The Importance of Sticking to Your Plan

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Happy New Year chaps - I hope all of you had a wonderful Christmas and NYE.

What an astonishing year 2020 turned out to be - A potential war with Iran, the Trump impeachment trials and subsequent US elections, the killing of George Floyd and ensuing global BLM protests, climate disruptions all over the world with sweeping wildfires and tropical storms, protests in Belarus, Brexit and last but not least the wretched Covid-19 Pandemic.

Who could have predicted the chaos and suffering 2020 would bring?..and yet, we survived - we adapted, we coped…we saw the best and worst of humanity and have made it to 2021. We truly are a resilient species.

This is one of the main reasons I never ever try and time the market and I completely ignore the so called pundits wheeled out on the financial news. If you are a long term investor none of this matters - we buy and hold and adjust our asset allocation according to our risk tolerance.

No matter what your investment philosophy is - index investing, active funds or even a concentrated portfolio of high growth stocks… In my opinion (and experience) consistency and discipline + increasing your savings rate are far more important in building wealth than arguing with strangers on the internet about reducing the TER of your portfolio by 0.001%. This thread on twitter really resonates with me.

As mentioned in a previous post, my strategy in CH is really simple; I invest 15k every quarter via standing order in a simple MSCI World Tracker fund.

As you can see below - I ended the year up 14% with this strategy which is remarkable given where we were back in Feb. This is why sticking to your plan is so important… many of my friends panic sold in March taking a 30%+ hit on their portfolio and are YET to get back in the market because they feel its overvalued. This is the problem with timing the market, when do you get back in?

The table below also highlights the beauty of dollar cost averaging, my March investment luckily coincided with the market bottom and resulted in a 45% return alone.

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Furthermore, reading between the lines in some of the other threads over the past year - It is apparent that this may have been the first crash that many of you have experienced (with skin in the game) - how did you feel you handled it?..any regrets?.. anything you would have done differently?

Cheers!

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Nice topic, thanks! You have a very eloquent way to resume 2020 and, indeed, sticking to the plan paid once more.

I keep reading this and this is the part where having a plan is really important. To me, getting back in is way easier to time than getting out. How do you know, when you get out, that the markets are going to keep dropping? If they don’t, you’ve lost your bet. On the other hand, if you get back in and the markets don’t go up as expected but start falling again, you’ve already cashed in some gains so this is a new bet, “just” assess whether you want to get back out or not.

My position, in short, is never go out of the market if you don’t have a plan to get back in. And if you have one? Well, more power to you. Stick to your plan.

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Tell that to the guy who missed re-entering the market because it recovered so fast and he thought it will drop again. Still waiting for the SP500 to drop below 3000 in order to not realize the loss. He might be waiting for the rest of his life.

Maybe you think this guy isn’t real, but there are probably thousands of them. One example: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=334425&sid=8a8b2d5f36945f589a5b88b58e54fd15

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From what I read, my understanding is that some (most?) people think that timing the market means getting out at the perfect top and in at the perfect bottom. Nobody can do that.

When you go out or in, it’s important to know the exact reasons why you do so and what are the scenarios you’re expecting and could have to deal with. The market can be overvalued and correct it by staying flat for a few years. The people who are out now based only on publicly available information and without special insight will have problem getting back in. They are making a bet based on what they think (or feel) is a fair value for the market and a belief that when the market gets away from that value, it has to get back to it and doing so drives prices below the level at which they are now. They don’t have a plan to get out and, even more, don’t have one to get in so, yes, they can stay out forever.

The market can be overvalued, and it can correct itself, and prices may never ever be as low as they are now, the three can apply without conflicting with each other.

When trying to time the market, basic principles still apply. On average, stocks go up more than they go down. That means that you want to be in more than to be out. In case of doubt, be in. If you are freaking out and don’t know when to get back in, that means two things: you should seriously assess your assets allocation, and whatever part of your portoflio is dedicated to stocks should be invested.

britbanker’s thread is very aptly named: you have to have a plan, and then, stick to it. Acting without a plan or not sticking to your plan and getting left with only beliefs and feelings about where you think stocks should be has nothing to do with the difficulty of timing the market. Don’t invest without a plan. Craft a plan, write down your plan, follow your plan.

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Vanguard investors are smart.
Be like Vanguard investors :wink:

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It was indeed my first crash but personally I think it was an easy one to cope with.
At the time I was so much more worried about other things (e.g. the health of the people I love) that I didn’t pay much attention to the market performance.
A healthy amount of cash in the bank account helped a lot as well for the peace of mind.

As you do, I also invest quarterly so I bought the usual etfs at the end of March without overthinking it…and then 3 months later the markets were back again in good shape.

I think it will be much harder to stay the course in a slowly falling market which would take months (or years) to get to the bottom.

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Hi @britbanker,

good observation - and congrats to sticking to a simple and successful strategy.

For me, it was the first time to have a significant amount of money invested and go through a rollercoaster like this. I actually invested within a few days of the bottom in March. How did I pull this off? Glad that you asked…
A combination of luck (not proud of that) and discipline (of which I’m a little proud).
The (near)-bottom just coincided with my regular re-balancing and buying day. From the experience of a few years, I knew I’d second guess myself. So I set myself pretty specific rules what to do when.
As @s-g stated, it was also a rather short rollercoaster ride, so inertia may have prevented many investors from more significant mistakes.

Bottom line and what I can recommend to others who are quite new to the investing space:

  • Have an Investment Policy Statement (IPS), s. examples at Investopedia and Bogleheads. Sounds always overblown when starting out, but you can (and should) refine it along the way.
  • Document your thoughts, actions and results in a journal. Mine is actually part of an Excel sheet together with re-balancing calculations, the IPS etc… No need to go fancy with a Frida Kahlo Moleskine…
  • Make a dress rehearsal (i. e. test account) before you actually invest, then start out with small amounts early rather than with the big checks.

Cheers,

J.

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First big crisis for me too, at least with significant money in the game. Not sure however that this would be comparable to a real crash. How many would stay the course if we didn’t have a market recovery, and would drop another 20% this first quarter? The fact that this was a curable, outside event also probably helped, given long-term outlook remained intact.

I myself stayed the course, including rebalancing and additionally buying into equity. Felt comparatively easy given that I knew the scenario would come one day and that sticking to the plan was the best option, indifferent to any personal feelings about it.

I find it more difficult in some non-crisis months to keep buying due to the high valuations. I define the minimum investment per month, but choose individually what I buy and at which point during the month. Speculative plays on the side are easy, but that investment part gets tricky. In the end, the months where I gave up and just bought VWRL during the last trading day have added up.

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Did you live under a rock for the last 12 months? This was the fastest crash in the history of stock markets. Just because it recovered faster than expected doesn’t it make it less of a crash. The severe losses you are talking about are extremely rare. So rare in fact that they happen once in a century, 1929 and 2008. The next 50-60% crash might not even happen in our lifetime.

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That might be the difference between many people holding their investments through or selling at -35% and waiting next 5-20 years to get back in!

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Interesting but not sure I get this. I mean I bought some Vanguard ETFs during the crash and I think other too, so someone must have sold at the bottom, or I am reading this wrong?

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Could have been authorized participants/market makers . But anyway I assume they meant either mutual fund investors or brokerage clients.

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Some really good responses so far - thank you for taking the time to reply.

I just want to preface this discussion by saying, I am not trying to downplay or sound callous regarding the pandemic. To be honest I am just trying move on from what has been an extremely difficult year for all of us. I live alone in Zurich, I don’t speak German and I don’t have a support system here yet - I have been working from home since March and I haven’t been able to see my friends or family in almost a year. It has been really challenging dealing with the isolation and I pray that the vaccine rollout helps restore some sense of normality. I’ll be on the first plane back home to the UK to give my parents a hug! I hope all of you and your families have stayed safe during this pandemic.

With that being said - this is an investing forum, and I am really interested in understanding how the financial aspect of this pandemic ie the market crash affected your investing style and any learnings that we can all take going forward.

The main criticism that investors faced over the last decade is that anyone could have made money in this bull market, that none of the younger, newer investors had ever faced a crash… well the crash arrived… did your strategies work? were you able to stick to your plan. Did you panic and have any regrets now?

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That was a heartbreaking but all too familiar read. The strategy of buy and hold has undoubtedly been proven right over so many crashes, but its amazing how human psychology makes this such a difficult thing to do.

In 2007, I was a young lad working in London - I was living way beyond my means on credit cards trying to project this image of a rich banker. I was 100% invested in the market and had just bought an apartment with a mortgage… life was great!

Then the crash happened and it blindsided all of us - suddenly one day my entire team was made redundant, my portfolio was trashed and down 40%. I had no emergency fund or savings and it was only my severance package that helped me keep a roof over my head. The FTSE 100 was at 6700 in June 2007 and it bled continually down to 3500 by March 2009!

That was a very scary and humbling experience - those 2 years were the longest of my life. I rented out my apartment way below the market rate, but just enough to cover the mortgage payments and moved in with my parents for a while to get back on my feet.

In the midst of all this misery, job losses, foreclosures etc a couple of my colleagues that managed to hold on to their jobs made a killing in the market by continually buying over this period and using their cash buffer to make strategic investments right at the bottom. I was so jealous… if only I had been more prudent or had money to invest in the market. I promised myself that I would never be so stupid again and that I would start being more responsible. It was around this time that I discovered passive investing and the FIRE movement and I was hooked.

I managed to get a job again in late 2009 and I moved back into my apartment but kept my renter as a flatmate. I spent all of 2010 saving aggressively for an emergency fund (back then I had 12 months expenses saved up) and then I began to overpay my mortgage like no tomorrow.

In 2018 I finally paid off my mortgage entirely and I have always kept at least a 6 months cash buffer with me at all times.

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Thank you - I think having a plan and sticking with it is very important.

If you are a long term investor with a 20+ year horizon, then you should automate your investments and just forget about them. Some people may get lucky with timing the top and bottom or hitting it big on some penny stocks, but this cannot be achieved consistently over the long run.

For most young investors just starting out, I think their time is better spent investing in themselves and trying to increase their salary (and hence savings rate) than trying to time the market or spend hours debating how can reduce their TER.

At the end of the day it really all comes down to risk management and risk tolerance - there is no shame in panic selling and getting out of the market, we are all learning here and there is no judgement, but if you do get out of the market then you need to decide how and when you will get back in or whether your asset allocation was correct in the first place.

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This is a great point and really highlights the psychological aspect of investing.

Evidence suggests a simple buy and hold strategy over will outperform over the long run, but yet so many investors find this difficult to do when faced with a market crash.

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Great work - well done. Do you think you think this experience will help you stay the course in any future crash?

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I think you make an interesting point, but I tend to disagree.

Back in Feb when the market was crashing double digits daily and circuit breakers were being deployed continually - no one knew what would happen. We all got flashbacks of 2008.

No one could have predicted or foreseen the greatest 50 day rally in the history of the market subsequently, but that doesn’t diminish the nature or scale of this market crash - in my opinion.

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I think we are in danger of moving the goal posts with views like these. We can only deal and react to the situation we find ourselves in.

March 2020 was a significant market crash, much like 2008 and although we recovered much quicker than expected - people still lost jobs, lives were destroyed and fortunes were made and lost.

Those people that continued to invest throughout this downturn have done well and those that pulled out or panicked sadly did not - but again, that is fine… its not a competition and hopefully this experience will help determine your future course of action.

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Hi @britbanker,

in short: I do think so, but with some caveats.

They say “the average car driver thinks he’s better than the average driver”, so I’m careful to make a bold statement on my future behavior. And while I disagree with @TeaCup’s suggestion (March 2020 was indeed a veritable crash), I share his warning of overconfidence.

Things that work in my favor and that may be illustrative for other DIY investors with only a few year’s of experience:

  • I actually went through the crash in 2007-2009 with a stock fund that recovered and two Real Estate funds that had to be forcibly closed as owners rushed to the exits. That was with a (then) significant part of my savings, but I actually watched it in a almost detached way. I learned that stocks do recover - and ditched dubious investment advisors.
    –> Learn with a testing account or tip your toes in carefully.

  • Since 2014, I’m more serious with my finances and investing. So I’d consider my approach more informed and sound - and more crash-proof.
    –> Knowledge and information exchange such as this forum help tremendously to prepare for stormy weather.

  • While I have an aggressive asset allocation on paper (80% stocks), I also have quite the cash cushion (>6 months’ expenses). Financially speaking, my partner and I have also happen to have a “simple setup”: We rent, don’t have any debts, no kids, no car, no money-intense hobbies = Not frugal, but also no lifestyle inflation. We’re also lucky to work in jobs that have been rather Corona-proof, so far.
    –> Once things go south, you suddenly realize how good exactly a nice cash cushion is for a good night’s sleep, as unsexy as it sounds when markets rise. As for my lifestyle and job choice, it’s highly subjective and also a matter of luck, so I’d never recommend mine.

Bottom line:
I think both building your defenses and having a sound framework to invest in helps to weather turbulent times. If in a middle of a crash, you realize you’re not made for this, it’s like going on a helicopter ride and discovering that you suffer from vertigo…
Among the types of investors, I tend towards the “try not to f%@! things up” fraction, not “maximize every last bit of return” one.

Cheers,

J.

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