Do You Still Dream?

I realize that I don’t dream anymore. I don’t mean the “being chased by a creepy guy and my legs won’t work” kind of dream. I have more of those than ever. But, ever since the pandemic lockdown started, I don’t daydream about the future anymore. No more dreams about traveling to London, Paris and Tuscany; no plans to show Iceland to my wife and wondering whether we should visit the Faroe Islands while we’re in the neighborhood; and no thoughts of a 275-yard bomb off the tee box on the 18th. Quite frankly, I’m not sure what to dream about now and I really miss it. And that’s a shame because dreaming is the fun, first step toward doing.

Last week I wrote about the economic uncertainty caused by the pandemic and, when in doubt, the best action is to follow one’s strategy – specifically one’s investment strategy. But what is an investment strategy?

First, every strategy begins with a dream. I have friends who want to move to a new city in order to work where they choose to live, rather than live to work. I have friends who want to be in a financial position to choose to work, rather than have to work. I have friends who retired early and want enough income to enjoy their winters on a warm island, spoil their grandchildren and improve their Lexington home so they will enjoy it for decades to come. Those dreams became financial plans which are now supported by investment strategies.

Think of an investment strategy as a flight plan from New York to Los Angeles. The pilot will calculate the estimated flight time, the fuel required to arrive at the destination safely and the precise route to take. Similarly, an investment strategy is developed to meet one’s specific needs and dreams based on current assets and liabilities, time to reach the goal and how much fuel it will take to get there – along with safety features to smooth out the ride.

So, for example, let’s assume an investment strategy called for 50% of the portfolio(all retirement accounts invested as one) in bond mutual funds and 50% of the portfolio invested in stock mutual funds. Within each of those broad categories are different varieties of bonds – government, corporate, high-yield, bank loans, etc. – and different varieties of stocks – U.S., growth companies, value companies, small and large, real estate and international companies.

When our figurative flight was over Kansas City, however, it was buffeted by terrible headwinds in the form of a bear stock market – a drop of 20% or more from the previous high. Can we still reach Los Angeles on schedule?

Here is an example of how we adjust to return to the flight path that is the investment strategy:

• Beginning in 2000, stocks fell 43% during the so-called Tech Wreck and this 50/50 portfolio would have been 70% bonds and 30% stocks by the end of 2002 – much too slow for your trans-continental flight;
  • In this case, we sell bonds and purchase stocks to return to our flight path;
• Back in your 50/50 strategy starting in 2009, stocks returned an average annual return of almost 11% over the next two decades, revving up your mix to about 73.5% stocks and 26.5% bonds by the end of 2019 – all this speed risks flying too high and running out of fuel about Las Vegas;
  • So, once again we sell – this time stocks – to return to our 50/50 investment strategy.

I don’t have a plan to hit that 275-yard drive – that truly is just a dream – but the key to realizing your financial dreams is to focus on what you can control. During this pandemic bad dream we’re all living, we control by following our investment strategy and by monitoring and rebalancing our portfolios regularly.

Steve Byars, CFP®