Author Topic: How to weather the storm when it comes  (Read 4309 times)

rxmurphy

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How to weather the storm when it comes
« on: January 16, 2018, 06:12:40 AM »
I've been saving and investing for several years but am by no means an expert. I am about 5 years from retirement and have a mid 6 figure nest egg. I am 90/10 equities/bonds. Most in 401K. If When there is a market correction, how do I protect as much as I can? Move all to bonds and keep investing? My sense is this is akin to timing the market, but I am old enough to have been majorly burned twice. Those times, I did nothing and I recovered, but I had a longer time frame back then. Now not so much. Advice on any resources to help would be appreciated.

Maenad

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Re: How to weather the storm when it comes
« Reply #1 on: January 16, 2018, 07:26:32 AM »
If you have a shorter timeframe, you should likely change your asset allocation to something more conservative, like 60/40 or 50/50. DH and I are only 2 years projected from RE, but we're in our early 40s, so we if have to keep working for a few more years it's just an inconvenience. If you're closer to 65, it could be disastrous. You may want to look into a "bond tent" like what Michael Kitces wrote about: https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

rxmurphy

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Re: How to weather the storm when it comes
« Reply #2 on: January 16, 2018, 08:11:02 AM »
Thanks for the reply and suggestion Maenad. Your assumption is correct, I am 62, so definitely in a different boat than you regarding timelines.

meghan88

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Re: How to weather the storm when it comes
« Reply #3 on: January 16, 2018, 08:27:32 AM »
Posting to follow.  Same boat, minus a couple of years, and looking to retire in 2.

Frankies Girl

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Re: How to weather the storm when it comes
« Reply #4 on: January 16, 2018, 08:41:10 AM »
If the idea of a correction (drop of 10%) or a crash (20%+) would significantly hurt your portfolio and cause you to lose sleep, then your asset allocation is wrong/too aggressive for you. I agree with Maenad about going to a 60/40 or 50/50 asset allocation, but you'll need to understand you're sacrificing growth for preserving your current assets.

I am already FIREd and much younger than you so my portfolio needs to last longer, and while I'm not going to be super excited to see my portfolio's value drop in any downward movement, I am not worried about it because I know I can weather even a 50% loss at this point before doing anything drastic (like getting a job - plan b).

I understand the risks involved in investing, and I also get that my portfolio isn't an all-or-nothing thing. I invested in low cost index funds, I have a year's worth of expenses in a high yield savings account and in the event I need to draw off a significantly lowered portfolio, I understand that I won't need every last penny RIGHT THIS MINUTE and can cut expenses to ensure that the amounts I'm drawing off are minimal to allow it to recover.

I would suggest you write up an investment policy statement to get your plans and "what if" movements figured out, and then use this as the blueprint for going forward. Once this is set up, re-set your asset allocation to match up with your risk/needs profile.


https://www.bogleheads.org/wiki/Investment_policy_statement
https://www.bogleheads.org/wiki/Asset_allocation

Other suggested reading:

https://www.bogleheads.org/wiki/Lazy_portfolios

https://livingafi.com/2014/05/09/drawdown-part-1-the-basics/
^first in a 4 part series for Dr. Doom's draw down series (his entire blog is fantastic reading, but this 4 parter is solid gold)
« Last Edit: January 16, 2018, 08:43:41 AM by Frankies Girl »

NewDay1

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Re: How to weather the storm when it comes
« Reply #5 on: January 16, 2018, 09:48:17 AM »
Thanks for the post.  Following.

Livingthedream55

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Re: How to weather the storm when it comes
« Reply #6 on: January 16, 2018, 10:29:41 AM »
Copying what i just posted on another thread:

For me, since I'm getting closer to FIRE, it's 60% equities (Vanguard Total Stock Market Index Fund) and 40% bonds (Vanguard Total Bond Market Index Fund) and will remain so for the rest of my life. I will rebalance yearly. I will also have two other income streams (govt pension, Soc. Sec.).

Resource Suggestion:

I just finished reading Jim Collins' book which I highly recommend.

https://smile.amazon.com/Simple-Path-Wealth-financial-independence-ebook/dp/B01H97OQY2/ref=sr_1_1?ie=UTF8&qid=1516122829&sr=8-1&keywords=j+collins+investing

IMHO you need to think about your Asset Allocation - perhaps reducing the risk?   You don't want to market time - and I do not suggest 100% bonds - but keep reading here and elsewhere and pondering what are your "sleep at night" percentages?

 
« Last Edit: January 16, 2018, 10:33:28 AM by Livingthedream55 »

rxmurphy

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Re: How to weather the storm when it comes
« Reply #7 on: January 16, 2018, 01:59:41 PM »
Thanks for all the great advice.

What I am really looking for is this - what to do today, (still working, still saving) if there were to be a major market correction, with my current AA, which is basically all in my 401K? As I mentioned before, with other market downturns, I did nothing different, but I had a horizon of 10-15 years before retiring, so figured I would recover. Now, I should hopefully stop working in 4-5 years, not a lot of time to recover.

Mr. Boh

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Re: How to weather the storm when it comes
« Reply #8 on: January 16, 2018, 04:39:14 PM »
I think the answer is to start adjusting your AA today.

SeattleCPA

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Re: How to weather the storm when it comes
« Reply #9 on: January 17, 2018, 05:52:04 AM »
I was really "into" this topic a while back. You might find some of this interesting:

Bear Market Survival Tactics: Ideas from David Swensen's Book

Summary: Asset allocation matters, use simulations so you understand risks, don't panic, plan for a variable withdrawal rate

Also, I did a whole little series on the idea that people need a "retirement plan b"

Retirement Plan B: Why You Need One

Summary: Not everyone who's "all in" on equities understands the risks embedded in their portfolio. Probably partly because pretty much everyone has gotten great long-run returns in recent decades. But you can use firecalc, cfiresim and portfoliovisualizer to  understand the risk.

P.S. I realize I've experienced at some level four really crummy markets: a teenager planning to go to college with parents savings for my college in the late 60s and early 70s... 1987's crash... the tech crash in 2000... the great recession. I have the strong distinct impression from the last two or three crashes that many confident they can soldier through a bad patch lose their confidence when things get really bad.

AdrianC

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Re: How to weather the storm when it comes
« Reply #10 on: January 17, 2018, 06:58:30 AM »
I was really "into" this topic a while back. You might find some of this interesting:

Bear Market Survival Tactics: Ideas from David Swensen's Book

Summary: Asset allocation matters, use simulations so you understand risks, don't panic, plan for a variable withdrawal rate

Good article. I will point out, though, that the Swenson portfolio still had a 40%+ draw down in 2008/2009. A simple 70/30 US stocks/US bonds saw a 36% draw down, 50/50 was 25%.

harvestbook

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Re: How to weather the storm when it comes
« Reply #11 on: January 17, 2018, 07:22:19 AM »
I'm 90/10 at age 55 and am self-employed in a creative field with no reason to ever "retire" in the classic sense. Yet I am doing most of my financial planning toward age 65 primarily because of Medicare. As I get closer, I am slowly increasing my bond allocation to probably get around 60/40 at that time and see how my situation looks for those first couple of years. (Obviously health insurance is the biggest concern for my planning, since it's a third of our budget.)

If I were 62, I'd want to be 70/30 or 60/40, but it also depends on when you take social security, any pensions, debt, etc. Obviously without debt you can assume more risk, which is partly why I am aggressive at my age. But yeah, I have several Plan B's in case things don't work out exactly as I hope, since nothing ever does. I'd get where you want today and stay there until you have a specific reason to change rather than what you "think might happen." Good luck.

rxmurphy

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Re: How to weather the storm when it comes
« Reply #12 on: January 17, 2018, 08:26:38 AM »
You folks are great. Thanks to all, I have a lot of homework and thinking to do. SeattleCPA hit the nail squarely on the head with comment about decades of great equity returns. Change is hard for most (trading potential gains for higher level of security), but being able to sleep at night is priceless.
Again, many thanks

Retire-Canada

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Re: How to weather the storm when it comes
« Reply #13 on: January 17, 2018, 08:40:32 AM »
I've been saving and investing for several years but am by no means an expert. I am about 5 years from retirement and have a mid 6 figure nest egg. I am 90/10 equities/bonds. Most in 401K. If When there is a market correction, how do I protect as much as I can? Move all to bonds and keep investing? My sense is this is akin to timing the market, but I am old enough to have been majorly burned twice. Those times, I did nothing and I recovered, but I had a longer time frame back then. Now not so much. Advice on any resources to help would be appreciated.

I hope to FIRE in 2 years. I am 100% equities and will buy bonds closer to my FIRE date. Yes it's a risk that I could experience a crash close to my desired FIRE date, but before I bought my bonds. However, the question I ask myself is "Would I FIRE into the teeth of a big 30%-40% crash even if I had my 15%-20% bond allocation in place?" The answer is no I would not. I would keep working through the crash and FIRE once the recovery was underway. It's not like I'd enjoy being retired with a crushed portfolio and a shit ton of uncertainty.

With that ^^^ in mind shifting to a more conservative asset allocation early will only delay my FIRE should the next "Big One" not happen before I FIRE. So I am staying 100% equities. I lived through the tech bubble and 2008 without doing anything goofy Besides there is no bond or asset allocation I would rationally hold that would make the impact of a 2008 crash not a gut punch. That's just the nature of a severe event like that. Sure a 25% loss is better than a 30% loss, but emotionally it's no different and we are really talking about dealing with our emotions in the face of a stressful financial event.


TheAnonOne

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Re: How to weather the storm when it comes
« Reply #14 on: January 17, 2018, 09:12:13 AM »
Remember that picking a time to go into BONDS because the market is high looks awfully like market timing. You need to have a heart to heart with yourself over if you are truly off balance or doing some hidden market timing.

ysette9

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Re: How to weather the storm when it comes
« Reply #15 on: January 17, 2018, 07:58:19 PM »
Others have been saying it in not so many words, but the answer to your question is: nothing. If the market drops you do nothing. Anything else is locking in losses and making it harder for your portfolio to recover later. I know I have read that Fidelity or someone did an analysis of whose accounts had the best performance over time, and found that the best performing accounts belonged to people who were dead.

Personally I am intrigued by the idea of a reverse glide path asset allocation whereby you have more bonds when you retire and you live off of those bonds in the first 5-10 years, not replenishing them. That results in your asset allocation shifting increasingly to equities to provide the longevity in your portfolio you need. Sequence of returns risk is largely gone after the first ten years of retirement (I believe Kitces did the analysis there is you want to look it up), so after that point if you have gotten by unscathed then you are in “too big to fail” land.

I agree with what everyone else has said: if you are being kept up at night by the fear of an inevitable market correction then you have the wrong asset allocation and need to educate yourself more.

ysette9

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Re: How to weather the storm when it comes
« Reply #16 on: January 17, 2018, 08:36:46 PM »
Some reading:

Sequence of returns risk in the end of accumulation phase- https://www.kitces.com/blog/retirement-date-risk-how-sequence-of-returns-risk-impacts-a-pre-retirement-accumulator/

Safe withdrawal rate and sequence of returns risk in the first ten years of retirement: https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/

OurTown

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Re: How to weather the storm when it comes
« Reply #17 on: January 18, 2018, 01:10:03 PM »
It would be better to pick the desired asset allocation before the crash, not after.

Financial.Velociraptor

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Re: How to weather the storm when it comes
« Reply #18 on: January 18, 2018, 02:26:51 PM »
This forum gives great advice.  I'll pipe in with 90/10 is in my opinion, really freaking aggressive.  It's the type of allocation that makes sense only for those in their 20's and in good health.  I'm personally went FIRE on 60/40.  The equity portion has been creeping up some with gains but I've been adding to bonds (mostly closed end funds).  I hope to get on a rising equity glidepath AFTER the next 20%+ correction. 

CrankAddict

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Re: How to weather the storm when it comes
« Reply #19 on: January 18, 2018, 02:38:04 PM »
I've been saving and investing for several years but am by no means an expert. I am about 5 years from retirement and have a mid 6 figure nest egg. I am 90/10 equities/bonds. Most in 401K. If When there is a market correction, how do I protect as much as I can? Move all to bonds and keep investing? My sense is this is akin to timing the market, but I am old enough to have been majorly burned twice. Those times, I did nothing and I recovered, but I had a longer time frame back then. Now not so much. Advice on any resources to help would be appreciated.

As a few others have indicated, 90/10 is crazy aggressive.  That's what I have my daughter's Roth at and she's still in college :)

The thing I don't see you mention, which seems key, is where you are dollar-wise relative to what you think you need for retirement?  If you are only 75% of the way to that dollar amount then you might not have much choice but to keep your high ratio of stocks and hope for the best.  But if you have already hit your goal, or are near to it, then it seems like a pointless risk to maintain that ratio.  The correction could easily begin next week.  It could be 5 years until we hit today's levels again.  Nobody knows.  You should be able to analyze this even further by calculating the % return you'd need each of the 5 remaining years.  Then go with the absolute most conservative portfolio you believe will achieve that.  You almost certainly won't have success waiting until you see a correction and then acting.

Retire-Canada

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Re: How to weather the storm when it comes
« Reply #20 on: January 18, 2018, 04:16:26 PM »
I can't get cFIREsim working at the moment to get specific numbers, but as I recall over a reasonable length retirement say 40yrs 90/10 fails less often than 60/40 so I don't see the later as a "safer" option.

BTW - is cFIREsim working for you?

seattlecyclone

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Re: How to weather the storm when it comes
« Reply #21 on: January 18, 2018, 05:17:18 PM »
I think the answer is to start adjusting your AA today.

In a nutshell, I agree with this.

Your asset allocation should be something that you feel comfortable sticking with regardless of the market conditions. Trading your stocks for bonds only after we hit bottom is the exact wrong thing to do. Instead, go into the downturn with an allocation where you won't feel tempted to make any rash moves.

In general the way you maintain your asset allocation when you're withdrawing is to sell whatever is doing best that year in order to pay the bills. When the stock market is going up, that will naturally push your stock allocation above what you ideally want it to be, so you sell some stock to pay your living expenses that year. When the stock market is going down, that will naturally push your bond allocation above what you ideally want it to be, so you sell some bonds to pay your living expenses that year.

However if your bond allocation is so small that you essentially have no choice but to sell some stock right after a crash, that could be a problem. I personally have 20% bonds in my asset allocation for this reason. I believe in the stock market as the best way to get long-term growth, but I want to have enough in a more stable asset class that I don't find myself forced to sell stocks in a downturn.

Mighty-Dollar

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Re: How to weather the storm when it comes
« Reply #22 on: January 18, 2018, 11:49:51 PM »
62 years old, mid 6 figure nest egg. I am 90/10 equities/bonds.
You didn't mention how much of your saving you are spending per year. Ideally you are close to 4% per year (the 4% spending rule). If you're spending 4% or less then I say you are over allocated into stocks. You would be taking unnecessary risk.
Most people your age are about 58% stocks and 42% bonds.
(120 minus 62 = 58% stocks)
But it depends on if you've reached that 4% level yet. Also your general appetite for risk.
Nobody can predict the direction of the stock and bond markets.  And if stocks drop 5%, then 10%, then 15%, then 20%, etc how do you know if the correction is over? You don't. So you have to be prepared (diversified) at ALL times. 

AdrianC

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Re: How to weather the storm when it comes
« Reply #23 on: January 19, 2018, 06:03:55 AM »
As a few others have indicated, 90/10 is crazy aggressive.  That's what I have my daughter's Roth at and she's still in college :)

The thing I don't see you mention, which seems key, is where you are dollar-wise relative to what you think you need for retirement?  If you are only 75% of the way to that dollar amount then you might not have much choice but to keep your high ratio of stocks and hope for the best.  But if you have already hit your goal, or are near to it, then it seems like a pointless risk to maintain that ratio.  The correction could easily begin next week.  It could be 5 years until we hit today's levels again.  Nobody knows.  You should be able to analyze this even further by calculating the % return you'd need each of the 5 remaining years.  Then go with the absolute most conservative portfolio you believe will achieve that.  You almost certainly won't have success waiting until you see a correction and then acting.

That's interesting. So say he needs a 3% real return. Stocks might do 4% real long term from here. Aggregate bonds probably 0%. So his "absolute most conservative portfolio" would be 75/25.

I'm thinking that a 3% real return will be quite a disappointment to a lot of folks here, and you're not likely to get even that from a bond-heavy allocation.

I have too much FOMO for all that, so I take Buffett's advice...

“You shouldn’t be 40% in bonds…I would have productive assets. I would favor those enormously over fixed dollar investments now, and I think it’s silly to have some ratio like 30 or 40 or 50% in bonds. They’re terrible investments now…” Warren Buffett on CNBC May 2013

SeattleCPA

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Re: How to weather the storm when it comes
« Reply #24 on: January 19, 2018, 07:06:36 AM »
I was really "into" this topic a while back. You might find some of this interesting:

Bear Market Survival Tactics: Ideas from David Swensen's Book

Summary: Asset allocation matters, use simulations so you understand risks, don't panic, plan for a variable withdrawal rate

Good article. I will point out, though, that the Swenson portfolio still had a 40%+ draw down in 2008/2009. A simple 70/30 US stocks/US bonds saw a 36% draw down, 50/50 was 25%.

Good reminder. Absolutely agree. And I would also say "thank you for comment" because I think it's way to easy in this environment to lose sense of the risk baked into our portfolios.