Financial lesson from 2020

I have been investing for over 20 years. After learning about the capital asset pricing model and the mutual fund theorem and reading “A Random Walk Down Wall Street” and “Stocks for the Long Run”, I have been more or less consistently investing in low-cost index ETFs such as VTI and VXUS. This allowed me to stay in the market during the bottom in March 2009 and not to miss the bull market since then despite some of my colleagues advising me that stocks are overpriced. My kids’ 529 funds have grown about 3 times in nominal value. I have been maxing out my 403b, 457b, and Roth IRA contributions and joking I could retire if I choose to. Based on theory and experience, I preach the importance of passive investing to students in my finance class.

However, I have to confess I made my worst financial mistakes in 2020. During the COVID crash in March 2020, I bought stocks with extra cash. This was a good decision. But then the stock market rebounced, and due to the fact that the government imposed lockdowns, I was so convinced that there would be a second wave of stock market crash, and in April 2020 I liquidated my Roth IRA stock position. In addition, I bought put options on the SP500 index. Of course the stock market kept rising, my put option expired out-of-money, and I missed the stock recovery sitting on cash. The good news is that I only touched my Roth IRA account, whose value was much smaller than other accounts.

Based on this hard lesson, I have changed my investment strategy slightly. Instead of investing in ETFs, now I make automatic contributions to an old-fashioned mutual fund, namely VTWAX. I know ETFs are more efficient, but their liquidity tempts me to actively trade. I view old-fashioned mutual funds as a commitment device for passive investing.