About 2 years ago, I blogged about setting up a passive portfolio of 70% stocks and 30% bonds and wondered if it could be the worst time to invest. I updated the status of the portfolio a year later in Possibly The Worst Time to Invest – A Year On. In fact, I believe that nothing should stop us from investing and I initiated a second, more spicy passive portfolio last year. You can read more about it in The Anti-Fragile Portfolios. In the 13 months since the last post, the stock market underwent 2 major turbulences, first in Aug last year and second in Jan this year. It seemed to prove that last year was indeed a bad time to invest. Yet, the 2 passive portfolios, which were designed to rebalance themselves whenever the asset allocation exceeds the target allocation by 8%, soundly slept through both turbulences, blissfully ignorant of the upheavals in the financial markets.
This is not to say the portfolios did not suffer any losses. In Jan this year, when stock markets all over the world fell precipitously, the original passive portfolio suffered a loss of 0.7%. The spicy portfolio, true to its name, lost 7.0%. The stock allocation for the original passive portfolio roughly fell from 71.1% to 67.4%. However, the swing was too small to trigger any rebalancing. Currently, stock markets have recovered and so have both portfolios. The original and spicy portfolios currently return 8.5% and 0.6% respectively over their holding periods. After investing for nearly 2.5 years and 0.5 years respectively, the returns are nothing to shout about. However, considering the financial market upheavals in Jan when there were talks of crises in China, European banks, US credit markets, etc., the portfolios have performed admirably. Even my own actively managed portfolio went into a state of panic, as shown in I Don't Know Where The Market Is Heading, But I Should Know Where I Stand.
Moving forward, I am not particularly confident about the stock market and have been increasing the war chest for my active portfolio. However, I am not pulling any money out of the 2 passive portfolios. Their have in-built defence mechanism which was proven during the market crisis in Jan. While I do not hope to see another market crisis that leads to rebalancing of the portfolios, I am confident that these 2 portfolios will do well in the long-term even if a rebalancing is triggered.
In fact, passive investing in index funds is like buying an air ticket to your financial destination. There is no doubt that there will be mid-air turbulence from time to time. When that happens, do you head straight for the emergency exit and parachute to safety? Although you could save yourself from further turbulence if you do that, you will end up in nowhere and could only watch fellow passengers who sat through the entire flight land safely in their financial destinations. There is no way to avoid mid-air turbulence, but you could choose the type of aircraft you sit in and the pilot who will steer the aircraft. Index funds, which invest in some of the largest companies that make up the stock market indices, are among the most sturdy aircraft available. Passive investing strategies, whether it is Dollar Cost Averaging or portfolio rebalancing, are like flying on auto-pilot, which removes most of the errors associated with human pilots. Combined, passive investing in index funds is like flying on Boeing 777 on auto-pilot. No doubt, there will still be mid-air turbulence, but you can sleep soundly knowing that you are in good hands. You just have to tighten your seat belt and have faith that you have chosen the best aircraft and pilot that will bring you to your financial destination safely.
If you think flying on Boeing 777 on auto-pilot is not safe enough, compare that to the alternative of flying on a 2-seater propeller plane with me as the pilot. You will get a lot of excitement on this flight. For example, in Jan this year, you will hear passenger announcements that we are running out of fuel (i.e. war chest) and need to off-load some cargoes (i.e. sell stocks)! Thus, when you compare the alternatives, flying on Boeing 777 on auto-pilot seems the much better choice. You might ask, if this is the better choice, why do I still choose to fly on my own? I am been participating in the stock market for the past 30 years and will not totally switch to passive investing. It is like a driver who has been driving all his life; he will not easily switch to public transport, even though public transport may be more efficient.
How will the stock market and the 2 passive portfolios perform in the next 12 months? Let us wait and see.
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