How to Sleep at Night: Investing Strategies for Uncertain Markets

Despite the stock market performing historically well since the 2008 and 2020 crashes (with the exception of 2022), it is completely normal to feel a sense of dread or uncertainty about your portfolio. World events and economic headlines can make even the most seasoned investor nervous.

If you find yourself losing sleep over your investments, here's a practical guide to managing risk without completely exiting the market; "How to Sleep at Night Investing in an Uncertain Market."

Here is a breakdown of the key strategies discussed in the video.

1. Determine Your Risk Appetite (The Formula)

Before you can manage uncertainty, you need to define what kind of investor you are. Mahoney suggests breaking this down into three categories: Aggressive, Moderate, and Low Risk.

• Aggressive: This doesn't mean buying speculative crypto or "moonshot" stocks. It simply means your portfolio leans heavily toward stocks over bonds [01:43].

• Moderate/Low Risk: You prefer a higher cushion of safety, which usually means a higher allocation of bonds.

To determine what percentage of your portfolio should be in stocks, you can use these simple formulas based on your age:

• Aggressive: 120 - Your Age = % in Stocks

• Moderate: 110 - Your Age = % in Stocks

• Conservative (Classic Boglehead): 100 - Your Age = % in Stocks

Note: the classic "100 minus age" rule might be too conservative for modern times, potentially causing you to miss out on significant returns [03:03].

2. The Problem with Manual Rebalancing

Once you have your ideal ratio (e.g., 80% stocks / 20% bonds), maintaining it can be a headache. If the stock market drops, your bond percentage artificially rises, forcing you to sell bonds and buy stocks to get back to your 80/20 split.

Doing this manually is burdensome. It requires constant vigilance, can incur transaction fees, and may trigger unwanted tax consequences [05:13].

3. The Solution: Target Date Funds

A simpler alternative for the nervous investor is the Target Date Fund. These funds automatically adjust your risk based on your retirement year. If you plan to retire in 2055, you buy the "2055 Fund." It starts aggressive (mostly stocks) and slowly becomes conservative (more bonds) as you get older [05:47].

The "Sleep at Night" Hack: If you are particularly risk-averse or nervous about a looming correction, here's a clever tweak: Choose a Target Date Fund with a date sooner than your actual retirement.

• Example: If you plan to retire in 2065 but are nervous, invest in the 2055 fund instead [07:48].

• Why? The 2055 fund will have a higher allocation of bonds right now compared to the 2065 fund.

This strategy allows you to stay invested in the market while enjoying a larger safety cushion. Plus, the fund managers automatically rebalance for you—selling bonds to buy stocks at a discount during market dips—without you having to lift a finger [08:09].

Final Thoughts

The most important takeaway is to stay in the game. If you have more than 10 years until retirement, history suggests that staying invested is the best way to grow wealth, as you have plenty of time to recover from downturns [09:55]. However, if modifying your strategy allows you to sleep better and prevents you from panic-selling, then leaning more conservative is the right move for you.

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