Since the COVID-19 virus reared its ugly head in March 2020, few aspects of modern life have remained unchanged. Perhaps one of the most surprising effects was the impact on hairstyle trends. First, with lockdown closing salons, things got very hairy. Then the situation went from bad to worse.
To the dismay of those of us who survived the 80’s, the mullet staged a long-feared comeback. Blame the Tiger King or Miley Cyrus, who apparently failed to grasp the lessons of her father Billy Rae’s mullet missteps. Either way, the most ridiculed haircut ever started cropping up everywhere.
Unfortunately, the resurgent popularity of the mullet is not the most insidious “business in the front, party in the back“ development threatening society. No. In fact, it’s not just people, but also their portfolios, that may be sporting the misbegotten look. And this parallel trend is happening for much the same reason: unchecked growth. Except with portfolios, instead of hair gone wild, it’s the stock market.
UM, WHAT THE HECK IS A “MULLET PORTFOLIO”?
Since I just made up the term “mullet portfolio,“ perhaps I should explain…
Let’s suppose that way back in the year 1 BC (Before COVID), you sat down (with yourself or a financial advisor) and drew up a financial plan. It was crafted to match your goals, resources, timeframe, risk temperament, etc. It specified a target asset allocation (e.g. maybe 75% stocks, 25% bonds and cash), and you invested your money to match. When you were done, your portfolio had a nice, neat look, kind of like the wedge Dorothy Hamill famously sported to Olympic figure skating gold in 1976.
Before: Your 75/25 portfolio, right after your last financial checkup, pre-COVID
You congratulated yourself, sat back, and waited for a nice smooth ride like the previous decade’s to whisk you to retirement security.
Instead, the COVID train pulled into the station and laid waste to even the best laid plans. The stock market suffered a hair-raising decline. Then it defied all predictions and soared to record highs, taking your equity investments along for the ride. With stocks staging “a party in the back” as cash and bonds stayed stable, your asset mix undoubtedly diverged from its 75%/25% target.
The result? A mullet portfolio, an unruly mess of unknown proportions and risk.
After: The unruly mess your portfolio has become if you haven’t rebalanced since before the 2020 stock market runup
Why It’s Not a Good Look for Your Money Either
In my defense, George Clooney had the exact same look.
You don’t have to look far for evidence it’s best to abstain from the mullet hairstyle: Exhibits A (left), B, and C, for starters. But it may be less obvious why it’s not a good look for your portfolio either. After all, you’re probably thinking “The stock market hit another all-time high today, and so did my net worth. Woo hoo! I’ll take all the out-of-control growth the Dow can deliver.”
Your enthusiasm is understandable. Growing your money is the whole point of investing, right? Who wouldn’t want to see their portfolio busting at the seams?
Well, yeah, except it’s important to keep in mind a little something called the risk/reward relationship. Investing 101 refresher: the potential for returns is proportional to the risk being incurred. Putting your money in a savings account means little risk, but also little return. Stocks on the other hand promise great upside potential, but not without risk of decline.
As a portfolio starts to grow into a mullet, the greater proportion of stocks translates to increased risk. The new level of risk may exceed your tolerance. Unfortunately, that’s hardest to remember during times like these, when the market seems to be fueled by a limitless supply of helium. But… Debbie Downer alert…
It isn’t.
And when the bubble bursts, your mullet portfolio will take a big haircut, and there’s no telling what it’ll look like after that.
GET A TRIM!
So what’s an investor to do? You’ve got to sell some winners and buy some losers in order to bring your portfolio back in line with the risk/reward combo that’s right for you. In other words, get a haircut.
It’s simple, but not always easy to do, and might feel a bit counterintuitive. When every fiber of your being wants to hitch a ride on the FANG rocket ship and FOMO runs high, it can be pretty tough to place a sell order. Never mind how hard it is to buy the “losers” (read: bargains) of the recent past. But this is how you accomplish the elusive “buy low, sell high” strategy investors aspire to.
I’m not suggesting you panic sell everything. Heck, no. That would be the investing equivalent of shaving your head, another look few can pull off. I’m merely saying rebalance to your target asset mix. You’ve made a solid profit. Take some while you can. Or to revisit the hairstyle analogy, trim that overgrown tail and get back to the proportions that look good on you.
As history has proven time and again, bull markets don’t last forever. While many events of the COVID era were unpredictable, this isn't one of them. Nobody knows when, but for sure, this rocket ship will eventually return to earth. And when it does, you’ll want to have done everything you can to ensure a safe landing.
p.s. Want more info on this, or simply prefer a garden analogy? Check out my article Rebalancing Act.