This year's blog post on the same series comes out later than usual, as I wanted to see how the rest of 2020 would pan out for my passive portfolios. In fact, my plain vanilla passive portfolio has just past the 7-year mark while my spicy passive portfolio is 5.5 years old. You can read more about them in The Passive Portfolio and The Anti-Fragile Portfolios.
In Mar this year, the unrealised profits of my 2 passive portfolios dropped by nearly half. Prior to Mar, my plain vanilla portfolio had an unrealised profit of 57.7% since inception while my spicy portfolio had unrealised profit of 54.8%. Almost half of that profit accumulated painstakingly over 5-6 years vapourised in just 1 month! Is that it, the crash that I had been waiting for in the past 5-6 years? Would stock prices revisit the lows during the Global Financial Crisis in 2007-2009? Looking back at the lost profits in Mar, I wondered if I should have rebalanced and locked in some of the profits in Feb while the Dow Jones Industrial Average reached a new high (yet again, for the past 6 years).
No, stocks did not go into an unrelenting free fall. 5 months later, by Aug, the value of the 2 passive portfolios recovered to their highs in Feb. This time round, I carefully considered whether I should rebalance out of the equity funds into fixed income funds. But the rules that I set for rebalancing at the start of the portfolios had not been reached. The rules call for rebalancing whenever allocation to the equity portion reaches either 62% or 78% (i.e. +/-8% margin from the initial allocation of 70% to equities and 30% to fixed income). Equity allocation for the plain vanilla portfolio reached only 73% while that for the spicy portfolio reached only 77%, just a tad shy of the rebalancing trigger. In the end, I decided to stick to my original rules and not rebalance.
The portfolios dipped slightly in Oct, but recovered after the US presidential elections in early Nov. To-date, the 2 portfolios have reached new highs. Unrealised profit on the plain vanilla portfolio is 65.2%, while that of the spicy portfolio is 62.6%. I am glad that I had not tinkered with my rebalancing rules when the portfolios recovered to their Feb highs in Aug. To-date, neither portfolio has reached the rebalancing threshold, with equity allocation for the plain vanilla portfolio at 74% and that for the spicy portfolio at 77%.
COVID-19 is a major public health crisis, with significant economic impact on many sectors such as aviation, hospitality, tourism, retail, etc. Stock markets sold off sharply in Mar, but thanks to the massive fiscal and monetary responses from governments around the world, stock markets have recovered from their steep declines in Mar to post new highs. We are still not out of the woods yet, as vaccination from COVID-19 would take many months to complete, and there are reports of mutation of the COVID-19 virus. Nevertheless, this episode shows that we should not stop investing because we are worried of market crashes, so long as there are good defence mechanisms in the portfolios to manage them.