I had hoped to write about happier topics, such as our vacation over the last couple of weeks or an update on our finances for March. I’ll leave those for next week, as the headlines everywhere are Trump’s tariffs. Please excuse me if this article is a little more rough-around-the-edges as I’m writing and publishing frantically to react to the news.
My playbook goes back to my February 25 article, Is This Why Warren Buffett is Hoarding Cash?. I’ll give a quick summary for those who didn’t read it and are perhaps even lazier than I am to click the link. I realized that the markets were priced for perfection. The Shiller PE, which gauges how expensive the stock market is, was extremely high at 37. (The average since 2000 was about 25. The average has been 17 if you go back 100 years.) There was a lot of uncertainty with government layoffs and… of course, tariffs.
With all that information, I decided that it was time to cash out of some stocks and buy bonds. That’s basically what Warren Buffett was doing. I only did this in my retirement accounts, because I didn’t want to trigger any taxable events. (I’ll get to accounts held in brokerages later.)
This preparation was critical. My 11-year-old hasn’t perfected the time machine yet*, so I’m sorry if you missed this. Don’t fret yet; maybe you are set up to implement my playbook anyway.
Buy the Dips (with Retirement Accounts)
I follow the stock markets every day, but most people probably shouldn’t. It’s events like today, where the news is almost inescapable, that it’s worth giving it a look. These kind of events don’t happen often. I remember them in 2009, 2020, and today. There’s enough going on with the markets that they have the potential to drop a lot. However, no one knows how much. For all we know, Trump could change his mind about tariffs tomorrow, and the markets recover within a week. It doesn’t look that way to me, but he’s done it before. I’m not going to bet my financial future on whether I can read any politician’s mind.
We’re currently on the second day of stocks dropping around 4%. NASDAQ has entered bear territory, down 20% from its highs. In my mind, this is the dip where you start to buy. You have to have money to buy, so this is where it is helpful to have those bonds that I bought 6 weeks ago. I didn’t know if I’d need this quickly, but I’m happy they are there. They have actually gained a bit over the last couple of days. I consider them about as good as cash. Bonds can drop in value, but they are typically less volatile (as we are seeing now), and they pay out some handy cash in the meantime.
I divide up my bonds into slices. I want to be able to buy 8-10 times as the market goes down. It’s not a perfect science, so this is an area that is entirely up to your personal preference. I want to be able to sell bonds and buy stocks whenever the market drops 5%. This allows me to continue buying even if the market has dropped 40-50% as it did in 2009. I’m consistently buying stocks cheaply while I wait for the recovery. If we get a large drop, I’ll be buying a fair amount of cheap stock. If we get a small drop, then I won’t have gained too much, but stocks will have recovered so that small amount is gravy.
I’m 49 years old, so I’ve got time to wait for a recovery with my retirement accounts.
What Stocks Do I Buy?
I have two schools of thought with this one. I think each has merit, and it just depends on your risk tolerance:
- Buy Technology and Small Cap Stocks
These are the two areas that typically get hit the hardest during a sell-off. They are simply the most volatile as investors focus on the safest companies, such as consumer staples, that people will buy even in a recession. I specifically buy the NASDAQ 100 (symbol QQQ or QQQM) and Vanguard Small Business ETF (symbol VB). Over the last couple of days, I’ve been buying the NASDAQ and taking advantage of the 20% off sale. In the spirit of baseball’s spring training, I’m swinging for the fences. - Buy Dividend Stocks
Many companies that pay dividends have steady businesses. Otherwise they couldn’t commit to paying the dividends. They are often oil companies and the consumer staples mentioned above. Usually they hold up better in big drops. This is a more conservative plan. I’m hoping to just hit a single. I haven’t bought any of this during this tariff event, but I had bought a high-dividend ETF (Symbol: ETF) six weeks ago when I was buying the bonds.
When the recovery happens, and it always does, I sell the stocks and add back to my bonds.
What About Taxable Brokerage Accounts?
I do almost nothing with my taxable brokerage accounts. I had set them up to conservatively invest to begin with. I knew I wouldn’t want to actively trade them, so there isn’t a lot do.
There are a couple of small things you can do. My conservative investments paid a good amount of quarterly dividends at the end of March. I always take these in cash so that I can buy whatever is cheap to rebalance my portfolio. This seems like a good time to put those cash dividends to work, right?
The other thing you can do is tax loss harvesting. I won’t go too deep into this, but if you have some stocks that have gained and some that have lost, you can sell them. When you match them up you can avoid paying taxes, get cash to reinvest in other areas.
For example, I have some NASDAQ stock that I bought very low that has gained a lot with the artificial intelligence run-up. I have some international stocks that have lost money. I can match them up and buy something else (perhaps a different international ETF) to rebalance without creating a taxable event. (I think I usually create a taxable event of a few dollars, but it’s not noticeable at tax time.) There are many, many people who know a lot more about tax-loss harvesting than I do. I recommend using Reddit or maybe even ChatGPT to learn a little more. It’s a fairly advanced topic.
Final Thoughts
This was my blueprint during COVID and it worked perfectly. Back then I was fortunately to increase my bonds greatly and buy a high-dividend ETF because the market had gone up for a decade. I didn’t have a crystal ball telling me that COVID was coming. I ended up buying some stock cheaper and when the market recovered, my accounts were stronger than ever before.
Do you have an investment plan to navigate Tariffgate? If so, let me know in the comments.
