You Should (Possibly) Be Day Trading

Market downturns of this scope and velocity create an uncomfortable truth for prudent, long-term investors: you should (possibly) be day trading.

As I wrote nearly three years ago, Naomi Hasegawa can be your guide when determining to buy or sell stocks. Like her family's decision to avoid distractions and only sell mochi (for the last 1,000 years!), you too only have one job when it comes to your stock market exposure:

Pick a percentage, and stick to it.

My hope is that you have "done a financial plan" — which is just daunting-sounding language meaning that you've (1) identified the life you want to live, and (2) how you will endow it with your assets.

It involves "mapping your cash flows" — which is just daunting-sounding language for determining what money is coming in and what money is going out.

And finally that the above work has allowed you to "contextualize your distribution of likely outcomes" — which is just daunting-sound language for knowing if you should be confident that you can indeed do what you want in life, or whether some actions are likely needed to grease the skids (e.g. saving/investing more, spending less, working longer, etc.).

Look, financial planning is critical work. At Peltoma, we describe it as "the heartbeat of our firm." But my colleagues and I arrived at that decision, that financial planning work must come before investment management work, because we all worked in investment management first. And something was very obvious...

I need to know what you're trying to accomplish before I tell you how to invest.

Alas, the U.S. stock market is down 11% in two days. It may not be UN-precedented, but it is HARDLY-precedented. This is extremely rare, and we are living through a moment that will be written in history books. We will now refer to recent crises as tech bust, GFC, 9/11, Covid, Trump tariffs.

What history writes about this period is still unknown — markets could scream back like they did in Covid (bottoming after 3 weeks), or churn stomachs for years like the GFC in 2007-09.

Regardless, and whether you've done the appropriate financial planning work or not, I can tell you the best way to manage your portfolio: pick a percentage for stocks, and stick to it. Change it only when things change about your life, not about the economy or your opinions about the economy.

That might be 65% stocks or 80% stocks or 45% stocks. I don't know (as I don't recommend an appropriate amount for anyone without understanding what they're trying to accomplish), but if you haven't done that work, you may consider using research from reputable places like Vanguard, Blackrock, or Dimensional. They offer up research on how they designed their "Target Date Funds" — which are single funds that attempt to deliver an appropriate amount of stock exposure based on when you are trying to retire (or where you are in retirement).

They are blunt instruments, but how they're designed is useful. They aren't perfect, but they're a better guide than having no guide.

And I am not necessarily suggesting the funds themselves, but rather the underlying exposures (e.g. stock percentage based on a broad goal, like retirement age) as informative.

However determined, investors should have a desired, overall stock percentage. And that is your guiding light through periods like this.

My firm chooses 5% bands as when we try to rebalance. So last Wednesday, if you were supposed to be in a 70% stock / 30% bond portfolio, and the stock market went down 10%+ over the next two days (while the bond market went up), there is likely a necessary rebalance...to sell bonds relatively higher and buy stocks relatively lower. NOT to time the market, but simply to get you back to your original desired exposures.

It is much easier to get distracted by media narratives about tariffs, the economy, inflation/deflation, Trump's stupidity or brilliance, etc.

But you know what?

Naomi Hasegawa doesn't sell bagels.

You are a pea-brained human, and your job is not to attempt to outguess prices. You are outmatched. One job — the percentage.

Stock prices have already adjusted for the current environment:

The U.S. stock market is nearly 18% off where it was in February. You will only distract yourself whether you try to determine if that is enough for the current tariff war (buy the dip!), or not enough (sell stocks now!). You can't know, because it's new information that will cause the next big stock move up or down.

Old information, what we already know, is already embedded in prices. That's why we are down 18%.

So be like Naomi, and stick to the one job.

However, there is one important thing we do know about periods like this in the short-run:

Current volatility typically leads to more volatility.

So while I can't tell you which direction the market will go, I can tell you that large moves — both upward and downward — should be the expectation for the next few weeks.

Which leads me to share a dirty-sounding insight with you, that will feel so wrong to many long-term investors and readers:

You should (possibly) be day trading.

Day trading, of course, is often put at odds with long-term investing. And 99%+ of the time it is and should be. But not right now.

How often you trade, EVEN intraday, is not important. What's important is picking a percentage of stocks and thoughtfully rebalancing to it.

The goal is to have the appropriate risk profile, and to rebalance to the right portfolio (to be properly positioned for whenever the stock market does make a comeback.).

The goal is not to make portfolio trades infrequently! That is just a function of good investing 99%+ of the time.

But not necessarily right now.

And so, in this hardly-precedented period, I would urge you to not wing it. You should have a stock percentage, a rule about how much you will let it drift before rebalancing, and stick to it (make sure to consider tax implications and settlement rules before trading).

My colleagues and I spent most of Thursday and Friday trading for clients (both rebalancing and tax-loss harvesting). Yet our clients are also long-term investors.

Both things are true in times like this.

And I will tell you — as stomach-churning as it may feel right now, at some point in the future, well before stocks ever fully recover, I expect a bounce where we rebalance the other way. We sell stocks amidst the downturn.

Why? Only because we were buying, based on our rebalancing bands, during the downturn. I don't care as much where the market came from (knowable) or where it's going (unknowable), as I do whether clients are in the portfolio we aligned on as appropriate.

And that requires trading on an unknown frequency, and oddly during the next few weeks, possibly daily.

Because, counterintuitively, investing for the long-term is based on risk, not time.

End.

N.B.: you can also use funds that do some rebalancing for you, like target date funds or balanced funds. These all have different rules, so I can't speak to them broadly. Whether you do it, your advisor does it, or you own a fund that does it — the point is that you should rebalancing based on percentages and not time. In a period like this, it's likely that it should be frequent.