We are over 9 years into a great bull market. If this trend continues this could be the longest bull market on record. And while that seems amazing that does mean that the inevitable, a market correction, has to be just around the corner. This trend can’t last forever. We have already seen some volatility in 2018 but the question is will this continue and turn into a market correction of 20% or will it become something even worse like the Great Recession that was the start of this bull market in the first place or the tech bubble that burst in the early 2000s? This is part of the reason that Mr. SFF and I have been reevaluating our portfolio lately. If our investments investments lost 50% at this point we would not be able to recover in time to reach our FIRE goal in 3 years. If we lost 20% we might still be able to make it happen if we made some adjustments.
So how do we hedge against what I see as the inevitable? We reallocate our investments. Back in March I started to make some changes to our accounts to make them more conservative. This was sort of the first step in the right direction. Recently Mr. SFF scheduled a phone consult with one of the advisors over at Personal Capital. I have been using the great free services at Personal Capital for a few years to evaluate allocations and also use their retirement calculator but the way they make money though is by managing money. Mr. SFF had a phone meeting on his own discussing the basics of our goals and then we had a follow up phone meeting with the three of us to review his plan. He went over some of the basics and then got into some more detailed analysis. He pointed out some things that we already knew and some others that I had learned about in the past but had’t considered in our portfolio.
One of the things he pointed out was how heavily weighted our portfolio was in technology, and in particular, Apple. We bought Apple many years ago and it has grown significantly. We have been talking about selling some for years but never got around to it. At this point this one individual stock is almost 7% of our total portfolio, and this doesn’t even take into consideration the ETFs the we hold that also invest in Apple such as VTI, which is our largest holding.
Why does this even matter? If you look at the last two recessions it is more obvious. Both of these recessions hit the whole market but one sector of the market was hit particularly hard. Technology companies were hit big time in the 2000 recession and financials were hit big in 2008, both of these sectors experiencing a 80% drop. For this reason it is never good to have too much of your investments in one sector.
And if you look at the breakdown of our investments we clearly had too much in technology. I have known this for a while but hadn’t done anything about it because I know we are going to be hit with capital gains. This meeting turned out to me the catalyst for me to start to make changes.
We don’t want to sell a whole lot as we have so much capital gains at this point in Apple so we decided to start selling off some every year. Also back in March I stopped the dividend reinvestment with Apple so we aren’t gaining more shares. We ended up selling $8,000 which interestingly was around the amount of our total cost basis. We will continue to sell $5,000-$10,000 per year over the next couple of years until we hit FIRE. The proceeds from this sale were invested in a bond fund as this investment was in our taxable account and will be one of the first accounts we access once we hit FIRE.
In addition to the sale of the Apple Mr. SFF finally rolled over an old 401(k) that was also held at Fidelity into his Traditional IRA. The easiest way to do this was to sell the investments so there was probably $30,000 of IBM sold as well. These two sales should help to reduce our exposure to the technology side of things at least slightly. We still need to sell some more but at least it is a step in the right direction.
VTI can be a great holding as it tracks the S&P 500 but it is important to remember that you need to diversify beyond this one holding as well. The ETF isn’t necessary evenly allocated and can give you too much exposure to a certain sector and also gives your accounts too much weight in Large Cap funds. Although I do have some Mid Cap and International holdings in our accounts we really did have too much in VTI, and therefore our accounts were very Large Cap oriented. Now this has been great while the market is booming but what about when we have that market correction that is inevitable comes around? I want to make sure we are more diversified among asset classes and sectors.
That brings me to the next change we made in our investments. I sold a bunch of VTI in Mr. SFF’s traditional IRA and reallocated some of this to Small Cap funds as well as International funds. The below charts show the changes from some Large Cap and into some Small and Mid Cap areas of the market. I do find it interesting that it felt like this was a major overhaul of our investments yet these percentages really only moved a few points. I will likely do some more reallocation again before the end of the year but I least I am starting to make changes.
The next thing we discussed was adding more alternatives to our investments. What are alternatives? Alternative investments are areas of the market that in general don’t move directly in line with the rest of the market. In other words, they have a low correlation to the S&P 500. They include things like consumables, real estate, utilities and precious metals. So why are these important? Because if the general market goes down people still need consumables and utilities. These parts of the market might not go down as much as the broad market. Our current allocation had a small amount in alternatives but the recommendation to help reduce volatility in our portfolio is to have around 10% in alternatives. I didn’t invest quite this much as recommended but I bought around 3% spread across 3 very different alternative ETFs with the balance of the VTI that I sold in Mr. SFFs IRA.
Obviously we didn’t move any money over to Personal Capital as our advisor was hoping but we did listen to what he had to say. Overall I sold just over 10% of our total investment portfolio to make all of these changes. I felt like this was a great place to start but I should probably revisit this again to make sure our investments are still trending towards a more balanced allocation. It can be hard to remember that investing isn’t always about making the biggest gains but it is also about protecting what you already have by making sure you have a well balanced portfolio. Is ours perfect? No, but hopefully these changes will help for when the market does take a tumble.