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The overwhelming majority of my portfolio is in T. Rowe Price funds.
Since I use a simple but effective method to pick good funds, I’ve been able to outperform the S&P 500 over the past 18 years by about 1.1% a year. That’s nothing to sneeze at since it builds up significantly over the long haul.
However, it completely pales in comparison to my 2020 results.
My Portfolio’s Spectacular 2020
I doubt many would disagree that the best adjectives to describe 2020 would include deadly, horrific, catastrophic, miserable, depressing, and more in that vain.
My portfolio, however, had a spectacular 2020, returning nearly 40%, far above the S&P 500’s 18.4%.
This is due to two factors. First, my large bet on the tech sector – I had nearly 40% allocated to that sector, which returned 43.5% in 2020.
Second and more important, was that my method of picking mutual funds proved itself yet again. My top position returned 76% (!). My 7 top-performing positions, totaling 75% of my portfolio, all returned above 30%.
My Investment Strategy over the Years
Until recently, my investment strategy was as simple as 1-2-3.
- Invest whenever I had money and sell only when I needed money
- Invest close to 100% in stocks
- Pick well-managed funds (see the link above for more details)
My plan was to continue in this vain until 4-5 years before reaching financial independence, at which point I’d switch to a far more defensive posture.
Then Things Changed…
Three things happened that made me reassess and change course.
- After the sharp bear market of early 2020, the market roared back, ending the year up over 18%
- My portfolio more than doubled that return, and continued to outperform in January 2021
- Although not yet at my planned time to shift to a conservative portfolio, I’m just a few years away
The S&P 500’s 18.4% return comes on top of a bull run for the ages, yet my portfolio’s results trounced that already high return. This doesn’t seem sustainable.
What I Did
After some consideration, I moved to a more defensive posture despite it being a few years earlier than planned. Here’s what I did.
First, I moved to 25% cash.
Second, I moved from my tech-heavy aggressive/speculative-growth position into one that balances growth with core and value, with a more even split across large-, mid-, and small-cap.
Third, I increased my international stock allocation to 30%.
The Bottom Line
I don’t claim to be an investment guru.
I certainly don’t claim to know how the markets will behave tomorrow, let alone in a month or a year.
However, I’m a firm believer in the old Wall Street saw that says, “Bulls can make money, bears can make money, but pigs get slaughtered.”
In my situation, continuing to bet on hyper-growth tech-heavy investments after such outsized performance in 2020 and early 2021 seemed to be greedy. That’s why I decided to take some profits and diversify across geographic regions, sectors, market caps, and investment styles.
Yes, the market may continue to run up, possibly a lot, and possibly for longer than most people expect. However, given current high market valuations and the growing expectation that the Fed will be unable to continue holding the line for very long against rising interest rates and inflation expectations, I’m reminded of another favorite quote: “The race isn’t always to the swift, nor the battle to the bold; but that’s the way to bet.”
When there is so much more downside than upside to a particular investment posture, it’s time to consider changing it, and sooner will likely be better than later. When you’re less than 10 years from when you want to be able to retire, you don’t have a lot of time to make up severe losses.
This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions. Nothing in the above should be seen as endorsing any particular mutual fund or mutual fund family.
About the Author
My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.