After the run-up in the market, there are no longer a lot of bargains.
I also think a recession is coming in the next couple of years, so I don’t want to take on unnecessary risk and would like to gradually unwind. I want to have plenty of cash to take advantage of the next downturn.
Additionally, looking at some of the mistakes in my portfolio, I noticed that they all happened when I bought subpar stocks just to stay 100% fully invested. Looking back on it, I would have been better off if I only purchased the bargains I felt were compelling, as I did with the stocks purchased in December 2018. I would have been better off if I held more cash and only bought when I had more conviction.
Thinking about all of this, I turned to the writings of Seth Klarman for advice. I think he nailed it with these quotes about this topic:
“Our willingness to hold cash at times when great opportunities are scarce allows us to take advantage of opportunity amidst the turmoil that could handcuff a competitor who is always fully invested.”
“It wouldn’t be overstating the case to say that investors face a crisis of low returns: less than they want or expect, and less than many of them need. Investors must choose between two alternatives. One is to hold stocks and bonds at the historically high prices that prevail in today’s markets, locking in what would traditionally have been sub-par returns. If prices never drop, causing returns to revert to more normal levels, this will have been the right decision. However, if prices decline, raising prospective returns on securities, investors will experience potentially substantial mark to market losses, thereby faring considerably worse than if they had been more patient.”
So, I moved $1,992.16 into short-term CD’s that mature in December with a 2%+ yield to maturity. The mid-December maturity coincides with my standard portfolio rebalance. Hopefully, at that point, more bargains will be available.
I considered moving towards a long-term bond ETF, but that is an outright speculative bet that a recession will happen. I think a recession is a likely outcome in the next 1-2 years, but I do not think I should make an outright speculative bet on that outcome.
For now, I will stick to the traditional value investing strategy. When I can’t find a new bargain, I will hold cash and cash instruments like CD’s and short term bonds. I will resist the impulse to stay fully invested at all times.
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