Omicron Variant Investing Adjustment

Omicron Variant Investing Adjustment

Whoa, what happened to the stock market on Friday? RB40Jr had a couple of friends over for a sleepover so I was offline for a couple of days. Those kids were just too noisy for me to get anything done. I was taking Thanksgiving week off anyway so I didn’t check the news. Apparently, there is a new variant of COVID – Omicron. Investors got scared and sold off some stocks. By the way, isn’t Omicron one of the Decepticons? The name sounds familiar. I looked it up and Omicron is just one of the minor characters in the Decepticon gang. Hopefully, the Omicron variant will be a minor footnote as well.

At this time, we don’t know much about the Omicron variant. It’s a concern because the Omicron variant has a large number of mutations and may increase reinfection risk. Scientists around the world are trying to figure out if this variant is more transmittable or causes more severe illnesses. We just don’t know very much right now. However, many countries are imposing travel restrictions on southern Africa. That’s where Omicron was first detected. I guess that’s a good precaution. Unfortunately, Omicron has already been found in the U.K., Israel, Belgium, the Netherlands, Germany, Italy, Australia, and Hong Kong. It hasn’t been detected in the United States yet, but it probably will be here soon. This is why investors got spooked.

*Update* Omicron has been detected in over 20 countries one day after this post was written. Also, the Fed plans to discuss the tapering of monthly bond purchases in December. That caused more investors to become nervous.

Investing with Omicron

On Friday, investors reacted to the news of the Omicron variant and the stock market had its worst day of 2021. The economy is just recovering and it’s in a vulnerable stage right now. If Omicron is more contagious, it might put a stumble in that recovery. However, I think investors overreacted because we still don’t know much about this new variant. Who knows, it might not be that bad.

Like me, most individual investors probably didn’t pay much attention to the stock market on Thanksgiving weekend. We’ll see what happens on Monday. As news develops, the stock market might drop some more and create a buying opportunity. Financial Samurai wrote a good post on this topic – The New COVID Variant Investment Thesis for Stocks and Real Estate. He’s way better than I am at following the market and predicting trends. I find he’s right pretty often. Basically, he expects the S&P 500 index to decline by 10% to 15% and he plans to aggressively buy the dip. I like this plan. You need to keep investing through thick and thin.

My Omicron adjustment plan

If you haven’t checked on your asset allocation in a while, now is the time to do it. The Vanguard S&P 500 index fund increased by almost 25% so far this year. That’s much higher than usual. Meanwhile, the Vanguard Total Bond Market Index Fund dropped by 1.5%. The difference in performance may have pushed your asset allocation off balance. Yes, it’s time to check your asset allocation.

Rebalance

I just checked and we have about 17% bonds in our portfolio right now. That’s a bit higher than I’d like. Earlier this year, I sold off some stocks and moved the money into bonds because I thought the stock market was overheated. However, the stock market kept hitting new highs. Now, I think it’s better to avoid active investing until we’re closer to full retirement. We don’t need to take the money out yet so it’s better to let it ride out the bumps. If Omicron causes the market to drop, I’ll decrease our bond allocation to about 10%. After that, I’ll stick with 10% bond for at least 6-7 years. (That’s when we plan to both retire full-time.)

Keep investing

Another thing that we plan to do is to keep investing. Mrs. RB40 is still working so she’ll continue to max out her 401k. That’s an easy call. I don’t have a regular job anymore, but I still have some income from this blog and my side hustles. I’ll keep contributing to my 401k as long as I have earned income. This really is the easiest way to become a millionaire. You should invest a good portion of your earned income every pay period and never stop. The magic of compounding will do the rest.

Adjust cash position

One of my 2021 New Year goals was to accumulate $50,000 in cash. That’s about how much we spend in one year. Mrs. RB40 planned to take a year off in 2022 so we wanted to be prepared. However, it looks like she’ll only get 6 months off. Hence, we won’t need as much cash. Now, I think $30,000 in cash will be plenty of cushion. We’ll keep $30,000 in the bank and invest anything over that in the stock market.

The booster shot

Lastly, we plan to get the COVID booster shot soon. The CDC now recommends that everyone over 18 gets a booster shot if it’s been over 6 months since your COVID vaccination. I already scheduled my booster shot for December 3rd. I’m flying to Thailand in January so I need to get it done early. Mrs. RB40 plans to get the booster shot when it becomes widely available. RB40Jr just got his first shot a couple of weeks ago and he’ll get his second shot in December. I’m not too worried about the Omicron variant because we’ll all be vaccinated very soon. Of course, I’m assuming this new variant isn’t extra sneaky about getting through the vaccine or causing more serious symptoms. I’m sure we’ll find out very soon. Scientists are working hard on this.

What about you? Have you checked your asset allocation lately? Do you have a plan if the Omicron variant causes the market to drop?

Image credit: Xingyue Huang

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

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14 thoughts on “Omicron Variant Investing Adjustment”

  1. I’m due up in December to update my asset allocation. I’m actually relatively close to where I’d like to be so I shouldn’t have to change too much then.

    Not sure if you mentioned it before, but that’s great you’re heading back to Thailand again to see your parents so soon. I think I just read that they’ve eliminated a lot of restrictions there recently – this trip should be a breeze compared to your last one! 🙂

    Reply
    • That’s great. The stock market gains this year didn’t change the asset allocation much? That’s surprising.
      Yes, it’ll be much easier to travel to Thailand this time. You only have to quarantine for 1 day while waiting for the PCR test result. Hopefully, that won’t change by the time I go…

      Reply
  2. Omicron might not be that bad, but it’s worth noting that we are a lot more letters down the Greek alphabet. It’s not like the alarm was sounded with the Kappa variant (whatever that was).

    I read that Delta had 9 mutations on the spokes, but Omicron has 30. The numbers may mean nothing (I don’t know), but the scientists seem concerned.

    I had some cash around and bought on Friday. It wasn’t a lot, but enough for psychological purposes.

    Reply
  3. If you think your bond allocation should be 10% for a number of years, you should consider making that change now. If you wait to react to some extended reaction to the Omicron variant, you will likely sell lower and buy higher at the time you change your allocation than if you do so now. I’ve been at 90%/10% since Q4 2016 (and throughout 2020) and it’s worked pretty well so far for my situation. I don’t plan to change my allocation until my time horizon forces me to.

    What is your thinking on waiting to make your allocation change? Also, is your upcoming 6-7 year 10% bond allocation based on Omicron (why 6-7 years then?) or on your time horizon/risk tolerance?

    Reply
    • That’s a good point. I already moved a bit and will readjust the rest soon.
      We plan to retire full-time in 6-7 years so we might increase our bond allocation a bit. It isn’t based on Omicron.

      Reply
  4. i raised a little more cash last week so that position is now around 11%. i sold some RIET index funds to do it in the 401k. i think it’s good to have a plan for what percentage of bonds or cash to deploy on market dips. it makes it easier when they come that you’ve thought of it ahead of time. worked well in the covid dip of spring 2020.

    Reply
  5. We were pretty close to 15% bonds last time I checked (which was shortly after buying 10k municipal bonds). That seems a bit high given that we don’t really need that level of safety, so the last few dumps I’ve done have been into the stock market. I’ve been trying to decrease our cash position now that DH is employed again so with every paycheck I’ve been putting $ into taxable. (That will slow down probably in February or March when we run out of the excess money I’d saved for his last unemployment spell and we need to make sure we have money for my unpaid summer.)

    I basically ignore what is going on with the market. We’re not close to retirement yet and there’s no need to try to time it. I know that we should probably be trying to do tax-efficient stuff, using market timing to turn losses into tax advantages, but I’m not sure we ever will. I think of it as donating to the government.

    Reply
  6. So far, I see no reason to make any investment allocation changes. Humans fear ‘unknowns’ more than ‘knowns’, and this new variant is probably going to become another of *many* variants. This is no black swan. We’ll see new variants every year. Not unlike the flu. It’s endemic.

    From what I can see, this Omicron variant plays nicely into my current investment thesis.
    It seems like a neutral event. Heavy lockdowns seem unlikely again, despite what’s happened in a few EU countries.

    The world is slowly learning to live with COVID, and the sooner we all realize this is the new normal, the better.

    That said, the market might adjust lower in the coming weeks, and I’ll be happy to pick up more shares at lower prices. Thanks!

    Reply
    • I’m not sure. So many people are still unvaccinated. A more virulent variant could cause havoc. I hope Omicron isn’t too bad, though.
      I’ll keep track of the market closely over the next few weeks as well.

      Reply
  7. You say, “I already scheduled my booster shot for December 3rd.”

    I will be getting my booster shot on December 2. That is the first day I am eligible because I got my 2nd shot on June 5. Weirdly, I have had several friends and acquaintances try to shame me by saying things such as, “You must be a zombie to get vaccinated.” Incidentally, the majority of these people are barely getting by financially and will likely live in poverty in their retirement days. Also, I will get to travel to Honolulu in International Business Class (really first class) on 3 trips, one in January, one in February, and one in March, while they stay at home in the cold weather, not even able to go to restaurants here in my hometown.

    You ask, “Have you checked your asset allocation lately? Do you have a plan if the Omicron variant causes the market to drop?”

    I just checked my retirement portfolio of dividend stocks managed by my financial advisor friend and it didn’t seem to take a hit in the last day or two. The portfolio was worth $1,652,966 CAN on Dec 30 and now it’s worth $1,922,525 CAN. That’s a 16.3 percent gain and I only added $6,000 to the portfolio in February. Since I have another $300,000 CAN or so
    in my Prosperity Accounts in banks, I will just roll with what my financial advisor friend decides to do.

    Remember I am a lazy person. My financial advisor friend only charges me a fee of .5 percent and I know that his firm charges high-net-worth clients anywhere from 1 percent to 1.6 percent. So I am happy to have him do the work in managing my retirement account while I write more books that will likely make me even more money.

    Reply

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