I can safely vow to stick to the "never do it again" part. But I've hesitated to take that next big step.
This is your brain on fear
The reasons I haven't returned to the stock market are partly intellectual, partly emotional. I'm stumbling over three mental blocks.
The curse of interesting times: "One of the things I find hard in explaining investing to people is that you have to look at it as something outside your control, as a stochastic, or random, process," says Patrick Geddes of the Aperio Group, a Sausalito, Calif., money manager that specializes in index strategies.
It's random because, as Bernstein notes, prices move largely on surprises. Until July at least, I was pretty good at accepting that I couldn't control my returns.
What's changed is that at times I have the feeling that somebody else is messing with returns.
Since the 2008 crisis, politics and markets have strongly overlapped. I sold because I could imagine Congress blowing up my portfolio. (And I was angry -- is "rage trading" a thing?) Others have piled into gold because they tell themselves a story about Ben Bernanke "monetizing the debt."
Markets aren't any more predictable than they've ever been. But like a lot of amateur investors, I feel more confident in my views about the direction of this country than I do about whether, say, corporate earnings will beat consensus estimates. So my urge to predict -- and turn those predictions into market bets -- is cranked up to 11.
The burden of responsibility: According to Meir Statman, a professor of finance at Santa Clara University who studies the psychology of investing, I got myself into a bind the moment I started asking myself whether I should sell.
"If you just say, 'Hey, what can I do, I'm a cork bobbing on the sea,' you don't take pride when the market goes up, and you don't feel regret when it goes down," he says.
I used to be that happy cork. Then the more I thought about what could happen if Congress deadlocked, the more I could imagine how stupid I'd feel if I didn't act.
"If you've done a lot of thinking, you now have responsibility," says Statman. "Whichever way you go you cannot discharge that responsibility."
And if you make a big shift like I did -- going from over 60% in stocks to zero -- the weight of the responsibility gets even heavier.
Bernstein warns me that the magnitude of my trade has made good decision-making tougher from here. "In poker, the guy who usually wins is the guy betting the smallest percentage of his paycheck," he says. "There would have been nothing wrong if you had lightened up on stocks. If you were right, you would have gotten in again; if you were wrong, you would have just said, 'Yeah, I won't do that again.' "
Instead, I'm wrestling with a decision that seems to have existential stakes. If I get back into the market and it goes down, my mental reference point will be the 100%-safe cash position I could have had.
Following a herd of one: In a complex world, we use all kinds of simple rules to guide our behavior, and one of them is to remain consistent with what we've done before. The psychologist Dan Ariely has called this "self-herding."
Back when I was a buy-and-hold investor, I liked to think I was able to do that because I was a detached and analytical guy when it came to my money. But maybe I was that way because I hadn't traded yet.
When the 2008 crash hit, I resisted the urge to cut my losses because I had a strong self-image as a buy-and-holder.
Now that I've traded, I've lost that sense of myself as someone who can tolerate holding volatile assets. I'd like to get back there, but it may take some repeating of the new mantra Statman inspired: "Cork on the sea, cork on the sea."
Is owning stocks always rational?
Not long after I made my trade, I had drinks with a couple of old friends who work on Wall Street. I told them what I did, and one of them looked at me and said, "Sounds like you were overallocated." Which is a finance nerd's way of saying that I had more money at risk than I could tolerate. (My friends are in gold these days. They picked up the tab.)
The conventional wisdom is that for investors with a long lead time like me, keeping the majority of your retirement assets in equities is a safe bet. That assumption has been challenged, and I've even written about those arguments, but I've stuck to the standard advice to link my equity exposure to my age.
Now that I'm starting fresh, however, I'm asking myself: Is going back into the market as before the rational response?
Stocks have a lot going for them. Over the very long run, they've delivered an average return of about 10% a year, vs. 5% for bonds. That makes sense: Bonds provide an income payment every year, your principal back at maturity, and legal claims on the issuer if the first two things don't happen; owning part of a company is a bet that can go to zero.
Even if you diversify away company-specific risk, you can quickly lose half your money on equities. If markets are at all rational, stocks should be cheap enough to deliver a better return over time.
Here's the thing: With the exception of a few brief moments like the immediate aftermath of 2008, stocks have never been very cheap for my generation.
Whether measured by the earnings you get per share of stock or the dividend yield, stocks aren't a bargain now, despite the dips. It seems prudent to figure you'll get less than that historical 10% if you buy today -- though you'll likely still beat paltry bond yields.
The notion that stocks are priced to deliver lower-than-average returns -- that you can in effect predict the market -- may seem to contradict everything I've said about returns being random and unpredictable.
The truth is that while most economists assume that stock movements are largely random, there's plenty of debate about how far that randomness goes.
What should an individual investor make of that? Assume stocks are too unpredictable for you to be a profitable trader, but lower your expectations for how much you'll earn from buy-and-hold too.
You should also keep in mind that the risk of owning stocks remains real. Most investors in midcareer -- and many in retirement -- take comfort in the fact that over long stretches like 15, 20, or 30 years, stock investors have never lost money.
Boston U.'s Bodie has argued that the safety of long-run averages is a statistical illusion. As years pass, the chances of stock returns falling short of a risk-free investment get slimmer, but the potential size of your losses also gets bigger. You might be part of an unlucky generation that sees a long string of losing years.
The asset class called "you"
Does this justify my huge swing to "safe" assets? Not exactly.
First, cash and most bonds are very vulnerable to inflation, so their long-run real returns are risky too. Bodie recommends figuring out what you can't lose and investing that in Treasury Inflation Protected Securities, or TIPS, to get the most reliable real return.
Second, I ought to have considered my "human capital," which is, in a nutshell, my paycheck.
"Should a young person put a lot of money in stocks? I will say yes," says Lubos Pastor, a professor of finance at the University of Chicago. (He's also a skeptic of the idea that stocks get safer in the long run, but for different reasons than Bodie.) "For a typical young person," says Pastor, "most of their wealth is in their human capital, which generally produces a pretty steady stream of income, sort of like a bond."
According to Morningstar Investment Management, your wealth is mostly human capital until about age 55. Intuitively, the more "bonds" you have, the more you can handle the risk of stocks. That argues for bravery at my age.
Thinking of your portfolio as partly human capital, though, can also make it harder to follow the classic Buffett advice to buy when others are terrified. That's one thing if you have a truly reliable income -- like a tenured professor or a heart surgeon. Or if you're loaded like Buffett.
What if you're a public school teacher in New Jersey? Or a middle manager at a tech firm? Or, for that matter, a guy who makes his living in print media? In a time of tighter public payrolls and wobbly corporate career ladders, many of us have seen our human capital get riskier. Pulling back on market risk is a way to stay in balance.
So what now?
Running through a number of online calculators, I learned that if I save aggressively (about 20% of my income, including employer contributions) and stay in low-risk assets, I'll be okay but short of what I'd like to have. How much am I willing to put at risk for a chance at more?
My gut answer, as I learned vividly this summer, is "not much." My spouse's answer is "a little more, please" -- she feels the sting of missed opportunity more than I do. Our provisional solution is that we're going to move a large part of the lump sum I felt so desperate to protect into TIPS, even though with current yields the bonds could go down in the short term, and shift another chunk into the market each quarter. A larger portion of my future contributions will also go into stocks, but at least for now, not 60%.
This approach isn't financially optimal: If I think I should have more in stocks, the numbers say, I should go ahead and do it rather than ease in. But I'd like to minimize the regret I'd feel if the day after I moved tens of thousands into stocks the market came crashing down.
Tetlock points out that there's a well-known bias toward feeling worse about bad things that happen because of what we do (buying stocks, say) than those that happen because we stand pat. Going slow is a way of accepting and managing that.
I once told a financial planner what I earned, and she said, "You'll eat what you kill."
My wealth isn't going to come primarily from my skills as an investor, but from what I earn going to work every day. Retirement planning, for me, is largely a question of holding back some of the those earnings for the future. For those of us with little margin for error, the high equity allocations suggested by the conventional wisdom can be difficult to stick with. And the alternative -- keeping the money safe -- requires far more saving than most Americans are accustomed to.
What I've learned is that like many, I'm a bit overmatched by our 401(k)-based retirement system, which is the product of a more optimistic era.
In the '80s and '90s bull market, says Alicia Munnell of the Center for Retirement Research, "we got lulled into thinking retirement was cheap." In fact, our system requires not just a lot of saving but also a fair amount of risk taking, not to mention emotional energy. Couldn't we come up with something better, or less exhausting?
|What we want Apple to unveil at WWDC|
|Millennials squeezed out of buying a home|
|7 traits the rich have in common|
|Big Data knows you're sick, tired and depressed|
|Your car is a giant computer - and it can be hacked|
Carlos Rodriguez is trying to rid himself of $15,000 in credit card debt, while paying his mortgage and saving for his son's college education.
Susan Carson and Laura DeLallo make $225,000 and have half a million in retirement savings, but their sprawling portfolios is proving hard to manage.
|Overnight Avg Rate||Latest||Change||Last Week|
|30 yr fixed||3.78%||3.79%|
|15 yr fixed||2.98%||2.93%|
|30 yr refi||3.85%||3.85%|
|15 yr refi||3.05%||3.00%|
Today's featured rates: