Millionaire Teacher Sells $50,000 of bonds
OK, I’ll admit it. That might not be the most striking headline in the world.
But I’ve decided to sell some of my bonds to add more money to my stock indexes.
I typically do this to rebalance my account.
I’m not smart enough to know where the stock markets are headed over the short term, and I don’t really care. But when my portfolio’s alignment drifts from my desired asset allocation (roughly 40% bonds, 60% stocks) then I either do one of two things:
1. I add to the lagging index (in this case, the stock index)
2. I sell some of my bonds and buy the lagging stock indexes with the proceeds.
I don’t earn the kind of salary that will allow me to buy enough stock indexes over the next few months to bring my portfolio back to alignment, so I’m going to sell some of my bond index and buy stock indexes with the proceeds.
By no means is this a “market call”. It will still leave me with a percentage of bonds that will be very close to my age (I’m 41) and with luck, the markets will fall a lot further.
What will I do then, if the markets fall further?
Rinse and repeat.
- I did the same thing after the World Trade Centre collapse on 9/11/2001.
- I did the same thing during the beginning of the 2003 Iraq war.
- I did the same thing during the financial crisis of 2008/2009.
- And I did the same thing in June, 2010, when the U.S. and International stock markets were roughly 12 percent lower than they are right now.
These weren’t “market calls”. Yes, the stock markets increased dramatically, in short periods of time, after those rebalancing sessions. But that wasn’t what I wanted.
I’m a relatively young man. If I’m going to be purchasing something for many years (whether it’s gasoline at the pump, apples at the supermarket, or insurance for my home) why would I want to pay higher prices for those items? Today, I’m a collector. Perhaps in 15 or 20 years (when I’m selling my collection) I should hope for the prices of the collected items to rise. But why would I want to pay higher prices, as a collector, while I’m still collecting those goods?
Think of yourself as a stock market collector – if that’s what you are.
And learn to rewire your thinking:
- Cheap prices for the things you’re collecting = A Good Thing
- Rising prices for the things you’re collecting = A Bad Thing
Although stocks and bonds don’t always move inversely to each other, they usually do. For example, when people are selling stocks, they often put money into mattresses and bonds, putting their mattresses at a slightly higher elevation above the bed, and pushing bond prices higher as well.
Check out the recent stock market drop below, compared to my short term Canadian government bond index (XSB).
You can see that the bonds have risen in price as the stocks have fallen. The green line represents the total world stock market index (VT) and the blue line represents my Canadian government bond index. In the past three months, the world’s stock market index has dropped 13% and the Canadian government bond index has risen 3%.
Selling $50,000 of government bonds and buying stocks with the proceeds will still leave me with a bond allocation that’s very close to my age.
It’s a much smaller rebalancing sum than the money I shifted in 2008/2009 and smaller than the amount I rebalanced in June, 2010.
The markets haven’t dropped much, so a large rebalancing act isn’t really warranted right now.
But if I’m really lucky, the markets will fall further.
And I’ll rinse and repeat: allowing me to pay cheap prices for the coveted pieces of stocks that I’ll be adding to my collection.
To read more about my investment philosophy you can order my book – Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School.