Sell! Sell! Sell!

I had a sleepless night November 8^th. I went to bed after 12:00 California time, knowing all was lost to Trump, and writhing the more, knowing that markets had plunged across the globe.  Too late!  No way to get out. No way to preserve my little wealth before the tsunami to come.

I don’t know when I last had such a sleepless night.  Life’s been good to me so far, I can’t complain.

And then, next morning, Trump was still President-elect, but mirabile dictu, markets were up! And they have kept going up, to the present day.

I’ve been selling for some weeks now.  It’s a balm to the soul.

• I read an agonizing portrayal of the hellhole America is to become, and sell.
• I read about how Republican wet dreams, of rolling back the New Deal and the Great Society altogether, will soon come to fruition, and sell.
• I read about how the Great Con will go down, and sell.
• I imagine Frump with his finger on the nuclear button, and sell.

Hope the North Koreans don’t nuke my town—selling in time won’t help me then!

***

I am a little biased.  I retired this year, and was going to make my portfolio more conservative in any case.  I’ve got my kids’ college tuition piled up—just have to make sure I don’t blow it.  Plus I need some cash for a real estate venture.

All of the above would incline any financial advisor to tell me to raise some cash. But oh, how it helps, to read some gut-wrenching account of how Frump will trash democracy, the safety net, whatever, and to be able to Sell!

I recommend Sell! to all fellow baby boomers of like mind and circumstance.

***

But the markets have been going up ever since the election—why sell?

Two words: tail risk.

Tail risk is statistical-ese for an increased probability of a very unlikely, very bad event.

Probably, Trump is just another Republican president, no better or worse than George W. Bush (pretty bad), George H. W. Bush (meh), or Richard Nixon (yecch). The American nation will survive.

But improbably, Trump becomes an epic disaster.  Here is an example of how it could all go south.

1. With the aid of Attorney General Jefferson Beauregard Sessions, Trump cracks down on immigrants, Muslims, pretty much everyone who isn’t a white, male, Protestant, property-owning, Republican-registered citizen.
2. Nothing like seeing your mother and sister dragged off by jack-booted government goons to radicalize a young man who barely escaped down the rear stair.
3. As a consequence, for the first time terrorist recruitment in the homeland gains traction. The American dream dies for one too many.
4. Result: terrorist attack with enormous casualties—worst since 9-11
5. Trump cracks down harder, declaring martial law.
6. Harsher crackdown, more terrorist recruitment, more attacks.
7. Martial law extended indefinitely; 2020 Presidential election cancelled.
8. Trump declared President-for-Life
9. End, First American Republic, as later historians describe it.

You think that would be good for your 401(k) investments? You think Representative Jason Chaffetz, (R) Utah, Chairman of the House Oversight Committee, is going to put a stop to it?  Ha, ha, ha.

What about the Supreme Court, you ask? And I respond: after one Justice dies in an auto accident, a second dies in a suspicious house fire, and a third dies of an unsuspected heart condition, how do you think the six survivors will vote? Yeah.

Democracy is a very fragile thing. Or as Benjamin Franklin put it, “A Republic—if you can keep it.”

***

So, tail risk: epic investment disaster. What is the appropriate investment response?

Remember, tail risk represents a very bad outcome that nonetheless remains very improbable.  The more probable outcome under Frump: deficit spending, irresponsible tax cuts, corrupt defense contracts, boondoggles right and left, which all juice up the economy—for some period.  The stock market soars—for  a time. So you can’t ever justify selling it all and stuffing your cash into a mattress.

If you really believed it was all going deep south, you would buy small gold coins.  And you wouldn’t put them in a mattress in your suburban, vulnerable home; you’d build a fallout shelter in a defensible mountain area, stocked with a year of food.  And you’d buy lots of weaponry. You’d have to become an NRA poster child.

If you are not buying weaponry, and a year’s supply of canned goods, and a defensible mountain redoubt, then you are not serious in your expectations of impending disaster.  Crap or get off the pot.

***

So there you are, still living in your undefended and indefensible suburban house, still holding funds in a 401(k), IRA, or brokerage account, and still worried to death about Trumpian tail risk.  What can you do?

I’ll tell you what I did.

1. Sell Vanguard Total International. Sell Vanguard Emerging Markets.  Sell Latin American ETFs. Why? China risk.  Trade war risk.  America First risk. Strong dollar risk.
   1. Retain Europe funds (they are way down). Retain international small company funds (they may dodge the bullet). Swap some into international dividend funds.  Hold Canada funds. If you buy modern portfolio theory, you have to retain an international component.  Just dial down the risk.  Who knows, Trump may be great for the world economy.  Or not.
2. Sell large and midcap domestic funds, sell domestic small cap funds (the latter have gone way up). Retain dividend and utility funds (yeah, they are going to languish, probably; but you can’t go all to cash, and a Trumpian boom will lift all boats).  Retain and swap into REIT funds (yes they gave up all their summer 2016 gains; and yes, real estate has to be a good investment in the era of Trump, whaddayathink?).
3. Sell bonds and balanced funds. Balanced funds have been a great refuge for me for years (Vanguard Wellesley and Wellington).  But they will be hit on both ends if Trump falls hard.  And regular bond funds, except the shortest duration, are ripe for a fall, here at the end of the 35 year bull market in bonds. Retain or swap into inflation-protected securities and short term corporate funds.  And enjoy the pleasure of money market funds returning 1 percent or more, with yields ready to climb further.
4. When you are done, the 15-30% allocation you had to the riskiest assets, before the election, should now be in money market funds and short term bond funds, and the remaining assets should be in conservative income-producing equity funds

Remember, a stock market is only as secure as the nation that hosts it.  When Russia fell to the Bolsheviks in 1917, every Russian investor lost it all.  When the Weimar Republic suffered its inflation, every investor not owning real assets was wiped out. All century-long accounts of returns in the German markets have an asterisk that reads, “reset to zero in year X.”

You, I, we, cannot financially survive a meltdown of the American nation.  But we can prepare for hard times, like 2008, or 1973, or 1937, or 1921, or 1896, or 1873, or 1857, or 1837.

On the other hand, if you maintained your diversified portfolio of investments through 2008-09, without taking any action—you didn’t sell in a panic, and you didn’t snap up beaten-down bargains—and are happy with the results, then you may wish to do the same as the Frump era begins.

I bit of the apple, alas.

I believe I can make, not market timing decisions, but decisions that lean against / lean with the storm. I bought and bought and bought from October 2001 through 2002 through 2003.  I slowly sold and dialed back as 2006 turned into 2007.  Not enough, but some.

I liquidated safe investments and bought risky investments every month as 2008 turned into 2009.  I still had a little firepower left in March 2009, when the S&P 500 bottomed at 57% below its high.  Didn’t have to use it.  From 2010, I slowly dialed back my risk, moving into more conservative investments.

Now it’s more complicated.  I’m no longer working, and no longer plowing tens of thousands of dollars each year into my 403(b).  I have enough, and fear loss more than I fear foregone gains.

Sell!

Yes I may be leaving money on the table.  But I already have enough; why risk calamity?

And it makes reading about Frump’s latest depredation so much easier on the soul.