Author Topic: How concerned are you about the Everything Bubble?  (Read 7188 times)

vand

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Re: How concerned are you about the Everything Bubble?
« Reply #100 on: May 09, 2019, 09:29:03 AM »
Instead of starting a new, loosely related thread, I figured I'd jump in here and ask...  if market conditions are not to the point of making most of you concerned, are they at least meriting the idea of an AA revision?  My current AA is 85% total market, 15% total bond.  I'm 44 now but in the last 2 years I contributed 3x as much annually to my 401k as the previous 20 annually, and from this year forward it'll be more like 7x.  I'm really trying to make up for lost time, without a ton of time to do so.  Reading Buffet and others predict the next decade likely to be very flat or even negative for "currently over-valued" stocks it has me a bit concerned. 

Any hopes of FIRE'ing require some non-trivial return rate over the next 5-7 years.  What I really need is historically more the realm of stocks, but all of this has me wondering if I need to play it safer and lean more towards bonds.  I know the "stick to the plan" mantra is well-loved around here, but that seems to presume I started with a reasonable plan.  In some sense I'm 45, investing like I'm 25, hoping to retire when I'm 50, none of which probably makes much sense.  So do I switch towards more bonds now, and if so, is that more because of my age than the current market or does the current outlook argue for making that move sooner?  I know that sounds a bit "market timey" but I'll ask it anyway.

Only you can really know if your AA is too aggressive, because it ties in with your own appetite for risk. How would you feel if your portfolio was down 40-60% in the next few years? Granted, this is very much towards the "worst case scenario" but this sort of decline is not out of line of historical bear markets. Would you lose sleep, or would you sleep like a baby knowing that you are now presented with an opportunity to buy more stocks while they are on sale?

What you should also realise is that the sooner you are aiming to FIRE, the less of a factor your return on investment becomes, and the more important your own contributions (ie savings rate) becomes. With a 5-7 year span, you should not expect the market to deliver more than maybe a 20-30% return on your investment, so all your pot needs to be built up from your own contributions. Don't take this personally, but the market doesn't really care about your goals and dream (or mine, or anyone else's). It will let you come along for the ride, but don't be too upset if it doesn't work to your schedule or live up to your expectations.

BicycleB

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Re: How concerned are you about the Everything Bubble?
« Reply #101 on: May 09, 2019, 10:00:25 AM »
Btw I don’t agree with the broad statement that “everything” is over-inflated. For sure, I think western Bond, Equity and real estate markets are, but there are always some sectors that are beaten down and cheap.. you just have to cast your net wide enough and look beyond the mainstream markets. Today, those depressed  markets are commodities and emerging markets, which have both been heavily battered due to a strong USD, but may have bottomed.

Aren’t many stocks on the SP500 currently still beaten down to bear market levels?

Not that it matters, everything looks cheapish to me.

Do you consider it cheap because its down from recent highs? Or do you consider them cheap based on fundamental factors?

25% off a recent high is nothing in the world of stocks.

Cyclical stocks can easily lose 80-90% through a downturn.. and then gain it back again.

Yes, its true that many stocks are down from recent highs, and the indexes do not paint a full picture. the broader RUT index is nowhere near to recapturing the old highs, and other developed markets are not close to their ATHs. This suggests that the rally is pretty narrow and underpinned by a few big stocks.


@vand, I found both of your quotes above to be usefully thought provoking. They seem very relevant to the topic of an Everything Bubble!

Question: How do you think an investor should distinguish between "a few big stocks have an overly high value" vs "a few big stocks are correctly valued at a high price because they have established a valuable position in the economy"?

ysette9

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Re: How concerned are you about the Everything Bubble?
« Reply #102 on: May 09, 2019, 10:02:11 AM »
Personally our AA is not something set in stone but we have a plan for adjusting it based on our personal financial situation. Specifically, we are planning to implement the bond tent strategy to hedge against sequence of returns risk in early retirement, as well as the short runway we have now leading up to FI. So, we are increasing our bonds now, and will then slowly increase equities after we pull the plug on retirement.

This is a moving AA but it isn’t market timing because nowhere does market conditions factor into the plan.

So to the question above, it may be reasonable to adjust your AA based on how old you are and how many years left you have to save. But don’t let that be a slippery slope to wanting to predict the next stock crash or whatnot.

appleshampooid

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Re: How concerned are you about the Everything Bubble?
« Reply #103 on: May 09, 2019, 01:25:45 PM »
Personally our AA is not something set in stone but we have a plan for adjusting it based on our personal financial situation. Specifically, we are planning to implement the bond tent strategy to hedge against sequence of returns risk in early retirement, as well as the short runway we have now leading up to FI. So, we are increasing our bonds now, and will then slowly increase equities after we pull the plug on retirement.

This is a moving AA but it isn’t market timing because nowhere does market conditions factor into the plan.

So to the question above, it may be reasonable to adjust your AA based on how old you are and how many years left you have to save. But don’t let that be a slippery slope to wanting to predict the next stock crash or whatnot.
Same. Went from 10% bonds to 11% this year. Next year will tick it another percent. Aiming for 20% bonds at retirement, which should be about 9 years out. If things change, we can adjust the tent/ramp.

habaneroNorway

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Re: How concerned are you about the Everything Bubble?
« Reply #104 on: May 09, 2019, 01:37:24 PM »
With a 5-7 year span, you should not expect the market to deliver more than maybe a 20-30% return on your investment, so all your pot needs to be built up from your own contributions. Don't take this personally, but the market doesn't really care about your goals and dream (or mine, or anyone else's). It will let you come along for the ride, but don't be too upset if it doesn't work to your schedule or live up to your expectations.

This is an important point. Especially for an all-equities portfolio, returns over 5-7 years might be very low or even negative. Its not very likely but it's definately with possible scenarios if history is any guide. They can of course also be very high, but the range of possible outcomes is very wide. Historically the range of annual real returns with dividends reinvested for the S&P 500 for 7 years is in the range -7.5% to + 25.3%. For 5 years its -13% to +33.3%.

thd7t

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Re: How concerned are you about the Everything Bubble?
« Reply #105 on: May 09, 2019, 02:14:32 PM »
With a 5-7 year span, you should not expect the market to deliver more than maybe a 20-30% return on your investment, so all your pot needs to be built up from your own contributions. Don't take this personally, but the market doesn't really care about your goals and dream (or mine, or anyone else's). It will let you come along for the ride, but don't be too upset if it doesn't work to your schedule or live up to your expectations.

This is an important point. Especially for an all-equities portfolio, returns over 5-7 years might be very low or even negative. Its not very likely but it's definately with possible scenarios if history is any guide. They can of course also be very high, but the range of possible outcomes is very wide. Historically the range of annual real returns with dividends reinvested for the S&P 500 for 7 years is in the range -7.5% to + 25.3%. For 5 years its -13% to +33.3%.
Could you clarify what you mean by "historically the range"?  I'm probably misunderstanding this, because you can definitely find periods of greater growth than you're showing (like the last seven years) and I suspect losses as well (although with more finagling). 

I also tend to disagree with vand's point, because by the time you are approaching FI, your contributions are probably pretty small compared to market movements (in either direction) and have been for some time.  They help, but aren't the main driver.

ysette9

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Re: How concerned are you about the Everything Bubble?
« Reply #106 on: May 09, 2019, 02:30:12 PM »
Personally our AA is not something set in stone but we have a plan for adjusting it based on our personal financial situation. Specifically, we are planning to implement the bond tent strategy to hedge against sequence of returns risk in early retirement, as well as the short runway we have now leading up to FI. So, we are increasing our bonds now, and will then slowly increase equities after we pull the plug on retirement.

This is a moving AA but it isn’t market timing because nowhere does market conditions factor into the plan.

So to the question above, it may be reasonable to adjust your AA based on how old you are and how many years left you have to save. But don’t let that be a slippery slope to wanting to predict the next stock crash or whatnot.
Same. Went from 10% bonds to 11% this year. Next year will tick it another percent. Aiming for 20% bonds at retirement, which should be about 9 years out. If things change, we can adjust the tent/ramp.
That slope seems so gentle compared to ours! We are at 25% bonds, goal is 40% at FI. We’ll probably reach FI in 6-24 months

habaneroNorway

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Re: How concerned are you about the Everything Bubble?
« Reply #107 on: May 09, 2019, 02:38:31 PM »

Could you clarify what you mean by "historically the range"?  I'm probably misunderstanding this, because you can definitely find periods of greater growth than you're showing (like the last seven years) and I suspect losses as well (although with more finagling). 

I also tend to disagree with vand's point, because by the time you are approaching FI, your contributions are probably pretty small compared to market movements (in either direction) and have been for some time.  They help, but aren't the main driver.

The returns I gave were annualized real returns, not returns over X years in total.
« Last Edit: May 09, 2019, 02:47:11 PM by habaneroNorway »

thd7t

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Re: How concerned are you about the Everything Bubble?
« Reply #108 on: May 09, 2019, 02:57:18 PM »

Could you clarify what you mean by "historically the range"?  I'm probably misunderstanding this, because you can definitely find periods of greater growth than you're showing (like the last seven years) and I suspect losses as well (although with more finagling). 

I also tend to disagree with vand's point, because by the time you are approaching FI, your contributions are probably pretty small compared to market movements (in either direction) and have been for some time.  They help, but aren't the main driver.

The returns I gave were annualized real returns, not returns over X years in total.
Thanks!  I missed the word "annually" and figured I had to have something wrong.

Classical_Liberal

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Re: How concerned are you about the Everything Bubble?
« Reply #109 on: May 09, 2019, 03:50:28 PM »
I also tend to disagree with vand's point, because by the time you are approaching FI, your contributions are probably pretty small compared to market movements (in either direction) and have been for some time.  They help, but aren't the main driver.

This is exactly why some portfolio value stability is MORE critical to early RE period than to any other period.  Just to clarify its more critical IF someone is choosing a fixed, inflation adjusted withdrawal (ie 4%rule).  It matters much less if someone has very flexible WR's.  Hence all the discussions around here lately regarding bond tents.

ChpBstrd

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Re: How concerned are you about the Everything Bubble?
« Reply #110 on: May 09, 2019, 04:12:24 PM »
I think an 80% equity portfolio is a lot more aggressive and risky at a time when the market P/E is over 20 than the same allocation when the market P/E is 12. Equities are also a lot more risky when unemployment is under 4% than during the middle of a brutal recession.

Similarly, long-term bonds are more risky when the yield is less than 3% than they are when the yield is 6-10%. Remember, a blip of just a couple interest rate points would demolish long term bond prices worse than a bear market would do for equities.

Rental real estate investments that break even and depend upon rapid appreciation as a justification are more aggressive and risky than high-cash flow, high-ROE properties.

If these statements are self-evident, why hold an aggressive AA of such investments unhedged?

PDXTabs

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Re: How concerned are you about the Everything Bubble?
« Reply #111 on: May 09, 2019, 04:23:08 PM »
This is exactly why some portfolio value stability is MORE critical to early RE period than to any other period.  Just to clarify its more critical IF someone is choosing a fixed, inflation adjusted withdrawal (ie 4%rule).  It matters much less if someone has very flexible WR's.

Yup. I'm very willing to sit on a farm in Vietnam or Nepal for a couple years if I really need to.* Of course, I'm also willing to keep working.

* - Which is not to say that there is anything wrong with Vietnamese and Nepalese farms, just that the cost of living in rural Vietnam and Nepal is much lower than the west coast of the US.

frugledoc

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Re: How concerned are you about the Everything Bubble?
« Reply #112 on: May 09, 2019, 04:23:26 PM »
I think an 80% equity portfolio is a lot more aggressive and risky at a time when the market P/E is over 20 than the same allocation when the market P/E is 12. Equities are also a lot more risky when unemployment is under 4% than during the middle of a brutal recession.

Similarly, long-term bonds are more risky when the yield is less than 3% than they are when the yield is 6-10%. Remember, a blip of just a couple interest rate points would demolish long term bond prices worse than a bear market would do for equities.

Rental real estate investments that break even and depend upon rapid appreciation as a justification are more aggressive and risky than high-cash flow, high-ROE properties.

If these statements are self-evident, why hold an aggressive AA of such investments unhedged?

These statements are your personal opinion but they are by no means self evident or factual.

Stop thinking so much. Choose an asset allocation that lets you sleep at night and then throw everything you have at it.

I don’t fear a big crash, but don’t wish for it because of the harm it would cause to many.  I’m a doctor so a bad recession wouldn’t affect me too badly and I would continue with my plan.

FIREstache

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Re: How concerned are you about the Everything Bubble?
« Reply #113 on: May 09, 2019, 04:26:18 PM »
Personally our AA is not something set in stone but we have a plan for adjusting it based on our personal financial situation. Specifically, we are planning to implement the bond tent strategy to hedge against sequence of returns risk in early retirement, as well as the short runway we have now leading up to FI. So, we are increasing our bonds now, and will then slowly increase equities after we pull the plug on retirement.

This is a moving AA but it isn’t market timing because nowhere does market conditions factor into the plan.

So to the question above, it may be reasonable to adjust your AA based on how old you are and how many years left you have to save. But don’t let that be a slippery slope to wanting to predict the next stock crash or whatnot.

Thank you.  Same thing here - I've already made multiple changes to my  AA in the last year leading to my retirement and plan to ride up using a rising equity glide path after my FIRE date.  The last big change was last Friday when my investments were at a record high.

PDXTabs

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Re: How concerned are you about the Everything Bubble?
« Reply #114 on: May 09, 2019, 04:31:19 PM »
I think an 80% equity portfolio is a lot more aggressive and risky at a time when the market P/E is over 20 than the same allocation when the market P/E is 12.

These statements are your personal opinion but they are by no means self evident or factual.

There is certainly some evidence for very high CAPE ratios. Check out table 2. But it's not like we have an N of 30 or anything, I'm still a buy more with every paycheck kind of guy.
« Last Edit: May 09, 2019, 04:42:55 PM by PDXTabs »

sol

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Re: How concerned are you about the Everything Bubble?
« Reply #115 on: May 09, 2019, 04:32:34 PM »
I think an 80% equity portfolio is a lot more aggressive and risky at a time when the market P/E is over 20 than the same allocation when the market P/E is 12.

Twelve?  That's funny.  You mean like back in 1982?  Entire investing careers have come and gone while someone waiting for a P/E of 12 would have been sitting on the sidelines.  I'm already FIREd and I was literally in kindergarten the last time the P/E was 12.

Telecaster

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Re: How concerned are you about the Everything Bubble?
« Reply #116 on: May 09, 2019, 04:35:21 PM »
I think an 80% equity portfolio is a lot more aggressive and risky at a time when the market P/E is over 20 than the same allocation when the market P/E is 12. Equities are also a lot more risky when unemployment is under 4% than during the middle of a brutal recession.

I have a quibble with how you are using the term "risky."  What is your holding period?   Most people here have investing horizons of 30, 40, years or more.  There have been very few ten year periods where stock returns have been negative.  There have been no 15 years periods with negative returns.  CrankAddict is just starting investing.   His investment horizon is likely more than 15 years.   Aside from an asteroid or zombie apocalypse,  What is the risk?    Bonds, by the way, commonly lose to inflation.  So it is not like you are getting off risk free there either. 

ChpBstrd

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Re: How concerned are you about the Everything Bubble?
« Reply #117 on: May 09, 2019, 08:29:45 PM »
I think an 80% equity portfolio is a lot more aggressive and risky at a time when the market P/E is over 20 than the same allocation when the market P/E is 12.

Twelve?  That's funny.  You mean like back in 1982?  Entire investing careers have come and gone while someone waiting for a P/E of 12 would have been sitting on the sidelines.  I'm already FIREd and I was literally in kindergarten the last time the P/E was 12.

That would have been a low-risk time to go all-in stocks. 1999 was a risker time. Disagree?

Telecaster

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Re: How concerned are you about the Everything Bubble?
« Reply #118 on: May 09, 2019, 11:23:38 PM »
I think an 80% equity portfolio is a lot more aggressive and risky at a time when the market P/E is over 20 than the same allocation when the market P/E is 12.

Twelve?  That's funny.  You mean like back in 1982?  Entire investing careers have come and gone while someone waiting for a P/E of 12 would have been sitting on the sidelines.  I'm already FIREd and I was literally in kindergarten the last time the P/E was 12.

That would have been a low-risk time to go all-in stocks. 1999 was a risker time. Disagree?

Define risky.  Since 1999 stocks have returned 218%

If a "risky" time means more than doubling your money...it doesn't sound all that risky. 

Classical_Liberal

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Re: How concerned are you about the Everything Bubble?
« Reply #119 on: May 10, 2019, 01:22:10 AM »
Define risky.  Since 1999 stocks have returned 218%

If a "risky" time means more than doubling your money...it doesn't sound all that risky. 
Well, following the 4% rule with 100% Total US in 1999 and you'd be over half depleted in real terms only 20 years in.  Someone who bond tented at 60/40 is looking a whole lot better.  So "risk" is more than total returns, 218% doesn't mean jack to that person.   

Advocating a very high equity allocation, no matter goals, no matter valuations, is a poor policy.  It works great for someone who retires at 30 with income from real estate rentals and side gigs that cover expenses (why this person even needs 25X in backup is a better question).  It also works great for a 25 year old who DCA's 50% of their income and doesn't plan to FIRE for more than a decade.  It probably isn't the best idea for someone with CAPE>30 who's planning to FIRE soon with no additional income sources.  But to each their own.

vand

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Re: How concerned are you about the Everything Bubble?
« Reply #120 on: May 10, 2019, 03:07:31 AM »
Question: How do you think an investor should distinguish between "a few big stocks have an overly high value" vs "a few big stocks are correctly valued at a high price because they have established a valuable position in the economy"?

It just depends on your investment philosophy; do you believe in paying top dollar today for the expectation of high future earnings (growth investing), or are you looking for something that has been around for a while and proven, has good solid cashflows, and selling at a reasonable price and will provide a known, steady expected return (value investing)?

Right now the market is willing to pay high premium for the promise of growth, but market history has shown that this is often a mistake and such lofty future expectations are unlikely to be met.  The problems with growth investing are that

1. tomorrow's growth and higher earnings are far from guaranteed. This is simply the free market at work; excess profit provides an economic signal for other companies to move into that space and compete for those customers. They bring new idea and new ways of doing things that usurp the original, so it becomes difficult for today's leading companies to always remain ahead of competition. History has shown this to be the case; look at any number of companies from GE, IBM, Microsoft, Ericsson, Intel that mature and then eventually fall behind the next new innovator. Apple & Amazon are world leaders today, they probably won't be 20 years from now.

Therefore, if you bet on growth stocks, you are betting against the long term economic forces of & profit signalling, supply & demand that are constantly churning away

Not only do profits tend to be normalized within industries, but also between industries. If one industry is loss making, firms will cease to operate in that industry and move to one where there are excess profits. These isalso self evident just looking at an individual level; you bring your particular set of skills to the market and there are market forces at work that mean you will get paid roughly similar if you work for a oil producer, software developer, or fashion retailer (ok, maybe not great examples, but my point is that it's your skills that primarily determine your wages, not the industry you work in).


2. Investors tend to get much more excited about growth and therefore overpay more than they do for steady value, and of course this is reflected in the price premium built into the share price of these stocks. If and when those target start getting missed (they always do, eventually, see point above) the revision of expectations can be savage, much more so than just a boring value stock missing earnings, which of course also happens

« Last Edit: May 10, 2019, 03:21:08 AM by vand »

vand

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Re: How concerned are you about the Everything Bubble?
« Reply #121 on: May 10, 2019, 03:31:58 AM »
Also see https://seekingalpha.com/article/3987114-predicting-stock-market-returns-using-shiller-cape-pb

Note figure 7; current earnings growth provides absolutely no clairvoyance wrt to long term future price performance. Buying when profits are rising provides little better guidance than buying when profits are falling



Compare this to price/book valuation, which have much stronger correlation,



so by buying when cheap you are putting yourself in a position with a statistically better chance of realising higher future returns, and of course conversely the opposite is true, buying expensive you are statistically putting yourself in a position with a higher chance of lower future returns




Question: How do you think an investor should distinguish between "a few big stocks have an overly high value" vs "a few big stocks are correctly valued at a high price because they have established a valuable position in the economy"?

It just depends on your investment philosophy; do you believe in paying top dollar today for the expectation of high future earnings (growth investing), or are you looking for something that has been around for a while and proven, has good solid cashflows, and selling at a reasonable price and will provide a known, steady expected return (value investing)?

Right now the market is willing to pay high premium for the promise of growth, but market history has shown that this is often a mistake and such lofty future expectations are unlikely to be met.  The problems with growth investing are that

1. tomorrow's growth and higher earnings are far from guaranteed. This is simply the free market at work; excess profit provides an economic signal for other companies to move into that space and compete for those customers. They bring new idea and new ways of doing things that usurp the original, so it becomes difficult for today's leading companies to always remain ahead of competition. History has shown this to be the case; look at any number of companies from GE, IBM, Microsoft, Ericsson, Intel that mature and then eventually fall behind the next new innovator. Apple & Amazon are world leaders today, they probably won't be 20 years from now.

Therefore, if you bet on growth stocks, you are betting against the long term economic forces of & profit signalling, supply & demand that are constantly churning away

Not only do profits tend to be normalized within industries, but also between industries. If one industry is loss making, firms will cease to operate in that industry and move to one where there are excess profits. These isalso self evident just looking at an individual level; you bring your particular set of skills to the market and there are market forces at work that mean you will get paid roughly similar if you work for a oil producer, software developer, or fashion retailer (ok, maybe not great examples, but my point is that it's your skills that primarily determine your wages, not the industry you work in).


2. Investors tend to get much more excited about growth and therefore overpay more than they do for steady value, and of course this is reflected in the price premium built into the share price of these stocks. If and when those target start getting missed (they always do, eventually, see point above) the revision of expectations can be savage, much more so than just a boring value stock missing earnings, which of course also happens
« Last Edit: May 10, 2019, 03:35:28 AM by vand »

vand

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Re: How concerned are you about the Everything Bubble?
« Reply #122 on: May 10, 2019, 04:05:51 AM »

Laserjet3051's post is an excellent one. The reason everyone's bullish about their own prospects right now is the same reason why stocks are richly priced; employment is high, income is growing, they have spare cash to be buying stocks, and they see things getting better for them in the next few years. Conversely, in a downturn everything works in reverse.  The stock market, economy, and peoples' individual circumstances are not separate things. People tend to sell low because they have little choice.. they become forced sellers. When you have no income, or much reduced income, losing sleep because you're worried about being foreclosed, this creates FEAR. Buying cheap stocks is probably the last thing on your mind.

I don't think "everyone's bullish" right now because the good times are rolling, we've forgotten the past, or we think things are "getting better" (financially, I assume you mean).  I fully expect a major market pullback soon - like 30% plus.  However, I expected that in 2018, with CAPE moving well into the 30s.  And 2017 with the threat of nuclear war, Mueller getting started, and one of the longest bull markets on record.  And 2016 with Trump being elected, the Brexit vote, etc.  And 2015...
However, because I stuck to my IPS and just kept buying, I am now at a point where even if the markets drop 50% I'll still never need to work again.  Ok, if they drop 70% I'll be properly freaked out.  But 50%?  meh. 

The point is, I've learned I'm spectacularly bad at predicting what the markets are going to do and if I'd listened to my fears I wouldn't be FIREd right now because I'd still be waiting to buy the dip.  It's absolutely true that someone is going to come to these boards with excellent reasons why we should all get out now and start hoarding cash, and everything is going to crash right after they say that.  That's a 100% guarantee.  Just like it's a guarantee that someone's going to pick the Powerball numbers in an upcoming drawing.  In both cases we KNOW that's coming, we just have no idea which of the doomsday prophets will be correct or when it will happen. 

So yes, when the next crash comes I might have to sell some of my VTSAX when it's down - way down.  But because I didn't freak out when I started investing in the early 2000s when the tech bubble burst and I didn't change anything when my investments plummeted in 2008-2009, I'm now in a position where I DGAF what the markets do next.  I know I can't predict it.  But I also know I have enough that even if there's a major crash I can still live on the savings I built up ignoring all the people who said there was a bubble - even when they were right.

It's easy for those people who have had the fortune and patience to have ridden a 10 year bull market to suggest to others do the same thing, but it's not 2009 any more, or even 2014 or 2017.

Just to be clear, I am NOT against cost averaging over a long period; I do largely agree that monthly buying the market should be a part of of most people's strategy and do so myself, but only a part; asset allocation is also hugely important.  If you are fine with mediocre (possibly negative real) returns then I don't have a problem with you being fully 100% invested in the market, but if not and you want your money to work harder than 2% then you should probably exercise some caution and have some cash on the side - it makes sense if the spread between the risk-free rate of return vs the expected market return is as low as it is right now.


frugledoc

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Re: How concerned are you about the Everything Bubble?
« Reply #123 on: May 10, 2019, 04:19:13 AM »

Laserjet3051's post is an excellent one. The reason everyone's bullish about their own prospects right now is the same reason why stocks are richly priced; employment is high, income is growing, they have spare cash to be buying stocks, and they see things getting better for them in the next few years. Conversely, in a downturn everything works in reverse.  The stock market, economy, and peoples' individual circumstances are not separate things. People tend to sell low because they have little choice.. they become forced sellers. When you have no income, or much reduced income, losing sleep because you're worried about being foreclosed, this creates FEAR. Buying cheap stocks is probably the last thing on your mind.

I don't think "everyone's bullish" right now because the good times are rolling, we've forgotten the past, or we think things are "getting better" (financially, I assume you mean).  I fully expect a major market pullback soon - like 30% plus.  However, I expected that in 2018, with CAPE moving well into the 30s.  And 2017 with the threat of nuclear war, Mueller getting started, and one of the longest bull markets on record.  And 2016 with Trump being elected, the Brexit vote, etc.  And 2015...
However, because I stuck to my IPS and just kept buying, I am now at a point where even if the markets drop 50% I'll still never need to work again.  Ok, if they drop 70% I'll be properly freaked out.  But 50%?  meh. 

The point is, I've learned I'm spectacularly bad at predicting what the markets are going to do and if I'd listened to my fears I wouldn't be FIREd right now because I'd still be waiting to buy the dip.  It's absolutely true that someone is going to come to these boards with excellent reasons why we should all get out now and start hoarding cash, and everything is going to crash right after they say that.  That's a 100% guarantee.  Just like it's a guarantee that someone's going to pick the Powerball numbers in an upcoming drawing.  In both cases we KNOW that's coming, we just have no idea which of the doomsday prophets will be correct or when it will happen. 

So yes, when the next crash comes I might have to sell some of my VTSAX when it's down - way down.  But because I didn't freak out when I started investing in the early 2000s when the tech bubble burst and I didn't change anything when my investments plummeted in 2008-2009, I'm now in a position where I DGAF what the markets do next.  I know I can't predict it.  But I also know I have enough that even if there's a major crash I can still live on the savings I built up ignoring all the people who said there was a bubble - even when they were right.

It's easy for those people who have had the fortune and patience to have ridden a 10 year bull market to suggest to others do the same thing, but it's not 2009 any more, or even 2014 or 2017.

Just to be clear, I am NOT against cost averaging over a long period; I do largely agree that monthly buying the market should be a part of of most people's strategy and do so myself, but only a part; asset allocation is also hugely important.  If you are fine with mediocre (possibly negative real) returns then I don't have a problem with you being fully 100% invested in the market, but if not and you want your money to work harder than 2% then you should probably exercise some caution and have some cash on the side - it makes sense if the spread between the risk-free rate of return vs the expected market return is as low as it is right now.

Vand, I’m ok with 2% or negative returns compared to trying to time the market .  Just keep on accumulating for the next boom.   Long term markets are the opposite of gravity. What goes down must go up (in the long term).  I’m 100% confident I will outperform > 95% of market timers/swing traders over 10 years plus.  I definitely have no interest in trying to be in the 5% who are lucky/“skilled” to outperform.


vand

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Re: How concerned are you about the Everything Bubble?
« Reply #124 on: May 10, 2019, 05:05:40 AM »

Laserjet3051's post is an excellent one. The reason everyone's bullish about their own prospects right now is the same reason why stocks are richly priced; employment is high, income is growing, they have spare cash to be buying stocks, and they see things getting better for them in the next few years. Conversely, in a downturn everything works in reverse.  The stock market, economy, and peoples' individual circumstances are not separate things. People tend to sell low because they have little choice.. they become forced sellers. When you have no income, or much reduced income, losing sleep because you're worried about being foreclosed, this creates FEAR. Buying cheap stocks is probably the last thing on your mind.

I don't think "everyone's bullish" right now because the good times are rolling, we've forgotten the past, or we think things are "getting better" (financially, I assume you mean).  I fully expect a major market pullback soon - like 30% plus.  However, I expected that in 2018, with CAPE moving well into the 30s.  And 2017 with the threat of nuclear war, Mueller getting started, and one of the longest bull markets on record.  And 2016 with Trump being elected, the Brexit vote, etc.  And 2015...
However, because I stuck to my IPS and just kept buying, I am now at a point where even if the markets drop 50% I'll still never need to work again.  Ok, if they drop 70% I'll be properly freaked out.  But 50%?  meh. 

The point is, I've learned I'm spectacularly bad at predicting what the markets are going to do and if I'd listened to my fears I wouldn't be FIREd right now because I'd still be waiting to buy the dip.  It's absolutely true that someone is going to come to these boards with excellent reasons why we should all get out now and start hoarding cash, and everything is going to crash right after they say that.  That's a 100% guarantee.  Just like it's a guarantee that someone's going to pick the Powerball numbers in an upcoming drawing.  In both cases we KNOW that's coming, we just have no idea which of the doomsday prophets will be correct or when it will happen. 

So yes, when the next crash comes I might have to sell some of my VTSAX when it's down - way down.  But because I didn't freak out when I started investing in the early 2000s when the tech bubble burst and I didn't change anything when my investments plummeted in 2008-2009, I'm now in a position where I DGAF what the markets do next.  I know I can't predict it.  But I also know I have enough that even if there's a major crash I can still live on the savings I built up ignoring all the people who said there was a bubble - even when they were right.

It's easy for those people who have had the fortune and patience to have ridden a 10 year bull market to suggest to others do the same thing, but it's not 2009 any more, or even 2014 or 2017.

Just to be clear, I am NOT against cost averaging over a long period; I do largely agree that monthly buying the market should be a part of of most people's strategy and do so myself, but only a part; asset allocation is also hugely important.  If you are fine with mediocre (possibly negative real) returns then I don't have a problem with you being fully 100% invested in the market, but if not and you want your money to work harder than 2% then you should probably exercise some caution and have some cash on the side - it makes sense if the spread between the risk-free rate of return vs the expected market return is as low as it is right now.

Vand, I’m ok with 2% or negative returns compared to trying to time the market .  Just keep on accumulating for the next boom.   Long term markets are the opposite of gravity. What goes down must go up (in the long term).  I’m 100% confident I will outperform > 95% of market timers/swing traders over 10 years plus.  I definitely have no interest in trying to be in the 5% who are lucky/“skilled” to outperform.

you don't really understand what I'm saying, do you? My point is that Asset Allocation matters. Hugely. The investing universe does not start and end with VSTAX. As I have alluded to, there are other markets out there right now that are depressed and therefore offer the chance of a higher expected future return. Maybe you should go and read up about them so they form a part of circle of competence rather than thinking the best and only way is all-in, all-of-the-time, and anyone who disagrees is a clueless "market timer".
« Last Edit: May 10, 2019, 05:07:15 AM by vand »

thd7t

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Re: How concerned are you about the Everything Bubble?
« Reply #125 on: May 10, 2019, 06:40:58 AM »

Laserjet3051's post is an excellent one. The reason everyone's bullish about their own prospects right now is the same reason why stocks are richly priced; employment is high, income is growing, they have spare cash to be buying stocks, and they see things getting better for them in the next few years. Conversely, in a downturn everything works in reverse.  The stock market, economy, and peoples' individual circumstances are not separate things. People tend to sell low because they have little choice.. they become forced sellers. When you have no income, or much reduced income, losing sleep because you're worried about being foreclosed, this creates FEAR. Buying cheap stocks is probably the last thing on your mind.

I don't think "everyone's bullish" right now because the good times are rolling, we've forgotten the past, or we think things are "getting better" (financially, I assume you mean).  I fully expect a major market pullback soon - like 30% plus.  However, I expected that in 2018, with CAPE moving well into the 30s.  And 2017 with the threat of nuclear war, Mueller getting started, and one of the longest bull markets on record.  And 2016 with Trump being elected, the Brexit vote, etc.  And 2015...
However, because I stuck to my IPS and just kept buying, I am now at a point where even if the markets drop 50% I'll still never need to work again.  Ok, if they drop 70% I'll be properly freaked out.  But 50%?  meh. 

The point is, I've learned I'm spectacularly bad at predicting what the markets are going to do and if I'd listened to my fears I wouldn't be FIREd right now because I'd still be waiting to buy the dip.  It's absolutely true that someone is going to come to these boards with excellent reasons why we should all get out now and start hoarding cash, and everything is going to crash right after they say that.  That's a 100% guarantee.  Just like it's a guarantee that someone's going to pick the Powerball numbers in an upcoming drawing.  In both cases we KNOW that's coming, we just have no idea which of the doomsday prophets will be correct or when it will happen. 

So yes, when the next crash comes I might have to sell some of my VTSAX when it's down - way down.  But because I didn't freak out when I started investing in the early 2000s when the tech bubble burst and I didn't change anything when my investments plummeted in 2008-2009, I'm now in a position where I DGAF what the markets do next.  I know I can't predict it.  But I also know I have enough that even if there's a major crash I can still live on the savings I built up ignoring all the people who said there was a bubble - even when they were right.

It's easy for those people who have had the fortune and patience to have ridden a 10 year bull market to suggest to others do the same thing, but it's not 2009 any more, or even 2014 or 2017.

Just to be clear, I am NOT against cost averaging over a long period; I do largely agree that monthly buying the market should be a part of of most people's strategy and do so myself, but only a part; asset allocation is also hugely important.  If you are fine with mediocre (possibly negative real) returns then I don't have a problem with you being fully 100% invested in the market, but if not and you want your money to work harder than 2% then you should probably exercise some caution and have some cash on the side - it makes sense if the spread between the risk-free rate of return vs the expected market return is as low as it is right now.

Vand, I’m ok with 2% or negative returns compared to trying to time the market .  Just keep on accumulating for the next boom.   Long term markets are the opposite of gravity. What goes down must go up (in the long term).  I’m 100% confident I will outperform > 95% of market timers/swing traders over 10 years plus.  I definitely have no interest in trying to be in the 5% who are lucky/“skilled” to outperform.

you don't really understand what I'm saying, do you? My point is that Asset Allocation matters. Hugely. The investing universe does not start and end with VSTAX. As I have alluded to, there are other markets out there right now that are depressed and therefore offer the chance of a higher expected future return. Maybe you should go and read up about them so they form a part of circle of competence rather than thinking the best and only way is all-in, all-of-the-time, and anyone who disagrees is a clueless "market timer".
Vand, I definitely agree that asset allocation matters hugely, but I think that where we diverge is that I don't think that asset allocation should be a function of what I think the market will do.  It's why I disagree with the "Everything Bubble" element of this discussion.

habaneroNorway

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Re: How concerned are you about the Everything Bubble?
« Reply #126 on: May 10, 2019, 06:55:52 AM »
If you at the height of the .com boom in year 2000 started saving a fixed sum pr. month in an SPX total return fund, contribution  increasing by 2.5% per year to assume nominal saving rising with inflation. Assuming short-term money market investments paid 1 month US treasury bill rates and interest was reinvested every month. The equities-position would "permanently" be outperforming from early 2011 onwards. Today your net worth would be ~2.5 times as high as the most defensive investment possible. 

This is ignoring tax effects etc which generally favor equities, and fees - but the point is basically only that it can take a very long time to recover after heights (this period includes 2 major bear markets). But even up to before the 2008-2009 crisies, equities were not that much ahead (roughly 20% total over 8 years). So timing does matter. A lot. But it's hard to time. And now interest rates are much lower than at the start of the century as well.

If you get a 50% drop in equities, its basically back to break-even vs 1m government returns over 20 years. Then rinse and repeat - maybe.

Valvore

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Re: How concerned are you about the Everything Bubble?
« Reply #127 on: May 10, 2019, 10:28:26 AM »
Really quick back on topic comment:

The only reason an "everything bubble" would scare you is if you think you could lose your job and not have enough money to float you until you find another one. Similarly if you're FIRE and don't follow the 4% SWR. (From what I've read over time I believe if you hit half of your initial FIRE number, you're in trouble and will need to adjust your WR or add to Stache)

The market doesn't matter. What matters is how I'm funding my expenses and is that funding sustainable (ie. from a job or from my stache). At least that's what I tell myself now that I'm down 2% in the last two days haha, still makes me grumble but I don't change what I'm doing. (Plus its pay day so I have another $1K getting invested today at discount!)

BicycleB

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Re: How concerned are you about the Everything Bubble?
« Reply #128 on: May 10, 2019, 10:49:30 AM »
Really quick back on topic comment:

The only reason an "everything bubble" would scare you is if you think you could lose your job and not have enough money to float you until you find another one. Similarly if you're FIRE and don't follow the 4% SWR. (From what I've read over time I believe if you hit half of your initial FIRE number, you're in trouble and will need to adjust your WR or add to Stache)

The market doesn't matter. What matters is how I'm funding my expenses and is that funding sustainable (ie. from a job or from my stache). At least that's what I tell myself now that I'm down 2% in the last two days haha, still makes me grumble but I don't change what I'm doing. (Plus its pay day so I have another $1K getting invested today at discount!)

FIREd, no job.

Biggest portion of portfolio is real estate, hard to even calculate 4% though I'm right at the edge of it as far as I can tell; who knows what the future brings. Pondering sale of property, which would result in financial assets predominating.

Fwiw, most of the comments appear on topic in that one person's "timing" is another person's "asset allocation" because both viewpoints influence which investments you choose and how you choose them. To me the idea of an "everything bubble" is one way of approaching the question of how to best allocate capital in an era with historically low interest rates and arguably weird asset values. Very much appreciating the discussion so far.

I agree that if you're in the accumulation phase with a high savings rate and good job/career, any "everything bubble" should mean little to you. Congrats on your progress!!

frugledoc

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Re: How concerned are you about the Everything Bubble?
« Reply #129 on: May 10, 2019, 11:10:23 AM »

Laserjet3051's post is an excellent one. The reason everyone's bullish about their own prospects right now is the same reason why stocks are richly priced; employment is high, income is growing, they have spare cash to be buying stocks, and they see things getting better for them in the next few years. Conversely, in a downturn everything works in reverse.  The stock market, economy, and peoples' individual circumstances are not separate things. People tend to sell low because they have little choice.. they become forced sellers. When you have no income, or much reduced income, losing sleep because you're worried about being foreclosed, this creates FEAR. Buying cheap stocks is probably the last thing on your mind.

I don't think "everyone's bullish" right now because the good times are rolling, we've forgotten the past, or we think things are "getting better" (financially, I assume you mean).  I fully expect a major market pullback soon - like 30% plus.  However, I expected that in 2018, with CAPE moving well into the 30s.  And 2017 with the threat of nuclear war, Mueller getting started, and one of the longest bull markets on record.  And 2016 with Trump being elected, the Brexit vote, etc.  And 2015...
However, because I stuck to my IPS and just kept buying, I am now at a point where even if the markets drop 50% I'll still never need to work again.  Ok, if they drop 70% I'll be properly freaked out.  But 50%?  meh. 

The point is, I've learned I'm spectacularly bad at predicting what the markets are going to do and if I'd listened to my fears I wouldn't be FIREd right now because I'd still be waiting to buy the dip.  It's absolutely true that someone is going to come to these boards with excellent reasons why we should all get out now and start hoarding cash, and everything is going to crash right after they say that.  That's a 100% guarantee.  Just like it's a guarantee that someone's going to pick the Powerball numbers in an upcoming drawing.  In both cases we KNOW that's coming, we just have no idea which of the doomsday prophets will be correct or when it will happen. 

So yes, when the next crash comes I might have to sell some of my VTSAX when it's down - way down.  But because I didn't freak out when I started investing in the early 2000s when the tech bubble burst and I didn't change anything when my investments plummeted in 2008-2009, I'm now in a position where I DGAF what the markets do next.  I know I can't predict it.  But I also know I have enough that even if there's a major crash I can still live on the savings I built up ignoring all the people who said there was a bubble - even when they were right.

It's easy for those people who have had the fortune and patience to have ridden a 10 year bull market to suggest to others do the same thing, but it's not 2009 any more, or even 2014 or 2017.

Just to be clear, I am NOT against cost averaging over a long period; I do largely agree that monthly buying the market should be a part of of most people's strategy and do so myself, but only a part; asset allocation is also hugely important.  If you are fine with mediocre (possibly negative real) returns then I don't have a problem with you being fully 100% invested in the market, but if not and you want your money to work harder than 2% then you should probably exercise some caution and have some cash on the side - it makes sense if the spread between the risk-free rate of return vs the expected market return is as low as it is right now.

Vand, I’m ok with 2% or negative returns compared to trying to time the market .  Just keep on accumulating for the next boom.   Long term markets are the opposite of gravity. What goes down must go up (in the long term).  I’m 100% confident I will outperform > 95% of market timers/swing traders over 10 years plus.  I definitely have no interest in trying to be in the 5% who are lucky/“skilled” to outperform.

you don't really understand what I'm saying, do you? My point is that Asset Allocation matters. Hugely. The investing universe does not start and end with VSTAX. As I have alluded to, there are other markets out there right now that are depressed and therefore offer the chance of a higher expected future return. Maybe you should go and read up about them so they form a part of circle of competence rather than thinking the best and only way is all-in, all-of-the-time, and anyone who disagrees is a clueless "market timer".

I invest in vanguard all world so I hold all the major markets.

I didn’t say you were clueless, although I did think it :)

ChpBstrd

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Re: How concerned are you about the Everything Bubble?
« Reply #130 on: May 10, 2019, 11:56:20 AM »
Really quick back on topic comment:

The only reason an "everything bubble" would scare you is if you think you could lose your job and not have enough money to float you until you find another one. Similarly if you're FIRE and don't follow the 4% SWR. (From what I've read over time I believe if you hit half of your initial FIRE number, you're in trouble and will need to adjust your WR or add to Stache)

The market doesn't matter. What matters is how I'm funding my expenses and is that funding sustainable (ie. from a job or from my stache). At least that's what I tell myself now that I'm down 2% in the last two days haha, still makes me grumble but I don't change what I'm doing. (Plus its pay day so I have another $1K getting invested today at discount!)

Market prices do matter to retirees. For a retiree applying the 4% rule, the plan is to sell approximately 0.75% of the shares in one’s portfolio every 3 months (the remainder of their income would come from dividends and interest). If market prices tank, they will have to sell more than the budgeted number of shares to cover the same expenses. Every quarter one sells more shares than is sustainable, the risk of exhausting one’s savings increases.

Additionally, one is most likely to reach one’s “FIRE number” at a market peak, not at a low or average level. This simple dynamic means one’s actual odds of outliving an X% WR are probably a lot less than those modeled in the Trinity study, which simply assumed an equal number of retirements occurring each year.

For more detail on this risk, see
https://earlyretirementnow.com/2017/01/18/the-ultimate-guide-to-safe-withdrawal-rates-part-6-a-2000-2016-case-study/

maizeman

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Re: How concerned are you about the Everything Bubble?
« Reply #131 on: May 10, 2019, 12:01:52 PM »
Additionally, one is most likely to reach one’s “FIRE number” at a market peak, not at a low or average level. This simple dynamic means one’s actual odds of outliving an X% WR are probably a lot less than those modeled in the Trinity study, which simply assumed an equal number of retirements occurring each year.

For more detail on this risk, see
https://earlyretirementnow.com/2017/01/18/the-ultimate-guide-to-safe-withdrawal-rates-part-6-a-2000-2016-case-study/

This effect really does exist but that website somewhat overstates it. I really liked @gerardc's work on this a couple of years ago here on the forum (and not just because he actually shows his code so it's possible to sanity check the assumptions). 

https://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-severely-overestimates-success-rates-for-mustachians/msg1625362/#msg1625362

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Re: How concerned are you about the Everything Bubble?
« Reply #132 on: May 10, 2019, 12:12:10 PM »
<snip>
It's easy for those people who have had the fortune and patience to have ridden a 10 year bull market to suggest to others do the same thing, but it's not 2009 any more, or even 2014 or 2017.
<snip>

I would doubt than many or most of us who are FIREd now got in just in 2009.  I started investing in the late 90s, just in time to "lose" what at the time felt like a lot of money in the markets during the dot com crash.  That wasn't easy.  I had multiple 6 figures in 2007/2008 when the SHTF - and I was also briefly unemployed during the worst of it.  That really wasn't easy.  But I kept plugging away, ignoring the markets as best I could and stuck to the plan.  It's possible that 2019 is going to be far worse than 1999/2000 or 2007/2008, but if so I suspect I'll be more worried about how to survive a nuclear winter or a global pandemic than market performance. 

ChpBstrd

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Re: How concerned are you about the Everything Bubble?
« Reply #133 on: May 10, 2019, 12:36:16 PM »
Additionally, one is most likely to reach one’s “FIRE number” at a market peak, not at a low or average level. This simple dynamic means one’s actual odds of outliving an X% WR are probably a lot less than those modeled in the Trinity study, which simply assumed an equal number of retirements occurring each year.

For more detail on this risk, see
https://earlyretirementnow.com/2017/01/18/the-ultimate-guide-to-safe-withdrawal-rates-part-6-a-2000-2016-case-study/

This effect really does exist but that website somewhat overstates it. I really liked @gerardc's work on this a couple of years ago here on the forum (and not just because he actually shows his code so it's possible to sanity check the assumptions). 

https://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-severely-overestimates-success-rates-for-mustachians/msg1625362/#msg1625362

It exists for those who retire at high market valuations (ask the year 2000 early retirement cohort). However the risk is nil for those who manage to retire at normal to low valuations (e.g 1993, 2011...).

To judge whether the risk applies would require a judgement about whether valuations were high. This judgement may sound like market timing, but is more like value investing. Still I think the ambiguity of making such an estimate of risk magnitude is another reason we should be setting our “FIRE number” based on earnings and cash flows being greater than expenses instead of saying we’re FI the day our market value exceeds 25x expenses. Earnings and FCF are more stable than market prices, and offer better predictive value about an asset’s future returns. This approach might help us decide whether to go OMY despite having an account value > 25x expenses, or to retire with a smaller equities portfolio after a crash.

maizeman

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Re: How concerned are you about the Everything Bubble?
« Reply #134 on: May 10, 2019, 12:40:41 PM »
I think we may have miscommunication. When I say “the effect” I mean the clustering of people hitting their FIRE numbers during market run ups (and so disproportionately retiring in years with bad sequence of returns risk). For someone saving 50% or more of their income there just isn’t that much clustering to begin with (See gerardc’s post linked above).

Now if you are only saving 10-20% per year, THEN I agree it is an effect folks need to be conscious of and worry about, because at super low savings rates like those market returns have a much bigger influence on when you hit your FIRE number and hence on your actual odds of failure.

Valvore

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Re: How concerned are you about the Everything Bubble?
« Reply #135 on: May 10, 2019, 12:45:44 PM »
Really quick back on topic comment:

The only reason an "everything bubble" would scare you is if you think you could lose your job and not have enough money to float you until you find another one. Similarly if you're FIRE and don't follow the 4% SWR. (From what I've read over time I believe if you hit half of your initial FIRE number, you're in trouble and will need to adjust your WR or add to Stache)

The market doesn't matter. What matters is how I'm funding my expenses and is that funding sustainable (ie. from a job or from my stache). At least that's what I tell myself now that I'm down 2% in the last two days haha, still makes me grumble but I don't change what I'm doing. (Plus its pay day so I have another $1K getting invested today at discount!)

Market prices do matter to retirees. For a retiree applying the 4% rule, the plan is to sell approximately 0.75% of the shares in one’s portfolio every 3 months (the remainder of their income would come from dividends and interest). If market prices tank, they will have to sell more than the budgeted number of shares to cover the same expenses. Every quarter one sells more shares than is sustainable, the risk of exhausting one’s savings increases.

Additionally, one is most likely to reach one’s “FIRE number” at a market peak, not at a low or average level. This simple dynamic means one’s actual odds of outliving an X% WR are probably a lot less than those modeled in the Trinity study, which simply assumed an equal number of retirements occurring each year.

For more detail on this risk, see
https://earlyretirementnow.com/2017/01/18/the-ultimate-guide-to-safe-withdrawal-rates-part-6-a-2000-2016-case-study/

Yes, retiree would have to sell more shares in a down year(s) but that is the point of using the safe withdrawal method. Because even though you are selling more stock/shares those shares will rise in price eventually and above where they were when you initially purchased. When FIRE'd peeps start pulling from their stache, they can't expect that it will always go up every year. It may even drop to almost have of the initial FIRE number, but what the Trinity study tells us is that your stache will recover and sustain your for 30 years (as long as it doesn't drop below a certain threshold).

Obviously all of this does depend on the type of shares invested and AA. If you are 100% in bonds and using 4% SWR, it ain't going to work for your.

habaneroNorway

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Re: How concerned are you about the Everything Bubble?
« Reply #136 on: May 10, 2019, 12:52:47 PM »
I guess the new unknown is what happens long term if equity markets go down the drain AND bonds yields are very low like they are now. Its not like you have a bond portfolio yielding 5-6-7% to cushion. The last factor is a major concern pointed out by our sovereign wealth fund (~70/30 + some pocket change in real estate). But then again, there are always potential sources of income and the odd windfall from inheritance etc.

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Re: How concerned are you about the Everything Bubble?
« Reply #137 on: May 10, 2019, 02:51:37 PM »
I guess the new unknown is what happens long term if equity markets go down the drain AND bonds yields are very low like they are now.

If you just retired having bond yields go up (prices go down) while equity prices also go down seem like the worst case for an average investor to me? Very few people buy individual bonds and then hold them until they mature to get their capital back.

Classical_Liberal

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Re: How concerned are you about the Everything Bubble?
« Reply #138 on: May 10, 2019, 04:19:43 PM »
Question: How do you think an investor should distinguish between "a few big stocks have an overly high value" vs "a few big stocks are correctly valued at a high price because they have established a valuable position in the economy"?

It just depends on your investment philosophy; do you believe in paying top dollar today for the expectation of high future earnings (growth investing), or are you looking for something that has been around for a while and proven, has good solid cashflows, and selling at a reasonable price and will provide a known, steady expected return (value investing)?

Right now the market is willing to pay high premium for the promise of growth, but market history has shown that this is often a mistake and such lofty future expectations are unlikely to be met.  The problems with growth investing are that

1. tomorrow's growth and higher earnings are far from guaranteed. This is simply the free market at work; excess profit provides an economic signal for other companies to move into that space and compete for those customers. They bring new idea and new ways of doing things that usurp the original, so it becomes difficult for today's leading companies to always remain ahead of competition. History has shown this to be the case; look at any number of companies from GE, IBM, Microsoft, Ericsson, Intel that mature and then eventually fall behind the next new innovator. Apple & Amazon are world leaders today, they probably won't be 20 years from now.

Therefore, if you bet on growth stocks, you are betting against the long term economic forces of & profit signalling, supply & demand that are constantly churning away

Not only do profits tend to be normalized within industries, but also between industries. If one industry is loss making, firms will cease to operate in that industry and move to one where there are excess profits. These isalso self evident just looking at an individual level; you bring your particular set of skills to the market and there are market forces at work that mean you will get paid roughly similar if you work for a oil producer, software developer, or fashion retailer (ok, maybe not great examples, but my point is that it's your skills that primarily determine your wages, not the industry you work in).


2. Investors tend to get much more excited about growth and therefore overpay more than they do for steady value, and of course this is reflected in the price premium built into the share price of these stocks. If and when those target start getting missed (they always do, eventually, see point above) the revision of expectations can be savage, much more so than just a boring value stock missing earnings, which of course also happens

I would add to this that economic cycles matter as well.  Growth investments tend to perform much better with economic tailwinds, whereas investors tend to look for value in headwinds. So focusing an AA more on growth makes a ton of sense in early to mid accumulation, as one approaches the end of accumulation SOR matters much more, so value is a better bet to try and stabilize a portfolio for any potential downturn.

What is hard to predict is the beginning and end of economic cycles.  What is easier to predict is when you want to retire.  Since both have a material impact on your investing, it's best to focus on the one you have the most control over/ data on. 

I do NOT think altering portfolio allocations based on personal situation is analogous with market timing.  That's just smart, you're acting on known information (ex you are retiring in one year).  This is why the link to @gerardc  is important.  People are more likely to retire towards end of a tailwind phase, they have had better recent returns and more money.  This makes my argument even stronger.

tldr;  My theory is that an investor of above average competence (most here) would benefit from an elastic asset allocation of different types of equities, bonds and cash if 90+% of this elasticity is based on personal circumstances as opposed to educated guessing on market cycle or valuations.

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Re: How concerned are you about the Everything Bubble?
« Reply #139 on: May 10, 2019, 04:26:49 PM »
Define risky.  Since 1999 stocks have returned 218%

If a "risky" time means more than doubling your money...it doesn't sound all that risky. 
Well, following the 4% rule with 100% Total US in 1999 and you'd be over half depleted in real terms only 20 years in.  Someone who bond tented at 60/40 is looking a whole lot better.  So "risk" is more than total returns, 218% doesn't mean jack to that person.   

Advocating a very high equity allocation, no matter goals, no matter valuations, is a poor policy.  It works great for someone who retires at 30 with income from real estate rentals and side gigs that cover expenses (why this person even needs 25X in backup is a better question).  It also works great for a 25 year old who DCA's 50% of their income and doesn't plan to FIRE for more than a decade.  It probably isn't the best idea for someone with CAPE>30 who's planning to FIRE soon with no additional income sources.  But to each their own.

In this case, Crankaddict is just starting investing.  He's not in withdrawal phase.   The claim was that 80% stocks was too risky.  Perhaps that's correct if you are withdrawal phase, but not if you are just starting out.   

Radagast

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Re: How concerned are you about the Everything Bubble?
« Reply #140 on: May 10, 2019, 09:46:45 PM »
I am skeptical equities are in a bubble.
      Jan 1 '00   May 10 '19   % Less
P/E      29.0          21.8          25%
P/E10  43.8          30.4          31%
P/Div   82.0          52.4          36%
P/B      5.05          3.38          33%

For earnings, accounting standards for earnings changed in 2001 and things would look less expensive than they do by the olden standards (so I understand, no first hand knowledge)
For PE10, it will magically be forced down over the next year as the recession clears out, so things are even less expensive than above by this metric
For dividends, as many companies apparently buy stock instead of paying them, I guess this measure is also less expensive than it looks
For book value, I imagine that many of the largest names are able to make a lot of money with a smaller amount of assets, so this is also not as expensive as it looks
For all, if many companies now buy their own shares instead of paying dividends, wouldn't this make the price appear higher relative to fundamentals than it would? The P side would be larger and the denominator the same. Another metric that could be giving a false impression of a bubble.
Put together and things are maybe at 60% of their value in 2000. Going by the numbers, the US could be at the place where a bubble could start, but it is not in one yet. It did feel just a little bubbly in January 2018 but that is old history now.

Non-US: From what I read equities in the rest of the world are even less in a bubble by those metrics.
Bonds: It will turn out to be a bubble if it pops. If it doesn't pop, it wasn't a bubble. If inflation goes to 0 for the next 30 years bonds will not have turned out to be in a bubble. If it goes to 10% they will.
Real Estate: Many locations, hard to say. Locally there are genuinely too few houses and apartments relative to the number of people who want them. No houses were built from 2007-2014 here. Result: not a single person remained in the house building business. Next result: when people wanted to buy houses again there was nobody to make them. Next next result: house prices are very high now.
Gold: As if we knew. But seems within the historical real range.
Others: ?

Radagast

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Re: How concerned are you about the Everything Bubble?
« Reply #141 on: May 10, 2019, 09:54:49 PM »
If not and you want your money to work harder than 2% then you should probably exercise some caution and have some cash on the side - it makes sense if the spread between the risk-free rate of return vs the expected market return is as low as it is right now.
I was all agreeing with you until here. So people who are afraid their money may grow as little as 2% should guarantee it grows not more than 2%.... right....

But yeah balanced allocations are ok. 50% World Stock Index, 50% Permanent Portfolio seems as good an allocation as any.

DavidAnnArbor

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Re: How concerned are you about the Everything Bubble?
« Reply #142 on: May 12, 2019, 09:03:20 PM »
If the stock market does decline during the first phase of one's retirement then simply lower the withdrawal rate.
GoCurryCracker has a blog post about living in some interesting countries where living expenses are very low.

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Re: How concerned are you about the Everything Bubble?
« Reply #143 on: May 13, 2019, 03:20:51 AM »
If not and you want your money to work harder than 2% then you should probably exercise some caution and have some cash on the side - it makes sense if the spread between the risk-free rate of return vs the expected market return is as low as it is right now.
I was all agreeing with you until here. So people who are afraid their money may grow as little as 2% should guarantee it grows not more than 2%.... right....

But yeah balanced allocations are ok. 50% World Stock Index, 50% Permanent Portfolio seems as good an allocation as any.

It's hard to make the case of anyone being "afraid" of a 2% real return. It's a real increase in wealth. Nobody should be afraid of a tomorrow that is materially better for them than today.

Maybe 2% isn't an acceptable return discounted to the present to make it a worthwhile investment, but that decision is not driven by fear.

50% stocks/ 50%PP is still 62.5% overall equity allocation. Maybe that's OK for some, but its still a historically aggressive AA. I can't say if it's right or wrong for anyone but myself, because in my view Investing and personal finance is much less about following what someone else says or chasing the highest possible return, it about doing your own research and determining your own risk/reward profile, and knowing your own sleep-easy point.