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Money Matters: The 10% Rule

August 16, 2011

Runners know the 10% rule. The basic idea is you don’t increase your mileage more than 10% from any one week to the next. There are plenty of places out there that will tell you this can be ignored depending on where you’re at as a runner and where you’re at for your weekly mileage. But the point is it got me thinking.

It got me thinking about finances. Supposedly the Monday after the S&P downgraded US debt, four times as many folks as normal did something with their 401ks. Most of us are familiar with the leave it alone or don’t look at it or think longterm and let it sit there mantras. I mostly believe in that. The last time I looked at my 401k was the post I did on a financial retrospective. Even then I wasn’t really looking at the number or thinking about how much I might have lost or gained or not gained in the last year.

There’s a lot of numbers out there used for what is considered the conventional wisdom of personal finance. There’s what your percentage you should be exposed to stock (your age minus something? your years until retirement plus something?). There’s how much people think the stock market will grow every year. They’ve thrown around numbers like 7% for a while now and I was surprised to hear a person on NPR this morning comment on how they hadn’t achieved the 10% a year everyone had told them they would, that they were "nowhere near" 10%. I’m not sure that should be any big surprise. I’d heard 7%, but even 7% a year is not guaranteed. Probably more like 4-5% average now, meaning people will have to save a lot more than they used to have to and probably work longer. The bummer truth of it all.

The 10% I’m thinking of though is a new rule I’m making up with regards to your portfolio: never move more than 10% of your portfolio at once. A lot of people in this recent dip decided to move money around. Whether that was to pull money out of savings/bonds/cash and move into the market after the dip, or whether to panic and decrease their exposure to stocks. I’m not saying people always make mistakes or always regret these sorts of decisions. I do think there are cases where you have to move things around. I have the luxury of time and can follow the "wait it out" words of wisdom. But some day that might change and I might start to think it’s a good time to do something. I just think in that case a good idea is to never move/add/subtract 10% of your retirement portfolio in any one given instance. It’s too dangerous to allow an individual to make rash decisions they might regret later. If you make a move and decide later it’s a good idea you can always keep moving in that direction after thought and reflection. Anyways, that’s my idea. What do you think, a new rule for financial wisdom? (photo by Umpqua)

2 Comments leave one →
  1. August 16, 2011 5:29 pm

    I actually moved 25% of my 401k from bonds to stocks since the stock prices were about 10% down. I do time the market. The indicators are looking BAD right now (ex: death cross). This is surely the signal for a bear market, and everything dropping further down (probably another 10-15%) in short order. Once it drops again (further), I’ll move the rest of my bonds (another 15% of my 401k) over to fire-sale stock.

    At a certain point (say up 15%), I move the stock+earnings over to bonds. I moved a lot of my stock money over to bond funds at the beginning of the year, and held steady in bonds until this most recent drop in stock prices (which put stock prices back to what I paid for them originally :).

    I do have some buy-and-hold funds that I don’t play “time the market” with (ex: Oakmark OAKBX). I don’t mess with funds that are geared for bear markets. Oakmark has a #1 on the bear market score. See bottom under volatility.

    Once the market drops (it will test the new bottom for a bit), BUY BUY BUY stocks. We have alot of time between now and retirement.

    With my market timing, I’m still above 10% for this year (I’m at 11.3% up as of today, w00t!). Most people who buy and hold are down or even. I haven’t moved my 5k into my roth yet this year – waiting for the bottom.

  2. August 20, 2011 10:42 am

    I’m irritated because I want to (try to) move my Ing account to Fidelity (again… tried and failed last summer), but with the stock market moving 5ppt up or down each day I could get creamed (or get a windfall) in the time between ing selling and fidelity buying. Shoulda pushed harder last year, I guess.

    Also want to sell my Oakmark funds and buy Vanguard indexes, but that’s also on hold until things settle down.

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