Q: You’re not recommending just selling now, then letting the market go down, and then getting back in when this episode appears to be over. Why not?
A: We do not recommend changes in target asset allocations. For example, if you normally target 60% in stocks, that should stay the same. It’s simply too difficult to time a turnaround, and missing the rebound makes these losses permanent. Within that allocation, however, we are very aware of managing risks. Following our investment process, we have sold certain stock positions, adding the proceeds to bonds and cash.
Q: With stock prices dropping do you think it is a good time to buy if there is cash in the investment account to do so? What opportunities do you see?
A: Yes, there are some good opportunities due to lower prices. First, tax-free municipal bonds now yield more than U.S. Treasuries, whereas they usually pay less. Second, “dividend growth” stocks look attractive. These companies raise their dividends every year and have been through plenty of crises in the past. Their (now higher) dividend yields look very attractive as bond yields have dropped, and they are more likely to make it through an economic slowdown.
Q: Why are we trading? Is Schwab entering trades?
A: We are trading consistent with our investment discipline. That has led us to reduce exposure to international and smaller companies, adding the proceeds to larger U.S. companies, high quality corporate bonds and cash. All trades are either initiated by us (Great Diamond Partners) or by a third-party manager that we hired for specific client situations. As your custodian, Schwab does not initiate any trades but simply reports them to you.