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A Few Words of Advice Regarding the Current Sell-Off

by Tom Madell

It was bound to happen. Stocks had reached astronomical heights so they were ripe for a fall when something correctly perceived as a negative happened. As investors should be aware, ten percent corrections like the one happening now are not that rare. The last one for the S&P 500 was about a year and a half ago, apparently triggered by the threat of a global trade war between the U.S. and China and the prospect of rising Fed-controlled interest rates at the time, the latter which can upset stock investors. This time it is worries that the coronavirus will cause a significant slowdown in global growth.

It appears that some investors have used the downdraft to reduce their stock positions, mainly out of fear of even bigger drops ahead but, in some cases, to preserve profits gained during the preceding nearly 11 year bull market. But is such selling right now what the average investor should do?

Neither I, nor really anyone, can say how much more, if any, the stock market has to fall. And, what any given investor should do depends on their financial situation, when they will really need their invested money, and on their level of fear. But it usually turns out to be a wrong move when investors sell as stocks are falling. While we can't go back in time, it is usually a better long-term strategy to occasionally sell a part of your riskiest stock funds when they have been on an upswing for quite a while, such as during various times over the past several years. That way, they preserve their gains and protect themselves in the event that an inevitable drop pushes their stock funds below what had been reasonably good profits up to that point.

So, if you have sold nothing since the recent highs of February, have a 5 year perspective or more, and are wondering what to do now, in most cases, do yourself a favor and keep holding your fund positions as is. All losses thus far are really just "paper losses." Your funds will undoubtedly bounce back. The coronavirus will not last forever.

An "Automatic" Adjustment of Your Asset Allocation

As implied above, investors might be tempted to adjust their asset allocation to stocks, bonds and cash as a result of the market downdraft. That is, one might want to reduce their allocation to stocks and increase it to bonds and cash. But here is another reason why it may not be wise nor necessary to do this. Let's use some hypothetical numbers to illustrate what I mean.

In the current correction, as of 2/29/2020, many stock funds have lost over 12.5%. But for simplicity, let's assume your stock portfolio dropped just 10%. Suppose prior to the current 10% correction your portfolio had $50,000 in stocks, $25,000 in bonds and $25,000 in cash. If your stock funds are now reflecting the 10% drop, they will have suffered a (paper) loss of $5,000, to $45,000

But suppose you own a somewhat typical bond fund such as Vanguard Total Bond Market Index Admiral Shares (VBTLX), or its nearly equivalent ETF, BND. What has been bad for stocks so far has actually been good for bonds. Since stocks peaked on 2/19, VBTLX has increased in value by over 1.5%. This means that your fund is now worth about $375 more (25K x .015). Let's assume your cash investments have not changed at all. All together then, your portfolio is now worth 45K plus 25,375 + 25K, or $95,375.

So without making any moves at all, your stock allocation has dropped to about 47% (45,000/95,375) while your bond allocation has gone up to about 26.5%. Even your cash allocation has risen to above 26%. If the stock market keeps dropping and bonds keep rising, your overall allocations to stocks will get even lower, while you bond and cash allocations will get higher. While these may not seem like big changes and it will likely to be disconcerting to lose money on paper, perhaps it will be a little comforting to know that you do not have as much now allocated to stocks while more to bonds and cash. Such may more accurately reflect how you now feel about each asset category.

Five Vanguard Stock Funds Revisited

In this rocky spell for stock fund investments, one should keep focused on how well one can do as a long-term holder of excellent funds, not on the sometimes painful short-term drops that are inevitable in stock market investing.

Just three years ago, in the March 2017 Newsletter, I highlighted five Vanguard funds I own that, over a period of about five to six years, resulted in a doubling of my original investment. While these represented some of my best investments, it would certainly be possible to find many, many other high quality stock fund investments that did just as well. But since I have been a long time proponent of most of these five funds, you might be interested seeing how these funds have done in the three years since I touted these funds. The results shown in the table below demonstrate that even including the late February losses, these funds still continue to do quite well.

Three of these five funds are included in my current list of recommended funds. (All my 13 currently recommended stock funds and seven bond funds and their 1, 5, and 10 year results were published here on Jan. 13th subsequent to the publication of the Jan. 2020 Newsletter). The remaining two of the stock funds are not included in my recommended fund list but are certainly worthy of consideration.

The five funds are the following:

• Vanguard Growth Index Admiral (VIGAX)

• Vanguard PRIMECAP Inv (VPMCX) (new) (closed to new investors). (I also own a Vanguard annuity which includes a Capital Growth fund option. This fund is virtually the same as VPMCX and is available to anyone who opens an annuity account with Vanguard.)

• Vanguard Small Cap Index Admiral (VSMAX)

• Vanguard Extended Market Admiral Idx (VEXAX)

• Vanguard Mid Cap Index Admiral (new) (VIMAX)

(Note: Each of the Admiral funds is also available from Vanguard as ETFs.)

How have these five funds done in the three years since the March 2017 article (between Feb 28, 2017 and Feb. 29, 2020)?

The average three year annualized return for all five funds is 8.75%.

Five Excellent Vanguard Bond Funds

Investors who wish to add one or more bond funds to their portfolio might want to consider any of the following Vanguard funds. While two of these funds are the same as those recommended in the above-mentioned Jan. 13th update, three are new as indicated below:

• Vanguard High-Yield Corporate Inv (VWEHX)

• Vanguard Interm-Term Tax-Ex Inv (VWITX) (new)
  

• Vanguard Total Intl Bd Idx Admiral (VTABX)

• Vanguard Emerging Mkts Govt Bd Idx Admiral (VGAVX) (new)

• Vanguard Interm-Term Bond Index Admiral (VBILX) (new)

Note 1: The Inv (Investor) funds are also available as Admiral funds.
Note 2. The last three funds are also available as ETFs.
Note 3: Tax-exempt bonds are Federal tax-free, and state tax-free as well when purchased with a predominance of your resident state's bonds.

So how have these five funds done in the three years since the March 2017 article? The following table shows you.

The average three year annualized return for all five of the above bond funds is 5.27%.

Key Takeaway: While investing in stocks is riskier than bonds and subject to, at times, large downdrafts, the investor with a long-term investment horizon and steady nerves is almost always better off in stocks than bonds or cash.

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