A crash is coming.

[Dr. Doom]

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

I read either the same study, or a at least summary of it.  You're describing the risk associated with retirement with a mostly stock portfolio due to the unpredictability of sequence of returns.

Example A: Retiring with 600K  in 2007 with a 4% pull might turn out to be a failure case because of the 60% S&P dump over the next year.
CAPE right before the dump?  About 29.  We're almost there now.
Example B: Retiring with 600K in March of 2008, though, when the S&P was 700, would result in a huge gain over the next four years.  You'd be sitting on at least 1.4 mil now.
CAPE right at the bottom of the market?  15, below historical averages.  Stocks are on sale.  Hooray.

Some of this stuff was discussed in this thread.

[gorion83]

I also think that a bear market is approaching, based on CAPE.

I also like Bogle tip of avoiding messing too much with allocation, so i'll just reduce the allocation by a quarter now

[hodedofome]

FWIW and full disclosure, in my trading account I sold all long stocks by early April of this year (all my trailing stops were hit) and I have 1 short on FLDM which has already paid off about 50% from my entry point. Large cap and value stocks are close to all time highs however small caps and momentum stocks have been killed. It's all systematic so I just follow the system, however the stocks I trade are already screaming 'bear market.'

[surfhb]

I think the point is that the S&P will be higher then it is right now in 20-30 years  right?    Now whether the index goes down to 900 to reach those future highs makes no difference to me.   Make sense?

PLUS!   Think of all those shares you will be accumulating during your self proclaimed stock market crash?    This is how patience pays off in investing

[dragoncar]

I think the point is that the S&P will be higher then it is right now in 20-30 years  right?    Now whether the index goes down to 900 to reach those future highs makes no difference to me.   Make sense?

PLUS!   Think of all those shares you will be accumulating during your self proclaimed stock market crash?    This is how patience pays off in investing

From a buy-and-hold investing perspective, yes.   But we all know that the stock market influences other factors around us -- the happiness of our neighbors, family members, and coworkers, the stability of (most of?) our jobs, etc.  Even if we are financially immune to a crash, it doesn't hurt to be aware of the conditions that make a crash more likely.  Of course, OP wanted to do some drastic stuff but I think maybe the discussion is moving on?

[SDREMNGR]

I'm mostly out of the market now, waiting for clearer signs of market direction.  I may wait it out until AFTER the FED starts actually selling off it's huge treasuries position and see what that does to the markets.  Which I'm being told will be around October. 

Only exception are my TMUS holdings, which are doing a little up from when I bought it last year at $33 hoping for a buyout.  As soon as that merger/buyout offer comes in, probably this year, I am heading for the exits on this too.

[SDREMNGR]

Heck, I know I shouldn't try to time the market but heck if I'm not going to at least try to hedge my bets.  I am pretty much 100% long on stocks right now but I do want to be able to reallocate when the time is right.  The metrics that I am watching closely are.


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

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

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

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

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

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

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

A small win today as the market was up after a flat start as predicted! ;)  Anyhow, I did get out of 90% of my positions and I'm now happily sitting in cash until probably end of this year or whenever some clear direction of the market happens.

[sirdoug007]

This discussion reminds me of a quote attributed to John Maynard Keynes:

"Markets can remain irrational a lot longer than you and I can remain solvent."

Here is the backstory: http://www.maynardkeynes.org/keynes-the-speculator.html

[oldtoyota]

Does Buffet sell and go into cash? Has he done well?

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

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

Is "dry powder" a way of referring to cash? It sounds cool like we are skiing with money. =-)

Each of us should have a certain amount of cash to get through the rough patches so that we do not need to sell stocks during a bad time to pay bills, etc. Our amount will be nowhere near Buffet's, of course.

My question was really whether Buffet *sells* into cash and not just if he *has* cash though. If he tends to sell into cash because he fears a market collapse, I will be quite surprised!

[hodedofome]

In Buffett's partnership days, I believe he sold stocks in the bubble days of the late '60s. Now however, I don't think he really sells that much. He more or less just stops buying and lets all that crazy amount of cash his companies produce sit there and build up.

[SDREMNGR]

Does Buffet sell and go into cash? Has he done well?

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

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

Is "dry powder" a way of referring to cash? It sounds cool like we are skiing with money. =-)

Each of us should have a certain amount of cash to get through the rough patches so that we do not need to sell stocks during a bad time to pay bills, etc. Our amount will be nowhere near Buffet's, of course.

My question was really whether Buffet *sells* into cash and not just if he *has* cash though. If he tends to sell into cash because he fears a market collapse, I will be quite surprised!

I believe dry powder isn't talking about snow conditions, but about dry gun powder (as opposed to the wet useless stuff).  Like having the ability to blow some stuff up if you wanted to.

Buffet does not sell off much if any.  He has bought and held Wells Fargo from when he bought it.  I believe most of his cash comes from the operating profits of his wholly owned companies as well as the holdings from his insurance businesses which gives him bundles of money to put towards purchasing new companies.  He is less of an "investor" and more of a one man private equity firm.

[oldtoyota]

Does Buffet sell and go into cash? Has he done well?

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

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

Is "dry powder" a way of referring to cash? It sounds cool like we are skiing with money. =-)

Each of us should have a certain amount of cash to get through the rough patches so that we do not need to sell stocks during a bad time to pay bills, etc. Our amount will be nowhere near Buffet's, of course.

My question was really whether Buffet *sells* into cash and not just if he *has* cash though. If he tends to sell into cash because he fears a market collapse, I will be quite surprised!

I believe dry powder isn't talking about snow conditions, but about dry gun powder (as opposed to the wet useless stuff).  Like having the ability to blow some stuff up if you wanted to.

Buffet does not sell off much if any.  He has bought and held Wells Fargo from when he bought it.  I believe most of his cash comes from the operating profits of his wholly owned companies as well as the holdings from his insurance businesses which gives him bundles of money to put towards purchasing new companies.  He is less of an "investor" and more of a one man private equity firm.

I did not think so and would have been surprised to learn otherwise. My question was mostly playful anyway as I figured he did not and was aiming to make the point that it's better to hold long term.

[foobar]

I think a bear market is coming also. Why? Because we are in a bull market:)  People are constantly predicting bear markets. They tend to be right every 7 or 8 years and the tough part is will it be a short one like 2011(down 19.6% for about 3 months) or long one (2000-2002. Technically I think it was 2 bear markets with a little rally in the middle).

I also think that a bear market is approaching, based on CAPE.

I also like Bogle tip of avoiding messing too much with allocation, so i'll just reduce the allocation by a quarter now

[rmendpara]

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

Rather than doing it actively (i.e. selling into cash and waiting for the correction), why not go a little more passively and just start building up cash?

Outside of catastrophic crashes (2000, 2008), it's not as common to see quick drops of 30-50%, and there's no reason to expect to see the next decline occur in the same fashion.

The next one may be more gradual, since we still haven't fully recovered and people & companies are still deleveraging. Credit is still super tight, though borrowing is indeed cheaper than it's been in 30+ years.

2000 crash was generally caused by wildly overvalued tech stocks, and 2008 was primarily a credit freeze as a result of the meltdown of MBS/ABS (and mostly the related derivatives). What do you think will be the catalyst of the next crash? If anything causes it, I think it will be a tightening of federal spending that the markets feel is too abrupt.

Personally, I think timing the market is a fool's errand, but good luck to you!

[Dr. Doom]

Outside of catastrophic crashes (2000, 2008), it's not as common to see quick drops of 30-50%, and there's no reason to expect to see the next decline occur in the same fashion.

Right.  This is the whole reason why you shouldn't try to time the market.  It's one thing if you happen to suddenly need cash (I do, for various reasons) and realize that this isn't a bad time to take some money out with the intention of keeping it out.  This isn't the same as market timing, where you'd be waiting at some point to stuff it back in.  You're facing long odds if you think you're going to get out now (high) and back in later (low).

We don't know what to expect.  Just because the market is overvalued (which I think is pretty clear) doesn't mean we know how it's going to correct.    The correction is frequently not a crash, and in these cases, it's much better to stay in.  What if price goes up even CPI adjusted 1-2% over the next 10 years while earnings are double that?  And what if, at that point, the market is then poised for explosive growth again?    It's happened before, and it might happen again.  In this case you'd be missing out on some nice consistent growth, especially after you factor in the 2% div on top of that.  And when exactly would you get back in?

I'll literally copy and paste jlcollinsnh here:
"The point is, to play this market timing game well even once, you need to be right twice: First you gotta call the high. Then you gotta call the low. The world is filled with sad investors who got the first right and then sat on the sidelines while the market recovered and marched right on past it’s old high."

edit:  adjective choice

[Eric]

A small win today as the market was up after a flat start as predicted! ;)  Anyhow, I did get out of 90% of my positions and I'm now happily sitting in cash until probably end of this year or whenever some clear direction of the market happens.

How'd that work out for you? 

*this is an old thread, note the date*

[ooeei]

A small win today as the market was up after a flat start as predicted! ;)  Anyhow, I did get out of 90% of my positions and I'm now happily sitting in cash until probably end of this year or whenever some clear direction of the market happens.

How'd that work out for you? 

*this is an old thread, note the date*

Didn't notice until midway down the first page.  Always good to see threads like this, what a great example to show someone asking a similar question today.

[Mr. Green]

Given that the OP hasn't been active in a year, I doubt there'll actually be an update. However, dredging up these old threads serves as a great reminder of why timing the market is a fool's errand. The S&P is up over 25% since the date of the OP.

[fattest_foot]

Given that the OP hasn't been active in a year, I doubt there'll actually be an update. However, dredging up these old threads serves as a great reminder of why timing the market is a fool's errand. The S&P is up over 25% since the date of the OP.

These threads are the best reminder to stay the course.

I remember 2 years ago the market had been flat for a while and we finally got the big dip in August. Figured the market would finally get its downturn. But here we are, and that would've been two years lost. The higher we go, the less likely we are to hit those lower numbers on the next correction.

[Eric]

Given that the OP hasn't been active in a year, I doubt there'll actually be an update. However, dredging up these old threads serves as a great reminder of why timing the market is a fool's errand. The S&P is up over 25% since the date of the OP.

It was more of a rhetorical question.  :)

[DavidAnnArbor]

Ha it's fun to see these old threads.

[davisgang90]

Ha it's fun to see these old threads.

I wonder if the OP ever put his money back in the market...

[dude]

A small win today as the market was up after a flat start as predicted! ;)  Anyhow, I did get out of 90% of my positions and I'm now happily sitting in cash until probably end of this year or whenever some clear direction of the market happens.

How'd that work out for you? 

*this is an old thread, note the date*

HAHAHA!  Excellent revival of an old thread!

[markbike528CBX]

Posting to find and point to for the next such posts.

RED DOW!  --- at least that one was during a noticeable dip.   

OP for this one was on a flat/upslope market.

[Tyson]

"I feel like the market is overvalued".   That feeling is called 'fear'.  Don't listen.

[pumpkinlantern]

Does Buffet sell and go into cash? Has he done well?

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

Buffett is too big to just buy the market.  He has to buy entire companies (or at least very large stakes in them).  He needs lots of cash to do that.  It doesn't make sense to compare to him unless you have enough money to buy entire companies...but if that were the case, you wouldn't be getting investing advice from this forum.

[theoverlook]

Given that the OP hasn't been active in a year, I doubt there'll actually be an update. However, dredging up these old threads serves as a great reminder of why timing the market is a fool's errand. The S&P is up over 25% since the date of the OP.

If I'm looking at it right, VTSAX total return (meaning, return with dividends included) is 34.5% since May 8th, 2014.

Lots of people ignore the dividends, but at ~2% they certainly add up. You can't look at the value of the index - you have to look at the total return.

[Tyson]

Given that the OP hasn't been active in a year, I doubt there'll actually be an update. However, dredging up these old threads serves as a great reminder of why timing the market is a fool's errand. The S&P is up over 25% since the date of the OP.

If I'm looking at it right, VTSAX total return (meaning, return with dividends included) is 34.5% since May 8th, 2014.

Lots of people ignore the dividends, but at ~2% they certainly add up. You can't look at the value of the index - you have to look at the total return.

It's funny, at the time this thread was started, the market was "high" and "due for a crash" according to the OP (and others).  So, these people jump out of the market at the mere idea that a drop 'might' happen?

Good lord, if they can't stay in the market when there's huge gains going on, what the hell are they going to do during an actual downturn?  Wow, just wow.

[RunningintoFI]

This thread was the best investing lesson I have seen on the internet to date.