. As I said, I’m minimalist, it’s worked well.
okay, I understand why you wouldn’t do this in an IRA but I’m sure you have pre-tax money elsewhere in another account. I can only surmise that you don’t have access to a bond fund (which is odd I think) in your 401k/403b or the expense ratio of those bond funds are much too high (which then I think makes your decision understandable, and I would say a very high expense ratio would be .60 or higher)
I’m federal government, so no 401k but TSP. I wanted TIPS specifically and can’t get them in my TSP. I do have bonds in my TSP elsewhere.
Yeah gotta go with your gut feeling. I did the same in December 2019. I moved about 10% of my equities to bonds and man did that end up paying off! I allocated those bonds back to equities in mid April 2020. Sheer luck that a market crash occurred a few months later and I had bonds to use for buying at a discount. I will say that having just bought bonds prior to that crash felt good, though I had no inkling a black swan event was heading our way. In no way did I try to time the market, but following my gut and plan allowed me to have reserves to buy at a discount.
Wow, what a stroke of great luck! If the same happens to me I doubt I’d put the money back in though, I’m at that stage where the security of keeping it safe is most important. Thanks for the comment!
I actually sold off 10% of my bonds to a 90/10 AA about 2 years ago. I clearly lucked out on that rise but now might be the time to move that back a bit to add some stability to the mix. Most likely just go to a 20% bond mix, bonus is it pays out dividends more than my equities which helps someone who is FIRE partially living off investments as I am.
Nicely timed move, luck is a good thing when it’s on your side. Sounds like our risk tolerances are very similar. I’m far riskier in my outdoor athletic pursuits 🙂
I would go for it and stop working altogether!
Going complete cold turkey is refreshing and it will bring about different emotions when the steady paycheck is no longer coming.
It’s very exciting to no longer have a paycheck anymore. Makes you really think about financial security in a different light.
Sam
Stopping is on the table Sam, I’m just not as much of a decisive person as most others and usually over-analyze things. In short I’m a worry-wart about big life changing decisions like that. But that’s where the winds are blowing and I’m on the journey, thanks for stopping by!
I’m turning 46 next month and I just de-risked from a 100% equity portfolio to 80/20 stock/bond. Very similar to you based on our number goal, stage in life and the willingness to take risk when we’re close to our goal.
We’re above the 25x spending based on our budget but I wanted to add more cushion to 33x or more because I want to add vacations and fun money and some flexibility to cut back if we hit a bear market.
My wife still works full time but we’re talking about her going part time. I’m semi-retired. This was another reason to de-risk.
I’ll be honest, it’s hard to de-risk in a hot bull market because greed is suck a powerful feeling.
Nice, we think alike on this one. To me it’s not too hard to do it in a bull market. I wasn’t fully in equities for over 20 years and still did tremendously well. If the market returns 20% for the year and I go up only 16%, I’m good with that.