Maybe I'm Not a Lazy Investor

If you don't know where you are going, you will wind up somewhere else. - Yogi Berra

Keeping in mind that this a family friendly conversation, I ask the following - is there such a thing as knowing too much information?  I'm searching for an answer to this question with regard to finance and economics, and how these subjects relate to and impact my retirement nest egg.

A Little Background

I graduated college in the late 90s to a job with an S&P 500 software firm.  Among my benefits was a 401k retirement plan with a generous company match of 50 cents on the dollar up to ten percent of my salary.  Knowing a good thing when I saw it, I immediately enrolled into the 401k program for ten percent of my salary.  After reading a few investment articles and talking to family and friends, I selected 4-5 stock mutual funds to diversify my fledgling nest egg.  My primary screen was fund performance and low cost.

Over the initial years, I have to admit a gratifying satisfaction watching my account balance rise with the stock market.  I took up finance and economics as a minor hobby reading the occasional magazine article and watching CNBC.  As with much of the nation, I was enamored with the idea of striking it rich in technology or Internet stocks.

However this joy came to an end that I never saw coming.  In March 2000, people decided that companies should earn a profit and not simply count how many eyeballs look at them daily.  Over the next several months, the stock market crashed and so did my 401k.

During this time, I did what I was supposed to do.  I kept on buying, which dollar-cost averaged my nest egg into cheaper shares.  Still, that didn't take the pain away.  I decided that I needed to learn how to look for warning signs of future market crashes, as well as learn from my mistakes - such as not having diversified into a bond fund those initial years, which would have significantly cushioned the blow.

Enter the Lazy Investor

Ironically during this time of learning and introspection, I recalled reading about the Coffeehouse Portfolio and lazy portfolio investing a year or so prior.  I remembered thinking that this was a really good idea that I should follow.

The basic premise behind lazy investing is that almost all actively managed mutual funds return less on an annual basis than the index used to measure their performance.  Thus if you build a diversified portfolio of low-cost stock and bond index mutual funds, you stand a very good chance of earning a higher return than you would otherwise. Why is it called lazy investing?  Primarily because the only action required is an annual rebalancing of your portfolio to ensure that it stays diversified.  Total time required to rebalance is less than 15 minutes for the entire year.  (Read the How To Build a Lazy Portfolio here)

This information all made perfect sense to me.  The only hiccup to implementing this in my 401k plan was the lack of low cost index mutual funds.  So I did my best by picking the lowest cost funds that gave me exposure to the large company US stocks, small company US stocks, international stocks, and bonds.  As the market had now experienced it's big crash, I saw no reason not to aggressively invest.

Fast forward to October 2007

October 2007 was a notable month as I decided to move on from the same software company to the position of stay-at-home dad.  It was also notable as I couldn't get my retirement money out of the 401k plan and into a rollover IRA at Vanguard fast enough.  While you might think I was in a hurry because Vanguard invented the low cost index mutual fund, you would be wrong.

Since the Nasdaq Crash of 2000, I had become a voracious reader of economic and financial subjects.  Here's a short list of items I was watching:

• Bank stocks
• Mortgage originators
• Mortgage insurers
• Non-financial companies with significant financial operations
• Credit card issuers 
• European banks (yes, I read about how EU banks were worse off than US banks back then)
• Climbing mortgage delinquency rates

Too much information?  This time I saw the financial storm on the horizon known as the US housing crisis, and I was determined to save my hard earned retirement nest egg.

However this was a crossroad for me as one of the principles of lazy investing is Never Sell/Market Time. Yet I knew that bank stocks, which made up a large percentage of the overall S&P 500 in 2007, would be whacked hard as the true extent of bad mortgages came to light.  As I would no longer be contributing to my retirement plan, I decided that saving principal trumped following principle.  Besides, I could always buy back, right?

And now it's 2012

As one of my favorite investor websites would say, this is not a victory lap nor am I looking for a high five. I share my experience to illustrate the difficulty of the other side of market timing that true lazy investors eliminate, which is when do I buy stock mutual funds again?

To this day, my retirement nest egg still resides in bonds, inflation protected bonds, and money market funds.  It would have been nice to re-buy at the market bottom, but I was afraid as some blogs I follow suggested that the S&P 500 could go as low as 400 (quick math: that's 40% lower than the actual March 2009 low).

Image from dshort.com

Certainly it's reasonable question to ask why not build a lazy portfolio now as I would be buying 14% lower than the 2007 high?  Again, too much information gets in my way.  Here is another short list of items I am watching gives you a glimpse on why I have not bought:

• European Central Bank (ECB) - is desperately trying to hold the EU together by all means, some of which may not be legal per its charter, but few are pressing them on these details.  The Long Term Refinancing Operation (LTRO) could be a game changer as it has released close to €500 billion in January to banks in exchange for any collateral.  At the end of February, it may accept up to €1.5 Trillion.  This could be a good thing short term, but eventually debt must either be repaid, restructured, or defaulted upon.
• Greece - will default. Honestly I don't know how anyone can classify a 50-70% loss on bonds as anything but a default.  However, Greece is a known problem.  Default is probably already priced in the market and may even be welcomed.  What I'm watching here is how any last minute deal might apply to other EU countries in trouble.
• Portugal, Spain, Italy, and Ireland - need help from other EU countries. Here I'm watching the bond rates, which are coming down from lofty highs since the start of the ECB's LTRO. However with hundreds of billions of euros of debt to refinance in 2012 alone, the present calm in European bond markets can be shattered over night.
  France - an upcoming election projects President Sarkozy to lose, which will inject a new risk as the next President may not follow the same policies.
• China - Europe is China's largest export market.  If the EU slows its imports, China's economy faces a deep recession.  Additionally China is trying to keep a property bubble from exploding.  A slowdown in China means a slowdown of commodity producers, which would impact Canada and Australia in particular.
• Japan - has borrowed enormous sums of money to try to spend it's way to a growing economy for over 20 years with no success.  It's debt load is now high enough that if the interest rates it pays for debt rises to 3%, it will spend its entire annual budget on debt repayment.  No one knows when this will matter, but my favorite quote is Japan is a bug in search of a windshield.
• United States - as a country, I'm watching for progress in cutting the budget deficit and wrangling entitlement programs to a fiscally manageable state.  Any level-headed approach to accomplishing this would be welcome.  Individual states and municipal debt also bear scrutiny as some states and cities have borrowed beyond their means and have pension liabilities to worry about.  

Whoa - maybe everyone should sell??? No even though this isn't the entire list of what I'm watching, I don't know where the market is going any better than one of those monkeys... err wall street analysts.  I have my own hunches, but overall most of those have proven false since 2007.

Too much information?

Parting Thoughts

I'm finding it's not easy writing a concise article for the masses that hopefully keeps your attention, educates you, plus leaves you feeling it was worth your time to read it.  This article could have easily included what considerations I make before investing, whether I think there is bond market bubble, or an example of treating investment risk like a poker hand.  Alas, these topics will be written up in future articles.

On that note, I foresee this blog's direction going towards daily content Monday through Friday where I will comment on a random topic or one piece of the daily financial/economic news.  On the weekend, I envision delving into a single, more detailed subject.  I hope to use this blog as a vehicle to educate by passing on what I have learned while at the same time learning from those who read it. Please drop me a note in the comments section to ask a question or let me know what you think.

Coincidentally while reconciling my desire to be a lazy investor with my complete apprehension of building a lazy portfolio with my nest egg, one novel idea came to me... maybe I'm not a lazy investor.

One day, I'll be back... I'll let you know when.
BOz