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Lessons from the COVID crash and recovery

Success is not the result of knowledge, talent, or even skill. These things help, to be sure, but the most important determinant of achievement is step-by-step improvement. It doesn’t matter how many times you fail, as long as you take those lessons and get back to it. It doesn’t matter if you start clueless and awkward as long as you learn and keep trying.

Aspirations of success are daydreams; a dedication to incremental improvement is life work.

Acknowledging failures without dwelling on them is a trick seldom mastered, but it is just as important in personal finance as it is in the rest of life. Humans are not wired to be good investors. The best we can do is side-step our tendencies to make bad decisions by sticking with an evidence-based plan.

But all plans have soft spots. Those weaknesses are often revealed when the markets go haywire. We can ignore them, make excuses for them, or acknowledge them and try to do better next time.

I am not virtue-signaling. To prove it, here are a few things the COVID crash has taught me, in increasing order of face-palm force.

Volatility can turn you into a market junkie

Investments are like a bar of soap – the more they’re handled, the smaller they get.

Fidelity did an internal study of their retail investors’ self-directed accounts between 2003 and 2013 to see which ones did best. Which investors came out on top? The dead ones. Second best were those who forgot about their accounts. That’s right, the best performance was achieved by those who did nothing. It’s a dramatic example of an investment fact that is just as true as it is counter-intuitive: doing less is usually the best course of action.

You’ve read it here before: develop a plan, put it in action, then ignore the volatility. But unless you’re blissfully unaware of your exposure to the stock market, it can be very difficult to put in practice.

These are historic times and most of us have been glued to the news. As we keep up to date with current events, we can’t escape the financial drama that is packaged with the rest of it: the fastest market decline in history, negative oil prices, comparisons to the Great Depression . . .

These are threats, and evolution has wired us to be hyper-sensitive to threatening situations. News channels do battle for our attention by capitalizing on this fact with a never-ending barrage of shocking stimuli. Our lizard brains can’t help but respond emotionally to threats and we are driven to neutralize them.

Although I run a blog, I generally spend little time checking my own investments. I know the behavioral errors frequent checking can trigger and I’d rather be building something in my workshop or doing something with my kids anyway.

But recently I becamse a financial news junkie, sucked into the vortex of events, announcements, and predictions. On the one hand it induced a vague sense of understanding and control, but like any addiction, it always left me feeling like I needed more. I stumbled into the trap laid by the financial-news-entertainment industry and I needed to summon Fidelity’s dead investors to get me out.

But it’s hard to ignore the stock market when part of your investment plan hinges on the very volatility you know you should be ignoring. Which brings me to my biggest mistake: I had been waiting for buying opportunities with about a ten percent cash position.

Don’t over-value cash

Having about ten percent of our savings in cash was part of our plan. It made me feel better over the last decade as the bull market went on and on. We would be able to take advantage of the market crash that always felt right around the corner. To be fair, I’m not sure I could have stomached more exposure to the stock market, but the events of the last two months have taught me a few things.

  1. Holding cash with an intention to buy at lower prices forces you to become a market news junkie. I had to be paying attention to all the volatility – how else could I decide when and what to buy? But the news changed constantly and the market responded in schizophrenic ways, making these decisions surprisingly hard.
  2. Holding cash made me feel worse, not better. I agonized over when to buy: after a 20% drop? 30%? Maybe I should keep waiting for 50%? Should I use up all of my “dry powder”? Half? Two thirds? I thought the cash would be calming during a downturn, but it had the opposite effect.
  3. Holding cash had a negative impact on our wealth. Buying when there’s “blood in the streets” sounds great in theory, but ignores one crucial point: What was that cash doing up until that point? We’ve had a ten percent cash position for years. Even though I invested most of this cash at the end of March when the market was close to its lows (lucky), I’m embarrassed by the thought of how much better off we would have been if we had invested that cash years ago. To be specific, one of the stocks I bought was TD at about $54 – a great discount from its recent highs around $76. But I could have bought it in 2013 around $42 and been collecting dividends all this time. Face palm.

Even knowing all this, I struggle to change my habits. I am still tempted to be overweight in financials, but is my confidence in the sector unfounded? I still struggle to break the habit of checking the day to day performance of certain stocks in our portfolio. And I am still reluctant to invest our remaining cash – just in case the market does what we’re all afraid of and takes another nosedive. My lizard brain is tuned into the threats and hacks away at rationality with endless “What ifs . . . ?”

My hope is that by discussing my struggles, you will be more willing to grapple with yours. If you’re feeling brave, tell us in the comments about one of your own soft spots and what you are trying to learn to do better. This is a safe place – I will filter any nasty or judgmental comments. Incremental improvement is better accomplished by learning from each other.

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