How We Doin' Mini-Crash Edition

October 18, 2014


As it turns out, the market does not in fact go up forever. 

Although this latest slide, which started about a month ago in mid-September, isn’t that big of a deal in percentage terms for the U.S. market, both the speed of the drop as well as bigger drops in hot growth stocks are scaring investors lulled into a false sense of security by a market with few down interruptions in recent years. Add in an Ebola scare, and you have a recipe for a mild investor panic. Even this week’s new iPad launch can’t shake the funk! 

I’m sort of glad. Not for the Ebola part (that’s a super bummer). 

But I’m glad for a couple of reasons:

1. We were somewhere in a 1998-1999 market that was getting a little too hopped up about growth stocks and headed to dangerous levels without some interruption. 

2. This is purely selfish, but our performance compared to the market is better, the rougher the market gets. If the market just kept going up forever, you wouldn’t need a strategy that moves into out-of-favor fund categories and cuts back on stocks. In fact, the popular areas we try to avoid usually do best when the market’s going up and up, leaving us in the financial dust.

So how are we doin ’ against the market now? The S&P 500 fell 7.4% (with dividends) from the close on 9/18 until 10/15. Our Conservative portfolio fell 0.87%, our Aggressive portfolio 1.73%. Despite  this recent downturn, the market’s still up 2.26% (with dividends) in the Vanguard 500 Index fund (VFINX) in 2014. That’s how strong a year it’s been. 

We, however, are now ahead of the S&P 500 for the year, with our Aggressive portfolio up 4.58% and our Conservative up 5.93% YTD. It’s a little early to brag, as we’ve been lagging this market nearly all the way up. But these down moves, like all the down moves since we launched in early 2002 (itself a down year) are a big reason we’re so far ahead of the S&P 500 since 2002. 

Although we’ve seen some of our funds fall harder than the market during this period, the upside from long-term investment-grade bonds like Vanguard Long-Term Bond Index ETF (BLV) (up over 5% during this slide), as well as shorting oil (up over 20%), has offset much of the stock market losses. Vanguard Extended Duration Treasury (EDV), which just owns the very longest duration government bonds, was up 12.4% as rates plunged with stocks. In strange news, Wasatch Frontier Emerging Small Country (WAFMX), which is in the riskiest emerging markets, including Africa, was down just 3%. 

By itself, falling 50% as much as the market when you only go up 50% as much as the market isn’t really impressive – although most high-fee, past performance gazers do far worse. Any good low-fee balanced index fund should achieve this (and perhaps  do even better, thanks to rebalancing). Our goal is to have a little more upside than proportional downside over time. Of course, this is riskier (and more expensive, more tax-inefficient, and more work) than going straight balanced index fund.

There will be changes to make along the way here. If this is not near the bottom in stocks, the “reason” (besides expensive stocks) will likely be a slowdown in growth, particularly in Internet ad revenue, not Ebola or the Federal Reserve leaving the party.