Stocks Are Collapsing, and I Am Pumped

The stock market is correcting, and I’m actually upbeat about it. Market volatility creates buying opportunities.

Stocks are dropping and bond prices are rallying, as nervous investors rush to U.S. Treasuries. All this will lead me to sell high and buy low in our retirement accounts. I’ll watch the markets, and once they hit a trading range, I will sell bonds and buy stocks. Finance folks call that “rebalancing.”

Rebalancing after the 2008 stock market collapse led to a doubling in value in a few years in our kids’ college savings accounts. Once the market free fall stopped, we decided to allocate some savings into 529 plans for our children. We didn’t know it at the time, but we invested the money just a week after the equity markets bottomed out and then proceeded to rally back. Total luck.

I’ve written previously here about how I follow an investment strategy outlined in a book written by the Yale endowment manager, David Swensen. He argues that non-institutional investors should stick to low-fee index funds and follow an asset allocation strategy. He recommends rebalancing periodically. In fact, the Yale endowment rebalances every day.

Studies show that asset allocation accounts for 85% to 100% of your public-market returns. So, it isn’t about whether you should buy HP stock over IBM. It instead is about how much you put into stocks vs. bonds. And, rebalancing episodically to maintain that allocation forces you to buy low and sell high.

I follow an allocation of 70% stocks and 30% bonds with both U.S. and non-U.S. components in each, designed to match the global indices’ mix. Here are the allocations:

Equities, 70% total
U.S. Total Stock Market Index: 50%
Emerging Markets: 4%
Developed Markets Index (this is non-U.S. and excl. emerging markets): 16%

Bonds, 30% total
U.S. Total Bond Market Index, 24%
International Bond Index, 6%

I find Swensen’s strategy to be awesome: it is simple, low-cost and effective. With so much going on, I don’t have a lot of time. His strategy lets me focus on other things in my life.

Over time, I’ve learned that my decision-making capacity is limited. And, I’d rather focus my energies on those areas in my life that matter most: my family and my role as an enabler of entrepreneurship.

I used to think that VC was about investing. I’ve since come to realize that it is that, but something else: being a fiduciary. Entrepreneurs and investors trust us to do the right thing. They’re asking us to show fidelis.

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