Author Topic: A gentle decrease of risk?  (Read 2805 times)

headwinds

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A gentle decrease of risk?
« on: January 28, 2018, 09:41:42 PM »
I'm curious what the MMM community might think of this.

I am 38. Hope to retire by age 50. I have $35K in a tax deferred account (457). Currently I hold 100% Valic Stock Index within this account as I don't have the choice to use Vanguard Stock Index fund. I am considering changing my allocation to 100% Vanguard Wellington, which is a choice that I have within this account.

I understand that the Wellington is not a good choice in a taxable account, but this account is tax-deferred. The reason I am considering this is because I would like to gently decrease the amount of risk I am exposed to. While I have enjoyed the roaring returns of the past year, I fully expect the bottom to drop out at any time and I would like to keep the gains that I have enjoyed over the past year. Historically the Wellington does underperform during bull markets compared to a Stock Index fund, it does still do pretty well and it hasn't taken nearly as big a hit during market downturns.

Does this choice make any sense at all or am I just being fearful?

Thanks

LAGuy

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Re: A gentle decrease of risk?
« Reply #1 on: January 28, 2018, 10:05:37 PM »
If you're 38 and want to retire by 50 and you only have $35k saved, you need to be in stocks. Risks be damned.

marty998

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Re: A gentle decrease of risk?
« Reply #2 on: January 29, 2018, 12:21:15 AM »
Does this choice make any sense at all or am I just being fearful?


I think you're being a bit too fearful. With $35k invested, your gains will be $5k... maybe $6k at best over the past year.

There will come a time when your gains and losses will be $5k per hour. Being fearful about losing $5k now will seem rather funny looking back in future :)

matchewed

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Re: A gentle decrease of risk?
« Reply #3 on: January 29, 2018, 09:49:46 AM »
Even if the market tanks 30% you shouldn't be worried about the money invested. That's old person money (or older than the amount of time it will take to recover).

You're trying to time the market. Keep buying whatever funds you have outlined in your IPS.

ChpBstrd

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Re: A gentle decrease of risk?
« Reply #4 on: January 29, 2018, 01:10:41 PM »
I think there is a tendency to be more protective/cautious when your portfolio is four or five digits, and a tendency to relax a little when, ironically, there is more at stake.

I remember ten years and half a million ago when I'd watch my portfolio lose $500 in a day and think "Holy shit, I just lost a month's savings and it just went poof! This stock market is dangerous. A few of these in a row and I'll be broke!"

Nowadays, losing $5,000 in a day is a "meh" moment.

I'm not sure why this is. Experience? Confidence? Margin of safety? Psychological scarcity conditions? I also know I've looked back at investments that were too volatile back in the day and SMH that I wasn't brave enough to take the bumpy ride up - so maybe it's learning. Amazon and Netflix seemed like such sketchy propositions back in the day.

My grandpa, who rode a few Wal-Mart shares to millionaire status decades ago, always replied to my questions about what the stock market will do next (questions which reliably came with every tiny correction) by simply saying "it'll go back up". At the time I thought he was bullshitting me because he had no clue. Turns out I should have taken the old man seriously. He must have thought, "how many times do I need to tell this kid?" Only now can I imagine myself in his mentality.

ketchup

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Re: A gentle decrease of risk?
« Reply #5 on: January 29, 2018, 01:24:10 PM »
I'm not sure why this is. Experience? Confidence? Margin of safety? Psychological scarcity conditions? I also know I've looked back at investments that were too volatile back in the day and SMH that I wasn't brave enough to take the bumpy ride up - so maybe it's learning. Amazon and Netflix seemed like such sketchy propositions back in the day.
I'd be careful with this mindset.  You could have ended up with shares of AOL and Enron.

GOFU

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Re: A gentle decrease of risk?
« Reply #6 on: January 29, 2018, 01:59:01 PM »
12 years is a long-term horizon such that you need to squelch your fear. What you are essentially talking about doing is trying to time the market.

Jim Collins takes on your very issue thoroughly in this piece.

http://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/

webguy

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Re: A gentle decrease of risk?
« Reply #7 on: January 29, 2018, 10:41:04 PM »
If the allocation within the Wellington fund is what youíre comfortable with from a risk tolerance perspective then go ahead. You need to be able to sleep at night. Remember that this is your long term fund though and so short term corrections donít matter. Right now youíre looking at the current number on paper rather than thinking long term. 12 years is a long time, and 35k isnít a lot of money in the big picture. If it makes you feel any better my portfolio was down 0.75% today which is a ďlossĒ of $10k. Donít let short term fluctuations bother you. You donít need this money for 12 years!

headwinds

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Re: A gentle decrease of risk?
« Reply #8 on: January 31, 2018, 04:24:11 AM »
Yeah this all makes sense. I was thinking along the lines of trying to time the market - I can't imagine it will do anything but correct at this point, and I was thinking it is possible to shield my gains from the drop, then put the money back into 100% stocks once I feel the bottom is in. However: I have no way of knowing how close we are to the top, nor will I have any way of knowing when we are close to the bottom. I could get lucky, or not. I know 35K isnt much, and I also have ~35K in pension as well which will not drop, defined benefit as it is. Just makes me nervous seeing the exponential rise in the value of equity, how high can it go? But, I should remember that the market is not rational and attempting to predict is going to be a total crapshoot. I should stay and get used to the idea of fluctuation. Actually, a big drop now would be a good thing for me in the long run, it would allow me to purchase more stocks at a discount for the long haul. I have read the J Collins stock series, I know he recommends 100% stocks for almost everyone. Thank you all for the reality check and the reassurance. It will all be ok.

GOFU

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Re: A gentle decrease of risk?
« Reply #9 on: January 31, 2018, 04:46:38 AM »
Yeah this all makes sense. I was thinking along the lines of trying to time the market - I can't imagine it will do anything but correct at this point, and I was thinking it is possible to shield my gains from the drop, then put the money back into 100% stocks once I feel the bottom is in. However: I have no way of knowing how close we are to the top, nor will I have any way of knowing when we are close to the bottom. I could get lucky, or not. I know 35K isnt much, and I also have ~35K in pension as well which will not drop, defined benefit as it is. Just makes me nervous seeing the exponential rise in the value of equity, how high can it go? But, I should remember that the market is not rational and attempting to predict is going to be a total crapshoot. I should stay and get used to the idea of fluctuation. Actually, a big drop now would be a good thing for me in the long run, it would allow me to purchase more stocks at a discount for the long haul. I have read the J Collins stock series, I know he recommends 100% stocks for almost everyone. Thank you all for the reality check and the reassurance. It will all be ok.

It's tempting, isn't it? To think you have that kind of wisdom and power? You don't. I don't. 99.99% of "professionals" don't. As Jack Goble says in the "Little Book" on investing in index funds - "Buy your shares, get out of the casino - and stay out!!

MasterStache

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Re: A gentle decrease of risk?
« Reply #10 on: January 31, 2018, 06:21:24 AM »
I'm not sure why this is. Experience? Confidence? Margin of safety? Psychological scarcity conditions? I also know I've looked back at investments that were too volatile back in the day and SMH that I wasn't brave enough to take the bumpy ride up - so maybe it's learning. Amazon and Netflix seemed like such sketchy propositions back in the day.
I'd be careful with this mindset.  You could have ended up with shares of AOL and Enron.

Yep. I have extended family members who invested heavily in Enron. Needless to say their working years were extended for a bit.

Cycling Stache

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Re: A gentle decrease of risk?
« Reply #11 on: February 03, 2018, 01:12:26 PM »
Yeah this all makes sense. I was thinking along the lines of trying to time the market - I can't imagine it will do anything but correct at this point, and I was thinking it is possible to shield my gains from the drop, then put the money back into 100% stocks once I feel the bottom is in. However: I have no way of knowing how close we are to the top, nor will I have any way of knowing when we are close to the bottom. I could get lucky, or not. I know 35K isnt much, and I also have ~35K in pension as well which will not drop, defined benefit as it is. Just makes me nervous seeing the exponential rise in the value of equity, how high can it go? But, I should remember that the market is not rational and attempting to predict is going to be a total crapshoot. I should stay and get used to the idea of fluctuation. Actually, a big drop now would be a good thing for me in the long run, it would allow me to purchase more stocks at a discount for the long haul. I have read the J Collins stock series, I know he recommends 100% stocks for almost everyone. Thank you all for the reality check and the reassurance. It will all be ok.

What you're experiencing is a combination of behavioral economics errors, all of which are normal, predictable, and wrong.

(1)  You have no idea when a market top is and what will happen next.  There's a 50-page thread on this called "Top is In" as well as many, many threads along the years that have "called the top"--all incredibly incorrectly at this point.  In short, you have no information that the market doesn't have, which means that you don't have any way to out predict what the market will do.  You can guess, and you might get lucky, but statistically you're likely to get it wrong because . . .

(2) Over time, the market goes up.  Yes, there is volatility in the short term.  But over long periods of time, the market always goes up.  If you sit out, you lose money.  The problem is that you--statistical you--treats losses as being twice as bad as gains.  Your instinct is to protect against potential losses, thus missing out on gains.  And if you want to have some fun, pull up the S&P 500 chart on google and look at it's overall trend (which doesn't even include dividends).  The market is up dramatically from every point in history, including most recently February 2007.   

(3)  You have no idea when the bottom will be.  Let's say 2 years ago you decided that there would be an imminent 10-20% drop.  The market is up 40% or so since then.  When do you get back in?  Do you wait for a 30% drop, that still puts the market above where it was 2 years ago?  All you're doing is guessing, and the problem is, you won't be able to act on that either.  Because if you think start thinking about market timing, and the market drops 30%, are you really going to go all in at that point or maybe continue to be worried about even more drops?  What about in 2007-2009?  It was a 60% drop.  Really think that 30% was going to be your magic number?  What if you decide 40% and it only drops 30% then roars back?  Never invest again?  It's an impossible analysis because it's just based on guessing, and behavioral economics says you're bad at guessing.

(4) You're not talking about much money if the market drops.  Indeed, you shouldn't be talking about losing any money at all.   You shouldn't be selling soon, so short-term fluctuations don't matter that much.  And even if they did, let's say you "lost" $20,000 because the market dropped.  Do you think your retirement calculations of how much money you'll need forever will come down to $20,000?  It's not a significant amount given what you're ultimately playing for.

(5) You have to rely on the market long-term unless you are going to work forever.  The only way your money grows and outpaces inflation is to invest it.  Investing in the market has risks, sure, but not really over long periods of time.  You eventually have to trust the market in order to get enough money to retire.  Otherwise, you have to earn and save an incredible amount of money through salary, which means working a long, long time.

And one more point just to show how unreliable your "rational" thoughts are.  You are worried about the market dropping.  Yet you've only saved $70k towards retirement, and probably need let's say a $1,000,000 or so.  What is your ideal outcome right now?  That the market drops 80% Monday!  So what if $70k drops to $14k on paper.  You're not going to sell it.  And what you will get to do is buy shares going forward at an incredibly reduced price. 

That point is why it's so ridiculous--rationally--that we fear market drops in the accumulation stage.  You should absolutely want the market to plummet while you're still buying shares, only for it to surge upwards right before you start withdrawing money.  Of course, that's not at all how we feel.  Think of how exciting the market run up has been, and realize that all it means is that you've been buying more and more expensive shares. 

So, you can't trust your thoughts when it comes to investing.  That's why you pick an acceptable market allocation for you (probably still a high percentage of stocks at your age), write it down somewhere (investor policy statement), invest in total stock market index funds and total market bond funds (if any) based on whatever allocation you decided (because you don't know anything that the market doesn't know), and automate your investing so you don't have to think about it.  Because the only way to overcome behavioral errors is to remove or reduce the opportunity to make them.

Hope that helps.  I'm also referencing @boarder42 because this is exactly the kind of discussion we had in another thread about how to handle situations where people make behavioral errors that cause them to do the "math" (analysis) wrong.

Good luck! 

boarder42

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Re: A gentle decrease of risk?
« Reply #12 on: February 03, 2018, 04:31:17 PM »
Cycling stache summed that up pretty well. The more I talk to normal people outside of this forum about money and investing and the more I see posts like this the larger my respect for 1% fee financial planning firms grows even when they only convince you to do index funds and keep your money in the market as well as provide other planning services for that cost. 

OP you're being incredibly irrational about pennies. 35k 70k whatever it is you have saved is pennies compared to what you need to retire. Many of those sitting here screaming to keep it invested may have lost what you have saved in the last week. I lost almost that full 35k. Last week in index funds. But you don't see me on here trying to time the market. Bc of all the reasons stated above by other posters. You invest and you invest more. And you keep investing the same way regardless of what the market is doing. 

Right now you should be focused on cutting your spending and upping your investments. And also educating yourself on why you shouldn't do exactly what you're thinking about here. Jlcollins stock series is a good read. Also Google bob the world's worst market timer. There is no secret fast path to wealth. You have 12 years. Come up with a plan to get there that includes spending and investing and follow it

headwinds

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Re: A gentle decrease of risk?
« Reply #13 on: February 06, 2018, 12:21:29 AM »
Well, FWIW, if I would have followed my hunch at the time that I had it, and moved my money into VWELX, I would have lost ~$400 less. Peanuts, as you are saying.

Still, I don't agree that that move would have been incredibly irrational, as I still would be free to move it back into the VSTIX at any time.

I had a hunch, I didn't act, I lost more money than I would have if I had acted.

But still, it was just a guess that turned out to be correct. As they say, even a broken clock is right twice per day, and I do understand that I was just as likely to have been wrong and missed out on $400 gains instead.

It's still quite tempting to shuffle things around, even 50% VWELX and 50% VSTIX or whatever.

I get the arguments against market timing, I have read the whole stock series which is why I'm 100% equities to begin with. And yet it's still tempting.

But what have you. Onward!

Cycling Stache

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Re: A gentle decrease of risk?
« Reply #14 on: February 06, 2018, 03:28:28 AM »
Still, I don't agree that that move would have been incredibly irrational, as I still would be free to move it back into the VSTIX at any time.

I had a hunch, I didn't act, I lost more money than I would have if I had acted.

It's tempting to think like this, but yes, relying on hunches when it comes to investing is irrational.

Here's something to help.  Post your prediction in this thread each morning of what you believe the market will do.  Do that for 60 days.  You can then see how well your hunches track actual performance, and you can conclude after that whether you are regularly calling the market, or whether it just becomes random guesses over time.

Bicycle_B

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Re: A gentle decrease of risk?
« Reply #15 on: February 06, 2018, 07:42:06 PM »
Great posts by @Cycling Stache and @boarder42 !!

You're exposed to risk in Wellington too - including the risk of missing out on gains.  With a 12 year timeframe to accumulate and some decades to live off the returns, being out of the market is probably a bigger risk than being in.  In the context of investing in stocks vs investing in, say, bonds, the only clear way to "beat" the system of steadily making your investments is to successfully predict the market's daily fluctuations.  Like the ability to predict winning lottery numbers, this is not really an ability, only a lucky guess.  Don't rely on luck.  Invest.

PS. Technically you can beat the system a little by being systematic in your investment holding.  Rebalancing between asset categories (stocks vs bonds; large cap vs small cap; US vs international) on a systematic annual basis gives you a slight edge over time.  Meanwhile you lose consistently (on average) if you don't invest.  Good luck staying the course.