Author Topic: A crash is coming.  (Read 30846 times)

Big_Paul

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A crash is coming.
« on: May 15, 2014, 07:09:55 PM »
Seeing as markets are at a high and a correction will be upon us soon could someone please tell me why I shouldn't cash out my index funds and then go back in when the market is cheap? I know you shouldn't try and time the market but why should I watch my investments halve at some point in the next year when I could have avoided it? I'm happy to sit on cash for a year. It will be 7 years next year since the crash of 2008 so we are due. I know I haven't got a crystal ball but I'm posing this question to get some interesting answers.

warfreak2

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Re: A crash is coming.
« Reply #1 on: May 15, 2014, 07:19:08 PM »
a correction will be upon us soon
Quote
investments halve at some point in the next year
Interesting, where do I get a crystal ball like yours?

Quote
I haven't got a crystal ball
Oh.


If you're happy to sit on cash for a year, go ahead. If you're confident of a 50% drop in the next year, you might go borrow as much as you can and take a big short position. But don't expect not to make an enormous loss when your strategy is essentially "the last 7 throws were all red, so the next one has to be black."

bigchrisb

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Re: A crash is coming.
« Reply #2 on: May 15, 2014, 07:21:40 PM »
Good question!  I "felt" that the markets were stretching valuations a year ago.  I resisted and stayed invested.  I was shown to be soundly wrong in my "feeling".

Will the market crash some time in the next 10 years?  I'm sure of it.  Will the market in 10 years finish higher than it currently is?  I'm pretty sure of that too. 

So I just stay invested, avoid the transaction costs and avoid realizing the capital gains.

(that said, I've effectively been timing the market at the moment by unwinding the margin loans and leverage I've held in the past, but in the name of de-risking, so this may be a case of "do as I say, not what I do")

Eric

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Re: A crash is coming.
« Reply #3 on: May 15, 2014, 07:22:19 PM »
No one can predict the future.  Markets are continually setting new highs.  You know why?  The market always goes up:

http://jlcollinsnh.com/2012/04/19/stocks-part-ii-the-market-always-goes-up/


frugalecon

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Re: A crash is coming.
« Reply #4 on: May 15, 2014, 07:22:26 PM »
If you have target allocations for different assets, you might have already rebalanced away from equities to some degree, in favor of, e.g., bonds. If stock prices decline, you can rebalance again and reap greater upside rewards.

I am not sure what you define as a crash. If you get antsy about a 20% swing, for instance, stock investing might not be for you.

iris lily

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Re: A crash is coming.
« Reply #5 on: May 15, 2014, 07:24:49 PM »
Good question!  I "felt" that the markets were stretching valuations a year ago.  I resisted and stayed invested.  I was shown to be soundly wrong in my "feeling".


I'll give you one better: I pulled a stache out of the market last fall because I was creeped out by how high things were going. Not only was I wrong in my "feeling" I lost (potential) money.   :)

but' it's all goo I've still got some of that stache in an index fund.

dragoncar

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Re: A crash is coming.
« Reply #6 on: May 15, 2014, 07:30:46 PM »
I have the same feeling but of course we both recognize the market can continue to go up.

So say you pull out and the market goes up another 10% next year.  What will you do then?  Continue to hold cash until a correction?  A correction of how much?  Or will you buy back in at the new highs?  Then you run the risk of the market crashing right after you buy back in.

If you are holding cash waiting for an x% correction, and are ok with potentially being out of the market for a very long time, then maybe go for it?

Or do you think real estate will outperform?  http://forum.mrmoneymustache.com/investor-alley/article-why-real-estate-returns-are-higher-than-stocks-bonds-and-mutual-funds/
« Last Edit: May 15, 2014, 07:32:46 PM by dragoncar »

ArbitraryGuy

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Re: A crash is coming.
« Reply #7 on: May 15, 2014, 07:31:20 PM »
Perhaps the asset allocation of your portfolio isn't in line with your risk tolerance?  Allocate more towards bonds and less towards stocks.

matchewed

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Re: A crash is coming.
« Reply #8 on: May 15, 2014, 08:02:12 PM »
Even if it is a recovery is also coming. So my only question is So what?

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Re: A crash is coming.
« Reply #10 on: May 15, 2014, 08:19:51 PM »
No one can predict the future.  Markets are continually setting new highs.  You know why?  The market always goes up:

http://jlcollinsnh.com/2012/04/19/stocks-part-ii-the-market-always-goes-up/
Look at it between 1880s and 1914.

hodedofome

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Re: A crash is coming.
« Reply #11 on: May 15, 2014, 08:25:55 PM »
If folks would stop talking like a crash is coming, maybe we can go ahead and have a crash and get it over with. I'm all for a crash so please, let's all say it's gonna go up forever ok?

phred

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Re: A crash is coming.
« Reply #12 on: May 15, 2014, 08:28:43 PM »
Well, I did this the last time.  When Dow was at 14,000s I converted all IRAs and 401(k) (wanted to leave job anyway) into bank CD type IRAs.  When Dow in 7,000s I went back into stocks.

The difference is that back then many were telling us that the real estate bubble was about to burst and take everything else down with it (and that GM was basically crap and its bonds would soon be worthless).  I don't see that happening at this time; no Paul Reveres on the bookshelves at Barnes & Noble.  In fact, the only negative view I've seen is that all American money becomes worthless July 1st thanks to Obama (yawn!)

All investments are somewhat cyclical.  Pick one that is currently out of favor, is cheap, that you like and put some of your money into it.  Other than that, learn more DIY skills so that you will need less money

randymarsh

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Re: A crash is coming.
« Reply #13 on: May 15, 2014, 08:33:16 PM »
This thread happens every 2 or 3 weeks.

I remember around Christmas people saying a "correction" was due anytime. 6 months later and the Dow has a new record.

bobmarley9993

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Re: A crash is coming.
« Reply #14 on: May 15, 2014, 08:40:39 PM »
Big_Paul,

I think there are 2 risks to your strategy:

1) As has been pointed out already, the market will eventually crash but it may never crash to the level it is at today.  The S&P500 might go up to 2500, then crash down briefly to 2000 before going on to new highs.

2) Even if it does crash below the current levels there is no guarantee you will buy in at the right time.  If it dropped this year to 1600 would you buy?  What about 1500?  1400?  1700? You just have no idea how low it is going to go.  You could probably mitigate this by averaging in but then you still risk missing it with only a fraction of your money invested.  This is basically what happened to me in the mini-crash at the beginning of 2012.   I had built up a little stockpile of new savings that I was going to deploy.  I watched the market go down from 1300's to 1100's but that didn't seem cheap enough.  I ended up buying in around 1250 which was hardly a discount at all.

Frankies Girl

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Re: A crash is coming.
« Reply #15 on: May 15, 2014, 08:41:58 PM »
Aren't crashes always coming? Corrections and crashes are a part of investing. The key is to just ride it out and wait for the recovery. Two steps forward, one step back.
« Last Edit: May 15, 2014, 11:13:33 PM by Frankies Girl »

RapmasterD

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Re: A crash is coming.
« Reply #16 on: May 15, 2014, 11:12:07 PM »
I sold all our stock holdings and bought an alpaca farm. Alpacas are the future. http://upload.wikimedia.org/wikipedia/commons/3/3e/Unshorn_alpaca_grazing.jpg
« Last Edit: May 15, 2014, 11:24:40 PM by RapmasterD »

milesdividendmd

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Re: A crash is coming.
« Reply #17 on: May 15, 2014, 11:30:03 PM »
First of all, we all have intuitions about which way the market is going. Sometimes
Were right, but more often we are wrong.

Second of all the evidence is clear that market timing is a loser's game. And selling right now based on the feeling that there will be a crash is no more nor less  than market timing.

Finally, an argument can be made for strategic asset allocation. This is when you define within your investment policy statement what your asset allocation will be depending on some measurable factor. As an example you could say that if the Schiller PE index is 15 or below I will have 80% stocks if it's 20 or above I will have 70% stocks and if it is 30 or above I will have 50% stocks. William Bernstein calls this "over rebalancing"and it is likely you would see higher gaines with such a strategy.

But if you base your investment allocation decisions on emotional judgements, you are almost sure to underperform. You must define your strategy a priori and stick to it in times of stress.

Finally, if you get out now when you feel The market is overvalued, How will you know when the market is overvalued?

Alexi
« Last Edit: May 16, 2014, 12:04:02 AM by milesdividendmd »

jpdcpajd

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Re: A crash is coming.
« Reply #18 on: May 15, 2014, 11:47:50 PM »
This issue is so much an age thing

  I graduated law school in 1999 and people talk of the 01 recession and because I was not largely in stocks I didn't feel it.

Oct 1987 was crazy (I was 12) but I remember it was quickly erased by a recovery

It was then that some days the market moved in unison one way but really most days some were up others were down now with the fed in control it seems everything is one direction




Eric

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Re: A crash is coming.
« Reply #19 on: May 16, 2014, 12:16:18 AM »
As an example you could say that if the Schiller PE index is 15 or below I will have 80% stocks if it's 20 or above I will have 70% stocks and if it is 30 or above I will have 50% stocks. William Bernstein calls this "over rebalancing"and it is likely you would see higher gaines with such a strategy.

Or you could decide that the Schiller PE is measured inconsistently, and that stocks, despite being near all time highs, are really not all that expensive.

http://philosophicaleconomics.wordpress.com/2013/12/13/shiller/

Eric

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Re: A crash is coming.
« Reply #20 on: May 16, 2014, 12:16:44 AM »
No one can predict the future.  Markets are continually setting new highs.  You know why?  The market always goes up:

http://jlcollinsnh.com/2012/04/19/stocks-part-ii-the-market-always-goes-up/
Look at it between 1880s and 1914.

I'm not sure what you're saying.  Can you elaborate?

milesdividendmd

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Re: A crash is coming.
« Reply #21 on: May 16, 2014, 12:58:30 AM »
As an example you could say that if the Schiller PE index is 15 or below I will have 80% stocks if it's 20 or above I will have 70% stocks and if it is 30 or above I will have 50% stocks. William Bernstein calls this "over rebalancing"and it is likely you would see higher gaines with such a strategy.

Or you could decide that the Schiller PE is measured inconsistently, and that stocks, despite being near all time highs, are really not all that expensive.

http://philosophicaleconomics.wordpress.com/2013/12/13/shiller/


Agreed, figuring out the correct metric for market valuation is no mean task. But perhaps the most crucial factor of all is having a plan and the conviction to stick to it.

Alexi

soccerluvof4

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Re: A crash is coming.
« Reply #22 on: May 16, 2014, 04:45:14 AM »
If folks would stop talking like a crash is coming, maybe we can go ahead and have a crash and get it over with. I'm all for a crash so please, let's all say it's gonna go up forever ok?


This ^+1

then sell anything that isnt nailed down and put in the market! The best thing is just keep contributing to your investment the way you have it. If you feel worried lighten up a little. I.e. if right now your putting in 8k a month put in 4k. Whatever helps you sleep at night but as most people said it could go higher just as easy as it could go lower. 2013 was a pretty damn good year and people wanted/were calling for it to crash at end of 2012.
« Last Edit: May 16, 2014, 05:57:43 AM by soccerluvof4 »

Le Dérisoire

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Re: A crash is coming.
« Reply #23 on: May 16, 2014, 06:42:33 AM »
Not so long ago, my coworker was saying the same thing, quoting stuff about China and what-not. It was very, very, very convincing (he's a finance guy). He chose to stay in cash. I chose to stick with the plan and invest as usual.

It was early 2013.

Later in the year, he told me that now that the market were so high, he felt that he had missed the boat and that a crash was on the way. He chose to stay in cash.

Crash will always come. Market will always be irrational. However, nobody can predict when it will crash and by how much.

oldtoyota

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Re: A crash is coming.
« Reply #24 on: May 16, 2014, 06:51:53 AM »
Does Buffet sell and go into cash? Has he done well?

Take the emotion out of investing. I invest pretty much the same amount every month no matter what. I do not worry about the ups and downs.


arebelspy

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Re: A crash is coming.
« Reply #25 on: May 16, 2014, 07:18:16 AM »
Does Buffet sell and go into cash? Has he done well?

Maybe not the best example.  Buffet pretty constantly carries a ton of dry powder, something I wouldn't recommend for the average investor.  Also he's not small enough to get in and get out easily without affecting the market.  It's a nonsensical question.

But as far as what would he recommend, no.  He would not recommend market timing in general.
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Franklin

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Re: A crash is coming.
« Reply #26 on: May 16, 2014, 07:45:53 AM »
Quote
why should I watch my investments halve at some point in the next year when I could have avoided it?
The simple answer is, the market will bounce back and so will your money.  That purchase has already been booked, so you need to find a way to remedy yourself long term to avoid going through this type of second guessing.  Here is a suggestion:  Keep a constant in-flow to a market index no matter what happens, shore up all other financial matters (retirement funds, emergency fund, college fund, etc.), THEN build yourself an opportunity fund.  When the market crashes, aim and fire.

I did it in 2000 and 2008 and the bounce-back made my knees wobble.

hodedofome

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Re: A crash is coming.
« Reply #27 on: May 16, 2014, 08:03:55 AM »
Whatever you do, running off of intuition is just a horrible strategy. You intuition in judging the state of the market is wrong way too much to be reliable. You need a system, some call it an investment policy. You need a systematic way of telling yourself that now is a good time to buy, how much to buy, what to buy, when to sell, how much to sell, what to sell, etc. If you don't have a system for that, then you are shooting yourself in the foot.

As others have said, people were calling for a top all of 2013 that never materialized. Don't predict the future, because you can't. Have a system and stick to the system. Hopefully your system is good and doesn't suck (you did properly TEST it first right?). You are your own worst enemy, not the market.

soccerluvof4

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Re: A crash is coming.
« Reply #28 on: May 16, 2014, 08:20:18 AM »
It's the U.S. stock market's theme song.
Fare you well my honey
Fare you well my only true one
All the birds that were singing
Have flown except you alone

Goin' to leave this Broke-down Palace
On my hands and my knees I will roll roll roll
Make myself a bed by the waterside
In my time -- in my time -- I will roll roll roll"

-- The Grateful Dead, "Brokedown Palace"

If the U.S. stock market were a song, it would be The Grateful Dead's "Brokedown Palace."

More importantly, as it relates to your own investments:

Err on the side of conservatism.
Maintain above-average cash balances.
Be diversified across company and industry lines.
Rationally consider reward vs. risk in every investment you make and holding you have.
Ignore those pundits/advisers/commentators who are self-confident in view. The only certainty is the lack of certainty (these days).
Consider being a contrarian who ignores the market's emotional responses.
Avoid the business media's hyperbole.
Don't be afraid to buy panic, and use euphoria as an opportunity to sell.
Seek investment freedom by doing your own homework.
Read every word written by Warren Buffett. It is useful to go back to his old annual letters to Berkshire Hathaway (BRK.A/BRK.B) investors.
Spend time on your investments; don't take short cuts -- particularly after a near trebling in the S&P 500 since March 2009.
There is a place for speculative investments in your portfolio -- also for conservative investments.
Invest within your means -- develop and stand by your own specific risk profile and investment/trading time frames.
And always remember that you worked hard to earn your investment capital.
"So we are pretty convinced that we don't want to play huge stadiums unless we play well."

-- Jerry Garcia.

waltworks

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Re: A crash is coming.
« Reply #29 on: May 16, 2014, 01:36:42 PM »
You could do all that, or you could just take Buffet's actual advice to normal investors and stick it in an index fund and forget about it.

-W

soccerluvof4

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Re: A crash is coming.
« Reply #30 on: May 16, 2014, 01:40:56 PM »
You could do all that, or you could just take Buffet's actual advice to normal investors and stick it in an index fund and forget about it.

-W


90/10. 90 in index..10 just to be in the game and keep the heart ticking!

tooqk4u22

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Re: A crash is coming.
« Reply #31 on: May 16, 2014, 02:31:40 PM »
Seeing as markets are at a high and a correction will be upon us soon could someone please tell me why I shouldn't cash out my index funds and then go back in when the market is cheap? I know you shouldn't try and time the market but why should I watch my investments halve at some point in the next year when I could have avoided it? I'm happy to sit on cash for a year. It will be 7 years next year since the crash of 2008 so we are due. I know I haven't got a crystal ball but I'm posing this question to get some interesting answers.

Setting aside all the market timing and asset allocation comments for the moment, you should keep in mind that while certain of the markets metrics are screaming hot (PE, CAPE, Divi yields, etc) the market is actual pretty well valued or possibly slightly overvalued when factoring in interest rates and inflation (doesn't mean the market can't go higher or even crash).  If there are drastic/unexpected changes in interest rate management by the fed or the fed loses control of rates then markets will experience turmoil.  But if rates rise gradually as expected and earnings grow moderately as expected then all those "hot" metrics will fall back in line naturally and without a crash.

Remember even a PE ratio of 20 is a 5% cash on cash return day one plus 2-4% GDP growth going forward - not terrible, and if economy expands even just a bit faster then earnings will grow even more.

My call is fairly flat with some downward pressure at times but not enough to abandon the market (again assuming that the fed doesn't f'up rate management......which they probably will)




DoctorOctagon

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Re: A crash is coming.
« Reply #32 on: May 16, 2014, 04:02:32 PM »
People have been saying a crash has been coming since April 1, 2009.  There are still a ton of bears and a scarred generation that's holding onto mostly cash and gold.  Tons of mergers, tons of IPOs, tons of earnings growth, and tons of businesses trading at 12x earnings or less.

All very bullish signs.  Anyone sitting in mostly cash right now is foolish

thesinecure

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Re: A crash is coming.
« Reply #33 on: May 16, 2014, 04:21:16 PM »
People have been saying a crash has been coming since April 1, 2009.  There are still a ton of bears and a scarred generation that's holding onto mostly cash and gold.  Tons of mergers, tons of IPOs, tons of earnings growth, and tons of businesses trading at 12x earnings or less.

All very bullish signs.  Anyone sitting in mostly cash right now is foolish

Actually several IPOs have started not hitting their targets and/or declining on issuance, which is actually bearish.  This has been occurring with more frequency the past few months.  A lot of "earnings growth" is also happening without revenue growth (see IBM as an example), which is another bearish trend.  Leverage has once again creeped to extremely high levels, it won't take much deleveraging to certainly dent a few things.

Most of the people I know that are holding a lot of cash right now didn't acquire that cash by being reckless, or by buying tops.

And pretty much no one is hoarding cash and gold, certainly not a large percentage of the population.  If they were, gold wouldn't be $1300, it would be multiples of that.

I think most people who are talking potential for crash are doing so because they don't believe the economy is as strong as some may think, and that the previous rounds of QE inflated asset prices (stocks, real estate, art, you name it) unnecessarily because savers couldn't earn any interest on deposits.  Sooner or later that will change, and it's possible it could change very quickly.

I support the idea that you keep trying to invest as you go with a plan, so that the ebbs and flows can average out for you over time.

dragoncar

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Re: A crash is coming.
« Reply #34 on: May 16, 2014, 04:27:29 PM »
You could do all that, or you could just take Buffet's actual advice to normal investors and stick it in an index fund and forget about it.

-W


90/10. 90 in index..10 just to be in the game and keep the heart ticking!

I'm putting my 10 into Snapchat IPO

arebelspy

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Re: A crash is coming.
« Reply #35 on: May 16, 2014, 04:34:44 PM »
You could do all that, or you could just take Buffet's actual advice to normal investors and stick it in an index fund and forget about it.

-W


90/10. 90 in index..10 just to be in the game and keep the heart ticking!

I'm putting my 10 into Snapchat IPO

But haven't you heard?  The prudes worriers are going to make it illegal...
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Ian

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Re: A crash is coming.
« Reply #36 on: May 16, 2014, 04:47:17 PM »
I struggle to overcome this because I can't invest on a monthly basis (I need to remit money, so the fees and exchange rate fluctuation would cost too much). When a lot of money is invested at once, it can be tempting to try to time the market. I've resisted that temptation twice so far and for the period so far that was the correct decision.

To compensate for the mental side of this, I've increased the size of my emergency fund somewhat. That way if the stock market truly crashes, I know I can cash in. I've found this eases my discomfort with my regular investments and based on some speculative math I don't think it hurts my returns too much.

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Re: A crash is coming.
« Reply #37 on: May 16, 2014, 05:35:20 PM »
Recently I have sold a few of my "winners" just to beef up my cash stash a bit just in case a correction occurs - yeah, can be seen as a form of market timing, but I can be a skittish investor at times. The majority of my holdings pay very good dividends (portfolio is yielding around 6%) so as long as the income rolls in every month or quarter, I can stomach some market hiccups.

But I have always kept a sizable amount handy in cash for the "sleep well at night" factor. Probably have 4 years living expenses in cash right now. Will look to deploy some more soon.

Dr. Doom

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Re: A crash is coming.
« Reply #38 on: May 16, 2014, 05:54:45 PM »
I sold all our stock holdings and bought an alpaca farm. Alpacas are the future. http://upload.wikimedia.org/wikipedia/commons/3/3e/Unshorn_alpaca_grazing.jpg

Completely and utterly awesome.

Look, sure, we're at an all time high.  And the cyclically adjusted P/E is at 25, which is 50% higher than normal. 

There are basically two ways that P/E will correct. 
1)  horizontally, over time.  The market might go up/down 2-3% a year for the next ten years while real earnings track higher to drive earnings up.
2)  Crash.

Bottom line: I can't predict which.  I tell myself:  If the market stays an inflation-adjusted flat, I'm still earning 2% on dividends.  And I stay in. 

As others have pointed out, btw, savings rate far outweighs investment returns when it comes to doing your personal FI math, so it hardly matters what is happening in the markets your earning/saving years.



Mr Mark

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Re: A crash is coming.
« Reply #39 on: May 16, 2014, 07:04:56 PM »
http://forum.mrmoneymustache.com/investor-alley/i-think-i'm-going-to-take-the-plunge-into-vanguard-have-questions/

Lol, look at the dates on these posts.

like it!

An investment of $11k in vanguard VWELX admiral fund*  around then (oct 2012) would now be worth $13550. A 23% return in 1.5 years.

SP500: that 11k would be $14700, around 34% , not bad.

Bonds. Not so good. 11120, about 1%.

* the one I recommended as a balanced approach.

SDREMNGR

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Re: A crash is coming.
« Reply #40 on: May 16, 2014, 07:30:09 PM »
Heck, I know I shouldn't try to time the market but heck if I'm not going to at least try to hedge my bets.  I am pretty much 100% long on stocks right now but I do want to be able to reallocate when the time is right.  The metrics that I am watching closely are.


1. Yield curve - It's a great market crash signal and a basic sign that majority of people who control money think that the economy will be heading south.
http://www.newyorkfed.org/research/capital_markets/Prob_Rec.pdf
The yield curve inverts when the long term treasury rate is lower than short term treasuries.  It pretty much predicted the last 5 crashes, and the last 2 by almost the same month.

2. PE Ratios, CAPE, Shiller, etc.
Call it what you will, but when PE ratios are high, that means something is up.  You can rationalize the exact reason why but it is what it is.  People are willing to pay a lot of money for very low yields.  That means something is up.  There are no better alternatives, corporate earnings are down, people expect corporate earnings to be up next year, etc.  But as a general broad metric, the PE ratio is a good one to add to the list to keep an eye on.

3. General economic indicators:
Employment rate, inflation, etc.  Skirt lengths, consumer confidence surveys, skin color of Presidents, twitter feeds what have you.  Whichever ones floats your boat.

4. Trendlines.
The MACD trend line correctly predicted the 2000 and 2008 crashes, and the 52 week SMA also did a pretty good job.  If trading costs are low (if only in Vanguard funds, for example) then it doesn't hurt to get in and out when the trendlines do break from positive to negative sides.  It would have saved you a lot of money in the 2 most recent big crashes of 2000 and 2008.  There would have been many false positive readings as well, but if trading costs are negligible or zero, and you don't mind paying attention to the headlines, then it's worth it I think.

I was thinking about selling out of the majority of my positions today on positive news, but I think Monday will have a good start and I will sell off then.  Or if Monday has a shitty start, then I will also sell off then.  As an aside, I realized how hard it would be for me to sell off my positions quickly because of the sheer number of different things that I am invested in.  A bunch of different mutual funds and a bunch of different IRA accounts (roth, roll over, simple, taxable acct).  I was doing a rebalancing portfolio bit but I think I am going to do only 2 etfs.  BND and VTI.  It makes it much easier to sell off my positions when I hit the panic button.

See you on the other side of the bear market!  ;)

Emilyngh

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Re: A crash is coming.
« Reply #41 on: May 16, 2014, 07:43:56 PM »
Heck, I know I shouldn't try to time the market but heck if I'm not going to at least try to hedge my bets.  I am pretty much 100% long on stocks right now but I do want to be able to reallocate when the time is right.  The metrics that I am watching closely are.


1. Yield curve - It's a great market crash signal and a basic sign that majority of people who control money think that the economy will be heading south.
http://www.newyorkfed.org/research/capital_markets/Prob_Rec.pdf
The yield curve inverts when the long term treasury rate is lower than short term treasuries.  It pretty much predicted the last 5 crashes, and the last 2 by almost the same month.

2. PE Ratios, CAPE, Shiller, etc.
Call it what you will, but when PE ratios are high, that means something is up.  You can rationalize the exact reason why but it is what it is.  People are willing to pay a lot of money for very low yields.  That means something is up.  There are no better alternatives, corporate earnings are down, people expect corporate earnings to be up next year, etc.  But as a general broad metric, the PE ratio is a good one to add to the list to keep an eye on.

3. General economic indicators:
Employment rate, inflation, etc.  Skirt lengths, consumer confidence surveys, skin color of Presidents, twitter feeds what have you.  Whichever ones floats your boat.

4. Trendlines.
The MACD trend line correctly predicted the 2000 and 2008 crashes, and the 52 week SMA also did a pretty good job.  If trading costs are low (if only in Vanguard funds, for example) then it doesn't hurt to get in and out when the trendlines do break from positive to negative sides.  It would have saved you a lot of money in the 2 most recent big crashes of 2000 and 2008.  There would have been many false positive readings as well, but if trading costs are negligible or zero, and you don't mind paying attention to the headlines, then it's worth it I think.

I was thinking about selling out of the majority of my positions today on positive news, but I think Monday will have a good start and I will sell off then.  Or if Monday has a shitty start, then I will also sell off then.  As an aside, I realized how hard it would be for me to sell off my positions quickly because of the sheer number of different things that I am invested in.  A bunch of different mutual funds and a bunch of different IRA accounts (roth, roll over, simple, taxable acct).  I was doing a rebalancing portfolio bit but I think I am going to do only 2 etfs.  BND and VTI.  It makes it much easier to sell off my positions when I hit the panic button.

See you on the other side of the bear market!  ;)

Oooh, a great post to refer to in a year with a "note the date" post.

SDREMNGR

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Re: A crash is coming.
« Reply #42 on: May 16, 2014, 07:49:33 PM »
But for all you buy and holders out there, here's an interesting take on it that supports buy and hold to some extent.  In the story, if you only bought in on the day before the market crash of 72, 87, 00, and 08, and then held it until 2013, you'd still have done pretty well.  $184,000 nominally was invested. ($6k in 72, $46k in 87, $68k in 99, $64k in 07).  If he just held on, he would have $1.1 mil in 2013.  If he had DCA, he'd have $2.3 mil.

http://awealthofcommonsense.com/worlds-worst-market-timer/

But of course, if he had somehow missed out on the bear markets.....
« Last Edit: May 16, 2014, 08:01:37 PM by SDREMNGR »

SDREMNGR

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Re: A crash is coming.
« Reply #43 on: May 16, 2014, 07:51:01 PM »
Heck, I know I shouldn't try to time the market but heck if I'm not going to at least try to hedge my bets.  I am pretty much 100% long on stocks right now but I do want to be able to reallocate when the time is right.  The metrics that I am watching closely are.


1. Yield curve - It's a great market crash signal and a basic sign that majority of people who control money think that the economy will be heading south.
http://www.newyorkfed.org/research/capital_markets/Prob_Rec.pdf
The yield curve inverts when the long term treasury rate is lower than short term treasuries.  It pretty much predicted the last 5 crashes, and the last 2 by almost the same month.

2. PE Ratios, CAPE, Shiller, etc.
Call it what you will, but when PE ratios are high, that means something is up.  You can rationalize the exact reason why but it is what it is.  People are willing to pay a lot of money for very low yields.  That means something is up.  There are no better alternatives, corporate earnings are down, people expect corporate earnings to be up next year, etc.  But as a general broad metric, the PE ratio is a good one to add to the list to keep an eye on.

3. General economic indicators:
Employment rate, inflation, etc.  Skirt lengths, consumer confidence surveys, skin color of Presidents, twitter feeds what have you.  Whichever ones floats your boat.

4. Trendlines.
The MACD trend line correctly predicted the 2000 and 2008 crashes, and the 52 week SMA also did a pretty good job.  If trading costs are low (if only in Vanguard funds, for example) then it doesn't hurt to get in and out when the trendlines do break from positive to negative sides.  It would have saved you a lot of money in the 2 most recent big crashes of 2000 and 2008.  There would have been many false positive readings as well, but if trading costs are negligible or zero, and you don't mind paying attention to the headlines, then it's worth it I think.

I was thinking about selling out of the majority of my positions today on positive news, but I think Monday will have a good start and I will sell off then.  Or if Monday has a shitty start, then I will also sell off then.  As an aside, I realized how hard it would be for me to sell off my positions quickly because of the sheer number of different things that I am invested in.  A bunch of different mutual funds and a bunch of different IRA accounts (roth, roll over, simple, taxable acct).  I was doing a rebalancing portfolio bit but I think I am going to do only 2 etfs.  BND and VTI.  It makes it much easier to sell off my positions when I hit the panic button.

See you on the other side of the bear market!  ;)

Oooh, a great post to refer to in a year with a "note the date" post.

If I turned out to be right... well, then I'll be writing a book and doing a book tour.  If I turned out to be wrong... well then, I'd be among the millions. :)

Eric

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Re: A crash is coming.
« Reply #44 on: May 16, 2014, 07:57:21 PM »
But of course, if he had somehow missed out on the bear markets.....

Then he would be the world's best market timer.  But of course if he was that clairvoyant, why not just choose winning lottery numbers instead?

Clover

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Re: A crash is coming.
« Reply #45 on: May 16, 2014, 09:10:27 PM »
Recently I have sold a few of my "winners" just to beef up my cash stash a bit just in case a correction occurs - yeah, can be seen as a form of market timing, but I can be a skittish investor at times. The majority of my holdings pay very good dividends (portfolio is yielding around 6%) so as long as the income rolls in every month or quarter, I can stomach some market hiccups.

But I have always kept a sizable amount handy in cash for the "sleep well at night" factor. Probably have 4 years living expenses in cash right now. Will look to deploy some more soon.

This.

If worrying about a correction is keeping you up at night, consider moving 50% to cash.  That way, no matter what happens you get to be right.  If the next 12 months are great, you've participated in the market.  If there's a crash, you've avoided losses and you get to buy back in at a deep discount.  Investors are often their own worse enemy so try to figure out what you need to do to keep from blowing yourself up financially.  Have you taken a risk tolerance survey lately?

RapmasterD

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Re: A crash is coming.
« Reply #46 on: May 17, 2014, 12:30:00 PM »
SDREMNGER -- As long as you systemically and consistently stick to your approach, I like it a lot.

I.E., This set of signals says "Get out." That set of signals says "Get in." No emotion. Just pure price charts and ratios.

Dr. Doom

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Re: A crash is coming.
« Reply #47 on: May 17, 2014, 12:45:26 PM »
2. PE Ratios, CAPE, Shiller, etc.
Call it what you will, but when PE ratios are high, that means something is up.  You can rationalize the exact reason why but it is what it is.  People are willing to pay a lot of money for very low yields.  That means something is up.  There are no better alternatives, corporate earnings are down, people expect corporate earnings to be up next year, etc.  But as a general broad metric, the PE ratio is a good one to add to the list to keep an eye on.

I like CAPE as well.  I heard an interview with Robert Shiller just last week where he said that he was very concerned about the current ratios but still cautioned against market timing because hey, you can't predict this.

But I completely agree with your main point here.  Something is out of whack.  It may be because boomers are rushing to get back in the market after being out for a while -- a desperate attempt to shore up poorly funded retirement accounts.  It may be because of the QE efforts by the Fed over the last 3 years.  It may be because of some Wall-Street manufactured mess, and we just don't know what it is yet.  Or some combination plus insert_your_alternate_theory_here.  No matter what the cause, there really can be no doubt that the ratio is high and the market is overvalued.  Either earnings will catch up over time, or there will be a correction down.  I believe in regression to the mean.

I will say this, too:  If most of your money is in funds, and you for whatever reason need cash right now, this is not a bad time to pull a bit of money.

For example I'm RE'ing soon and have decided to keep a 2.5 year cash/cd ladder buffer to ride out any horrible market dumps (2.5 years is about 50K for me).  I'm grabbing that cash this coming week.  I don't consider this to be market timing, exactly.  Just recognition that it's better to take money out when P/E is high, and worse to take it out when it's low. 



SDREMNGR

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Re: A crash is coming.
« Reply #48 on: May 17, 2014, 01:59:41 PM »
A pretty good study showed that if you are going to FIRE soon, and you want to statistically help your chances of never running out of money through your death, being overly conservative in the initial 2-5 years AFTER retiring can significantly decrease your probability of ruin from around 11% to about 6%.  So that means if you have 25x your spending saved in 100% stocks, and you plan on doing 4% SWR, your probability that the money will last you pretty much infinitely goes up from 89% to $94% if you moved your stocks to bonds for the initial 2 years.  I am paraphrasing here and the percentages may be off by one or two, but the gist is that the initial crash in net worth is dramatically more painful than in subsequent years.

warfreak2

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Re: A crash is coming.
« Reply #49 on: May 17, 2014, 02:24:52 PM »
100% stocks, and you plan on doing 4% SWR, your probability that the money will last you pretty much infinitely goes up from 89% to 94% if you moved your stocks to bonds for the initial 2 years.
That's hardly surprising, as the original study establishing the 4% SWR showed a 100% success rate for a consistent 75%/25% stocks/bonds allocation, better than the success rate for 100% stocks. One of us may be misunderstanding something.