The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: skeptic on June 13, 2018, 12:42:12 PM
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For decades I have followed the buy-and-hold philosophy. And I still think I mostly believe it, and am ready to do it for a couple more decades.
But somehow this particular market just seems to be screaming that it is overpriced.
I say that simply on the basis of earnings... a dollar just doesn't buy as much earnings as I somehow believe it "should" based on historic returns. It's not that I really know where _prices_ are going to go soon, but it just seems that the value isn't there. I didn't predict either of the last 2 stock market crashes (and luckily didn't try) but I did understand that real estate was overpriced before the big crash, not because I knew about lax mortgage standards or anything but just based on the price-to-rent ratios. They were too high. And I kind of feel like that again now with the stock market. (I'm sure some stocks are not overpriced but I don't feel knowledgeable enough to pick which ones.)
I don't know when the correction will be. I don't know if the market is going to go up another 15+% first (though, I guess if I really thought it was, I wouldn't move to cash).
I think my plan is this: to move 2/3rds of my portfolio sometime between today and then next few weeks (I've already moved about 1/3rd to cash today). The remaining 1/3rd will continue to buy-and-hold. [this does not have any significant tax implications.] The rest I'll hang on to and try to buy into the market after a correction... say, once the market has dropped 25% from the high. I know most corrections are more than that but I can't really predict the bottom (or the top).
It feels crazy to be saying this. I have been feeling the market was approaching a crash for the last 2+ years and I have felt fairly sanguine about it, having weathered a couple of these before. I know it will come back up. And I have looked at the "top is in" posts and been relieved I didn't miss out on the gains.
How confident am I that the market is near the top? I guess not very, otherwise I would sell everything instead of 2/3rds of it, and if one felt super-confident one might short the market. On margin! But I would never do that. So I don't feel highly confident that this is a good idea, but I guess I feel somewhat more than 50% confident. Maybe 65%?
I think I'll put the money in either money market accounts or perhaps 1-year cds that don't have particularly stiff early withdrawal penalties. Money market would be easiest, 1% and call it a day. I'll consider bonds but probably not.
One other thing I had considered is to move things to mainly international equities, where apparently valuations are not quite so high. But I don't know much about that so I am just going to skip it.
Just to make a record, SPY has been 278-279 today. I'd just like to say that regardless of how this adventure goes, I still feel ready to buy-and-hold for the rest of my life after this (even if I end up having to buy in higher because I screwed this up). Although I guess I would still consider doing this again if the signals were really strong for a long long time, though I hope not to.
I'm mainly writing to make a record of this. Hopefully I don't become a cautionary tale but if I am at least someone will learn something. Please don't hate me for being contrarian for once!
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http://engaging-data.com/market-all-time-high/
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Your plan is buy after the market drops 25%. I think you should have a more robust plan than that.
What will you do if the market drops 22% and then goes up 80%? What will you do if the market goes up 10% past old highs and then drops 25%+? What will you do if the market moves sideways for two years and then moves X% up/down?
I'm not saying that your plan is wrong, I'm just saying that it needs to be more robust. I do like your idea of writing it down and stating it publicly. Good luck.
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After reading your post.. you seem extremely uncertain of your own plan.
I think that should tell you something.
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@FIRE@50
Thank you for your thoughts. It's true I don't have a definite re-entry plan. I don't think I personally want to or am capable of making a hard-and-fast rule-based plan like "I will buy on x% drop" . My thinking is less based on price alone and more on price-to-earnings and expected earnings growth. There are lots of different ways to measure these things that take more or less account of past earnings, present earnings, or future earnings. All I can say is it seems really too high now. I will think about if there are certain metrics of price-to-earnings that I would feel good about buying back in on.
>What will you do if the market drops 22% and then goes up 80%?
That is a definite possibility and a real risk. In my case I think the more likely risk is that I buy back in too early (earlier than 25%) and still experience a lot of downside. I'm not sure what to say except there is always risk in every direction... at the moment this seems a little more likely to succeed to me.
@SwitchActiveDWG
Well, I always feel uncertain making decisions that try to predict the future. I think this is a little harder because I realize I will bear the blame/responsibility if things go badly, whereas if you lose money while holding the market, it feels ok to just blame the economy and at least you have plenty of company.
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"seems," "feels," "think," "believe."
Sounds like you are making emotional decisions that you're maybe two/thirds sure of.
The aggregate of all investment data clearly suggests staying in the market at all times is the best possible move.
That's why my motto is "I'm too dumb to know, and I can't afford to guess."
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Your plan is buy after the market drops 25%. I think you should have a more robust plan than that.
What will you do if the market drops 22% and then goes up 80%? What will you do if the market goes up 10% past old highs and then drops 25%+? What will you do if the market moves sideways for two years and then moves X% up/down?
I was going to chime in and say the same thing. There are so many possibilities that could happen that could screw your plan majorly. It's possible that your plan works out, but I think you have to realize that even if you are right about a large drop happening in the next few years, you may not come out ahead depending on how the market drops.
Also, how far along are you in your FI journey, are we talking about moving 5% of your target stache amount to cash or 75%?
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I understand your anxiety because I have contemplated everything you've written down. I also feel valuations are stretched and many areas of excess are opening up across the world economy. I've recently taken a particular interest in the housing markets of Canada and Australia, where it's obvious to me there is a bubble in many cities that may be popping. Bitcoin, rising interest rates, trade disputes, the level of debt among households and companies, and in general the length of time since our last recession all give me pause and leave a feeling of wanting safer investments.
But that said, I do not plan to do anything major with my portfolio beyond normal re-balancing. I have for a few months now allocated more of my new after tax savings (savings not going to tax advantaged accounts) to cash for a number of reasons-potential market decline one of them. I do like to think of cash like Warren Buffett does as a call option with no expiration date. What you purpose though is pretty much the definition of market timing, which may work in your favor, but there is a significant chance it won't. While I think it prudent to be careful in what looks like the late part of our credit and market cycle, no one knows for sure and I would find going to all cash pretty risky in itself.
I personally keep what is generally considered a large emergency fund (over one year of expenses) so that helps me keep calm and let my investment plan carry on, it also helps that I am fairly young and have the option of working more years. Your mileage may vary, good luck.
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what if you sell and the market continues up or flat the next 10 years with 50% returns then drops - the market doesnt have to drop to regulate it self back to a normal valuation- earnings can increase prices could just go up slower than normal a million different things could happen that wouldnt result in a market collapse to regulate itself -- this is a fools game.
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I'm going to talk you down with my story.
I followed calculatedriskblog.com early on, and starting in 2005 I started getting really, really nervous about the housing market, and the effects it would have generally on the financial industry and the economy. Because of that blog, I was one of the few people who "saw" the impending doom, and especially the precipitous plunge of Fannie Mae. I pulled out all my personal investments--over a hundred thousand dollars at the time--and went to a money market. I was RIGHT! The market tanked literally a couple of weeks after I pulled out.
I watched the subsequent catastrophe with horror--but nevertheless at least comforted that my money was out. The market kept dropping. I was sure it would keep dropping. Then it started to recover--but it was a fragile recovery. Smart people, like calculatedriskblog, noted so. I kept my money out, and took grim satisfaction with every new dip, thinking that this was the start of another plunge.
And I stayed out. And I stayed out. And I stayed out until something like 2014 (I can't even remember--but it was way late), having missed all the recovery AND THEN SOME. (ETA: I just looked it up. I started dribbling money back in in mid-2013.)
You see, timing the market doesn't take one very clever (or more likely, very lucky) call--it takes two. You have to know when to get back in. and it is NOT OBVIOUS.
If I had kept that $100+ thou in, and kept putting money in, I'd easily be retired today. (Thankfully, somehow I never touched my retirement funds, and even kept fully funding them throughout the entire ordeal. It was a weird sort of blind spot for which I am eternally grateful.)
Pulling my money out before the Great Crash--even though I was absolutely right--is the single biggest investing mistake I have ever made. So, take all that for what it's worth.
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Don’t do it.
Maybe readjust your asset allocation to more bonds/cash if your willingness/need/ability to take risk has changed but then stick with it
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I don't know when the correction will be. I don't know if the market is going to go up another 15+% first (though, I guess if I really thought it was, I wouldn't move to cash).
A correction is 10%, and that has already happened a couple times (Dow & S&P both) since the January 26 high.
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I personally believe the market has plenty of room to run because the economic fundamentals of the US are humming along nicely. One (or both) of us is wrong. Are you willing to risk being wrong?
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Good luck.
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After a long bull market, it is reasonable to assess whether one’s willingness and need to take risk has changed. When I recently rebalanced, I concluded that I would like to reduce my stock allocation to some degree, so that a sharp downdraft would be less stomach churning. I hated 2008, even though I stuck with my 90:10 at the time portfolio. I am obviously much closer to retirement now, so sequence of returns risk is more worrisome. But that doesn’t mean it is necessary to sell everything. Choose an asset allocation you can live with, and then live with it.
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Where are all of these "bubbles" that are being speculated upon? I've heard that car loans are the next bubble. But people need their cars and so I wonder about that. Housing is rising again. I hear talk of flipping houses in this rising market. I hear price / earnings ratio is higher than historic levels so beware.
I see lots of ads for jobs. I hear stories of jobs that cannot be filled. Profit levels for businesses seem high. I've heard of no big bankruptcies in the US lately. People are fighting for and getting some of the benefits they deserve. I see some inflation when I buy groceries and some gas price increases, but these are not out of bounds. There do not appear to be problems of scarcity. These things I see on a personal level make me think that the economy is going pretty well.
So if the economy is going well, why isn't this reflected with a stable robust stock market? Why should I expect the crash? Should I do like the Original Poster and hold the cash?
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Ooh, is this another The Top Is In! threads? Let me go make some popcorn and watch where this goes.
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As someone who is only going to seriosly start investing hopefully in November of this year, (pay will probably double before tax at my next job), I thought about this too.
Obviously there will be a correction within the next 1, 2, 3 or 4 years :-D I still plan on not timing, for two reasons:
1. Who knows, could be another great moderation coming next
2. If it goes down, I get to weather the emotional roller coaster with not-so-much-yet in the market. That should give me a real insight in my risk tolerance once there is not 30% of 5k at stake, but 30% of 20k or more.
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This thought: Your nervousness possibly suggests you were using a bad asset allocation.
BTW, I don't tell this story often but I rather perfectly timed the stock market in 2000. My logic went like this... over a three-year period of time, when total stock market delivered 20+% returns each year, I doubled my money. That stock market growth was fueled by technology stocks and I was writing about technology and saw pretty clearly that investors were way, way overoptimistic. (E.g., a friend registered a domain for a website *concept* called "keep it up" ... the idea was the new site would monitor whether your website was up and then would alert you if it wasn't... and VCs offered $1M for the "intellectual property" that amounted to a domain and two sentences. It was crazy. So I went from a high, high percentage in stocks (nearly 100%) to nearly all bonds.
It was pretty scary. All my technology writer friends knew I'd done this. And for a few months the market kept floating up. People loaded up on Intel and MSFT and Amazon felt pretty smug.
Then the market cratered (especially the technology stocks). And my "move" looked half clever.
The other half of the problem was when, gosh, when do you get back in (as noted in messages above).
Perhaps more alert to potential loss of life in the second gulf war because of family members serving the military, I got back into the stock market the day news broke about the number of body bags the US Army was taking to Iraq. (50,000 was the number I think... Remember, we thought they had chemical weapons at the time.) At that low point I figured, well crap, it probably can't get any worse and so I went back into the market with maybe an 80% to stocks allocation.
Selling high and re-buying low made a big impact on my portfolio returns... but in retrospect I think it was dumb luck. And I would never try to do it again. Too many things need to go right.
Also, even if I wasn't just lucky--and I think I was which is why I don't tell the story often--I don't think I could ever repeat my maneuver. I didn't, for example, avoid Great Recession.)
P.S. OP and others who worry about this stuff may benefit from this discussion: Why You Need a Retirement Plan B (https://evergreensmallbusiness.com/retirement-plan-b-need-one/)
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In June 2008, I KNEW the housing bubble was popping. I KNEW the market was going to go down. I was one of those insane people nobody wanted at a cocktail party because I'd be telling you how all your housing equity was going to go up in smoke. So, I cashed out all my stock investments and went to cash. Looking back, I was SO right!
However, what actually happened is that the stock market kept going up that summer. I panicked and bought back in thinking I was going to miss the rally. Then, I ate the whole crash. Never again. I'm staying in for life.
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Skeptic, maybe instead of market timing, a better plan would be annual rebalancing.
You just switched to one third in cash. How many years of expenses would that cover? However many years that is, the two thirds in stock has that many years to recover. Bonds instead of cash for most of the cash portion would bring you some additional income during that time, hence typical allocations have more bonds than cash. 60% stock, 30% bonds, 10% cash would be an example.
Rebalancing means that, at a certain point (for example, every year on the anniversary of your cash move), you calculate the value of each part of your portfolio. Then you sell the short-term winners and buy more of the short-term losers until you rebalance the portfolio to the original percentages. To the extent that trends eventually reverse, this rebalancing causes you to sell high and buy low.
One advantage of rebalancing is that it can be done systematically without emotional influence. By making small moves consistently, it guarantees that you will gradually be more efficient. Yet it also guarantees you'll never run out of cash (if 10% covers a year's worth of expenses), never lose the entire nest egg in a crash of one asset (stocks), and never have to give up the advantages of having some stock in the mix.
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Did you predict the six corrections since the 2008 market crisis?
Slightly obnoxious follow up: can you predict what they were, even now, after they happened?
https://en.wikipedia.org/wiki/List_of_stock_market_crashes_and_bear_markets
Or, more likely... have you ignored 6 corrections without noticing them? What's different now?
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Prices are based not just on current earnings, but also expected future earnings. Many companies have ridiculous P/E ratios because their future growth rate is expected to be high. At the moment, the S and P 500 is like a high-growth company.
S and P 500 earnings are expected to grow 18% in 2018 and 10% in 2019. If that materializes, then the next two years will reduce the price to earnings ratio as much or more than a moderate bear market, assuming the S and P 500 price remains the same. And if the price increases so that the P/E ratio remains the same, well, you'll have missed out on two years of double digit growth, and even if the market does drop 25% afterwards, you'd have been basically as well off, or better off, staying in. https://seekingalpha.com/article/4142857-2018-estimated-s-and-p-500-earnings-growth-rises-18-percent
You are betting that the price of stocks will drop at the same time earnings are rapidly increasing. Or else you are betting the earnings projections are totally off base. Either is possible, but the probability is not exactly high.
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Prices are based not just on current earnings, but also expected future earnings. Many companies have ridiculous P/E ratios because their future growth rate is expected to be high. At the moment, the S and P 500 is like a high-growth company.
S and P 500 earnings are expected to grow 18% in 2018 and 10% in 2019. If that materializes, then the next two years will reduce the price to earnings ratio as much or more than a moderate bear market, assuming the S and P 500 price remains the same. And if the price increases so that the P/E ratio remains the same, well, you'll have missed out on two years of double digit growth, and even if the market does drop 25% afterwards, you'd have been basically as well off, or better off, staying in. https://seekingalpha.com/article/4142857-2018-estimated-s-and-p-500-earnings-growth-rises-18-percent
You are betting that the price of stocks will drop at the same time earnings are rapidly increasing. Or else you are betting the earnings projections are totally off base. Either is possible, but the probability is not exactly high.
Where will this 18% and 10% come from if we already have full employment.
Also, regarding risk, need to compare to the treasury rate and with this rate more than guaranteed to go up in the future, the appetite risk comparison bar is raised for stocks to NEED to perform in the future. I don't see this..
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The market could be 'wrong' far, far longer than you are willing to wait.
The market in the 90s was expensive in some areas for 5 years or more.
What's your signal that tells you your strategy is wrong?
What about 50/50 stocks/bonds or 25/75 stocks/bonds? Or the permanent portfolio? Or tactical asset allocation? These lazy portfolios were created for people who are uncertain about the future.
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Where will this 18% and 10% come from if we already have full employment.
I am not making a prediction, I am just reporting the consensus prediction, and saying that if it's even close to right, moving from stocks to cash now doesn't seem like a great move. I don't market time myself. But to answer your question, there are many *possible* ways for earnings to jump up.
1. The tax cut increases after-tax earnings.
2. Companies increase buybacks (already happening) which reduces the number of shares, which increases earnings-per-share.
3. Full-employment leads to higher wages.
4. Full-employment gives consumers more security, so they increase spending rather than hoarding cash.
5. Maybe we aren't actually at full employment. Maybe companies will now hire people with criminal records, people with outdated skill sets, or maybe stay-at-home parents will be enticed by higher wages to re-enter the workforce. We're still creating 200k net new jobs per month, clearly some people are being hired.
6. The S and P 500 gets a huge (around 50%) portion of its revenue overseas. That portion of earnings may increase faster than US earnings.
... etc.
My point is, OP has a narrative that the market is over-valued and due for a drop. It's possible OP is right. However, it's just as easy to come up with half a dozen reasons why the market is due for further increases. We don't know which of these factors will be important and which ones won't. Predicting which factors will rule stock market returns for the next couple years is impossible. How can we know if rising interest rates will be more or less important than share buybacks? How can we know if elevated P/E ratios will be more or less important than rising wages? We can't.
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Where will this 18% and 10% come from if we already have full employment.
I am not making a prediction, I am just reporting the consensus prediction, and saying that if it's even close to right, moving from stocks to cash now doesn't seem like a great move. I don't market time myself. But to answer your question, there are many *possible* ways for earnings to jump up.
1. The tax cut increases after-tax earnings.
2. Companies increase buybacks (already happening) which reduces the number of shares, which increases earnings-per-share.
3. Full-employment leads to higher wages.
4. Full-employment gives consumers more security, so they increase spending rather than hoarding cash.
5. Maybe we aren't actually at full employment. Maybe companies will now hire people with criminal records, people with outdated skill sets, or maybe stay-at-home parents will be enticed by higher wages to re-enter the workforce. We're still creating 200k net new jobs per month, clearly some people are being hired.
6. The S and P 500 gets a huge (around 50%) portion of its revenue overseas. That portion of earnings may increase faster than US earnings.
... etc.
My point is, OP has a narrative that the market is over-valued and due for a drop. It's possible OP is right. However, it's just as easy to come up with half a dozen reasons why the market is due for further increases. We don't know which of these factors will be important and which ones won't. Predicting which factors will rule stock market returns for the next couple years is impossible. How can we know if rising interest rates will be more or less important than share buybacks? How can we know if elevated P/E ratios will be more or less important than rising wages? We can't.
Just a couple of thoughts/additions from my non economist brain:
#2 - if the index is market cap weighted (i.e. SP500 or VSTMX), then a buyback wouldn't by itself change the market cap of the stock, unless it leads to market cap appreciation and not just share price appreciation.
7. If full employment is here, then maybe companies realize they can't get more employees and invest in more automation and productivity and profits rises
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I just want to thank the many people who took the time to share their thoughts and help. I have read each post with an open mind. I have especially heard the argument that several have made that it takes two good decisions to succeed at market timing, and I readily admit I don't have a clear or good plan for re-entry, other than "when some combination of past and forward PE is more favorable than now," and I understand that's not good enough to have a high chance of success.
Roothy and SeattleCPA, thank you for sharing your personal stories, which I take to heart.
I still ultimately believe that there is some level of current and/or forward PE where one can reasonably say: the market is overpriced, and I am going to significantly reduce my exposure for that reason. What if the PE ratios were 30, 40, 50x or more, and with low earning growth predicted?
Are we there? I don't know. At 25x PE, I am buying only $4 of earnings with every $100. It's not outrageous but it seems steep for the risk involved.
economist, your argument of strong PE growth predictions for 2018 and 2019 are probably the most compelling to me. 18% and 10%. This gave me pause and so I re-bought the market earlier today... luckily my one day of market timing didn't cost me financially.
I can't say I feel certain of the course though. My main question about is: How accurate are these earnings growth numbers -- especially before a recession? I have looked some and I can't find the answer to: how much earnings growth was being predicted before the most recent bear markets? Or even better: how much earnings growth was predicted every year, and how did it match with reality?
Anyway, looks like you talked me down. Thanks all.
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Honest question.
Why are you so concerned with what the market does? Your going to have a lot of money either way right? What matters if things don't go as planned. Since we all know the eventual movement is up?
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That is a good question. What is your timeline and what are your goals? A better use of your time than fretting would be putting that down on paper and then building an investment policy statement ( https://www.bogleheads.org/wiki/Investment_policy_statement (https://www.bogleheads.org/wiki/Investment_policy_statement)) so you have a guidebook for when you do get panic-y. Living A FI wrote about how he did that and pulled it out to reassure himself he was on the right path in the depths of the Great Recession.
Related to that and what others have said, I’d take a look at your asset allocation in your shoes. How about a healthy dose of international stocks for diversification? That is what made me feel comfortable during all of this “US stocks are overvalued” blather. How about some bonds if stocks are too scary for you?
If that doesn’t work, I recommend my sister’s strategy: purposefully don’t look at your balances to avoid freaking out. She can recommend a lot of good books if you need help finding other things to do with your time. :)
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My feeling is that while there could be money to be made/saved by timing the market, I find it less stressful to just keep putting in the same amount every month and not look at it too much. The stress from selling and then waiting for the perfect time to buy back in, all that extra worry isn't worth it for me the way things are now. Now if something crazy happened like valuations doubled this year, I might start to consider going to 25/75 or something like that
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Sounds like fun, especially as an idea for a thread on MMM.
I would maybe try market timing if I had a strong reason, but I don't see any right now. Stocks are priced to give something like 4% real returns in the future (with huge variability), while generic "bonds" will give 1% real return and cash 0% both with low variability. So right now stocks look like the only game in town for the long term.
If rates and stock prices went up to the point that both bonds and stocks were expected to give 2% real return, maybe I'd want more bonds to get the same expected return with little risk. For that to happen bond yields need to reach 4%+ and stock prices need to rise another 50% (S&P at 4200+), with inflation remaining around 2%.
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Sounds like fun, especially as an idea for a thread on MMM.
I would maybe try market timing if I had a strong reason, but I don't see any right now. Stocks are priced to give something like 4% real returns in the future (with huge variability), while generic "bonds" will give 1% real return and cash 0% both with low variability. So right now stocks look like the only game in town for the long term.
If rates and stock prices went up to the point that both bonds and stocks were expected to give 2% real return, maybe I'd want more bonds to get the same expected return with little risk. For that to happen bond yields need to reach 4%+ and stock prices need to rise another 50% (S&P at 4200+), with inflation remaining around 2%.
only time i can think that market timing makes sense is if a recession happens and the market tanks even 10%(probably more like 20% or more) and interest rates on homes are lower or near where your current interest rate is - you could do a cash out REFI and dump it into the market its the one place most of us have money stored that can reasonably be easily liquidated back into cash with a Refinance- thats assuming it doesnt screw up your rate - alternatively a HEL not a HELOC that you can get fixed for 30 years or so may be a good way to tap that equity and "time" the market. even if it continues down for a bit longer you still bought a huge chunk of shares presumably on sale. if it continues down forever and it turns out to be bad well then you would have failed at FIRE anyways so who cares. Dont know how tempted i'd be to do this in FIRE - really would depend on the interest rate - but as long as the rates good its a 100% no brainer for a pre FIREee and likely a pretty easy decision for someone already FIREd
The markets are at a weird time bonds are very slowly receding from all time highs and stocks are still at all time highs. the way market pressures work if we see a 20-30% pull back and people market time and move to bonds that will drive down yields which will drive down mortgage rates making it a perfect storm to take some equity out of that house.
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If you're posting to publicly declare you are converting to cash, I'm here to do the opposite. It'll be interesting to compare in a few years.
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Also once you've converted to cash, if the market continues to rise, FOMO (fear of missing out) is really powerful and it might get you to buy back in at an even higher time that is more likely to crash.
try it out here: http://engaging-data.com/market-timing-game/
full disclosure: this is something I made and occasionally collect meagre ad revenues from.
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Because we're FI/FIRE and kinda lazy to boot, there is one aspect of the market DH and I try to time. Yup, heresy, I know. We try to buy our Roths on dips. Sometimes it works, sometimes we miss it. We've already hit our number, so these amounts are miniscule, but it does scratch that itch. We actually look forward to the dips. Everything else is on autopilot. No way in hell do we think we can be right twice.
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If you are this easily swayed into jumping in and out of the market, then I suggest you find alternatives to invest your money in, such a real estate, franchise, or something else that you have conviction in. You are guaranteed to loose money if you can be influence so easily by a bunch of online strangers to invest thousands of dollars in a single day.
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It's true I don't have a definite re-entry plan.
Well...if you're going to do it (not recommended) you must have a rules-based plan that you can stick to.
Have you looked at trend-following? It worked in '08. I haven't a clue if it will work again. Search on here for Dual Momentum and read the agonizing mega-thread for more "ideas". Currently, Dual Momentum would have you still holding US stocks. A drop of about 15% would have you in cash.
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No one has really mentioned it yet, but if you're concerned about PEs in the US, you could invest in other countries instead. There's a whole world out there, and "stocks" is not synonymous with the S&P 500. Split the stock allocation between US & International. Dial up the bond allocation to be more in tune with your risk tolerance. And then, the most important part, DO NOTHING!
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Sounds like fun, especially as an idea for a thread on MMM.
I would maybe try market timing if I had a strong reason, but I don't see any right now. Stocks are priced to give something like 4% real returns in the future (with huge variability), while generic "bonds" will give 1% real return and cash 0% both with low variability. So right now stocks look like the only game in town for the long term.
If rates and stock prices went up to the point that both bonds and stocks were expected to give 2% real return, maybe I'd want more bonds to get the same expected return with little risk. For that to happen bond yields need to reach 4%+ and stock prices need to rise another 50% (S&P at 4200+), with inflation remaining around 2%.
only time i can think that market timing makes sense is if a recession happens and the market tanks even 10%(probably more like 20% or more) and interest rates on homes are lower or near where your current interest rate is - you could do a cash out REFI and dump it into the market its the one place most of us have money stored that can reasonably be easily liquidated back into cash with a Refinance- thats assuming it doesnt screw up your rate - alternatively a HEL not a HELOC that you can get fixed for 30 years or so may be a good way to tap that equity and "time" the market. even if it continues down for a bit longer you still bought a huge chunk of shares presumably on sale. if it continues down forever and it turns out to be bad well then you would have failed at FIRE anyways so who cares. Dont know how tempted i'd be to do this in FIRE - really would depend on the interest rate - but as long as the rates good its a 100% no brainer for a pre FIREee and likely a pretty easy decision for someone already FIREd
The markets are at a weird time bonds are very slowly receding from all time highs and stocks are still at all time highs. the way market pressures work if we see a 20-30% pull back and people market time and move to bonds that will drive down yields which will drive down mortgage rates making it a perfect storm to take some equity out of that house.
I just started a thread on this very topic earlier today!! Haha I’ve been thinking about this type of strategy for a couple months and think it’s very viable with little downside if the interest rate on the HOL is decent enough and you wait for the market to drop to a low enough point. Please check out my thread and post your thoughts.
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I have been lurking on this forum for many years, and your original post got me to finally open an account! Please don't move to cash because you think the markets are overpriced. I once thought that the US housing market was overpriced (in 2013), and I sold my house and waited for the prices to fall. It's 2018........I'm still waiting. In fact I finally bought back into the market, once I found a condo I liked, but renting in the interim cost me several $100k. Don't think you're smarter than the market. Just set your allocation, and live your life.
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No one has really mentioned it yet, but if you're concerned about PEs in the US, you could invest in other countries instead. There's a whole world out there, and "stocks" is not synonymous with the S&P 500. Split the stock allocation between US & International. Dial up the bond allocation to be more in tune with your risk tolerance. And then, the most important part, DO NOTHING!
The waiting is the hardest part.
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From Jesse Livermore:
Well, there was one old chap who was not like the others. To begin with, he was a much older man. Another thing was that he never volunteered advice and never bragged of his winnings. He was a great hand for listening very attentively to the others.
He did not seem very keen to get tips that is, he never asked the talkers what they’d heard or what they knew. But when somebody gave him one he always thanked the tipster very politely. Sometimes he thanked the tipster again when the tip turned out O.K. But if it went wrong he never whined, so that nobody could tell whether he followed it or let it slide by. It was a legend of the office that the old jigger was rich and could swing quite a line. But he wasn’t donating much to the firm in the way of commissions; at least not that anyone could see. His name was Partridge, but they nicknamed him Turkey behind his back, because he was so thick-chested and had a habit of strutting about the various rooms, with the point of his chin resting on his breast.
The customers, who were all eager to be shoved and forced into doing things so as to lay the blame for failure on others, used to go to old Partridge and tell him what some friend of a friend of an insider had advised them to do in a certain stock. They would tell him what they had not done with the tip so he would tell them what they ought to do. But whether the tip they had was to buy or to sell, the old chap’s answer was always the same.
The customer would finish the tale of his perplexity and then ask: “What do you think I ought to do?”
Old Turkey would cock his head to one side, contemplate his fellow customer with a fatherly smile, and finally he would say very impressively, “You know, it’s a bull market!”
Time and again I heard him say, “Well, this is a bull market, you know!” as though he were giving to you a priceless talisman wrapped up in a million-dollar accident insurance policy. And of course I did not get his meaning.
One day a fellow named Elmer Harwood rushed into the office, wrote out an order and gave it to the clerk. Then he rushed over to where Mr. Partridge was listening politely to John Fanning’s story of the time he overheard Keene give an order to one of his brokers and all that John made was a measly three points on a hundred shares and of course the stock had to go up twenty-four points in three days right after John sold out. It was at least the fourth time that John had told him that tale of woe, but old Turkey was smiling as sympathetically as if it was the first time he heard it.
Well, Elmer made for the old man and, without a word of apology to John Fanning, told Turkey, “Mr. Partridge, I have just sold my Climax Motors. My people say the market is entitled to a reaction and that I’ll be able to buy it back cheaper. So you’d better do likewise. That is, if you’ve still got yours.”
Elmer looked suspiciously at the man to whom he had given the original tip to buy. The amateur, or gratuitous, tipster always thinks he owns the receiver of his tip body and soul, even before he knows how the tip is going to turn out. “Yes, Mr. Harwood, I still have it. Of course!” said Turkey gratefully. It was nice of Elmer to think of the old chap. “Well, now is the time to take your profit and get in again on the next dip,” said Elmer, as if he had just made out the deposit slip for the old man.
Failing to perceive enthusiastic gratitude in the beneficiary’s face Elmer went on: “I have just sold every share I owned!”
From his voice and manner you would have conservatively estimated it at ten thousand shares. But Mr. Partridge shook his head regretfully and whined, “No! No! I can’t do that!”
“What?” yelled Elmer.
“I simply can’t!” said Mr. Partridge. He was in great trouble.
“Didn’t I give you the tip to buy it?”
“You did, Mr. Harwood, and I am very grateful to you. Indeed, I am, sir. But ”
“Hold on! Let me talk! And didn’t that stock go op seven points in ten days? Didn’t it?”
“It did, and I am much obliged to you, my dear boy. But I couldn’t think of selling that
stock.”
“You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most
tip givers to be tip takers.
“No, I couldn’t.”
“Why not?” And Elmer drew nearer.
“Why, this is a bull market!” The old fellow said it as though he had given a long and
detailed explanation.
“That’s all right,” said Elmer, looking angry because of his disappointment. “I know this is a bull market as well as you do. But you’d better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself.”
“My dear boy,” said old Partridge, in great distress “my dear boy, if I sold that stock now I’d lose my position; and then where would I be?”
Elmer Harwood threw up his hands, shook his head and walked over to me to get sympathy: “Can you beat it?” he asked me in a stage whisper. “I ask you!”
I didn’t say anything. So he went on: “I give him a tip on Climax Motors. He buys five hundred shares. He’s got seven points’ profit and I advise him to get out and buy ’em back on the reaction that’s overdue even now. And what does he say when I tell him? He says that if he sells he’ll lose his job. What do you know about that?”
“I beg your pardon, Mr. Harwood; I didn’t say I’d lose my job,” cut in old Turkey. “I said I’d lose my position. And when you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be able to repurchase your line at a substantial concession, sir. But I myself can only trade in accordance with the experience of many years. I paid a high price for it and I don’t feel like throwing away a second tuition fee. But I am as much obliged to you as if I had the money in the bank. It’s a bull market, you know.” And he strutted away, leaving Elmer dazed.
What old Mr. Partridge said did not mean much to me until I began to think about my own numerous failures to make as much money as I ought to when I was so right on the general market. The more I studied the more I realized how wise that old chap was. He had evidently suffered from the same defect in his young days and knew his own human weaknesses. He would not lay himself open to a temptation that experience had taught him was hard to resist and had always proved expensive to him, as it was to me.
I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend.
And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.
The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight.
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As soon as I saw "Jesse Livermore", I thought "Oh, this is going to be good." And it was!
Thanks, @hodedofome!
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For decades I have followed the buy-and-hold philosophy. And I still think I mostly believe it,
...It's not that I really know ...
.... I didn't predict either of the last 2 stock market crashes
... I don't feel knowledgeable enough
....I don't know when the correction will be.
....I don't know if the market is going to go up
...It feels crazy to be saying this.
...How confident am I ... I guess not very...
.....So I don't feel highly confident that this is a good idea, ....
.... But I don't know much about that so I am just going to skip it.
....Hopefully I don't become a cautionary tale but if I am at least someone will learn something.
(tongue in cheek reply)
Edited out the irrelevant bits.
Seriously, though, fear resulting in a move to cash is not the worst fate, but maybe we can learn from it. Do you think you are smarter than all the other investment advisors and stock pickers?
Are you implying that investment advisors and stock pickers are smart about the market, and actually know something that other, non-market individuals don't? Because the vast majority of them frankly know sweet FA about what the market is going to do in future. Anyone who cares to learn technical analysis can figure out as much.
There is a reason most mutual funds fail to meet index returns.
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For decades I have followed the buy-and-hold philosophy. And I still think I mostly believe it,
...It's not that I really know ...
.... I didn't predict either of the last 2 stock market crashes
... I don't feel knowledgeable enough
....I don't know when the correction will be.
....I don't know if the market is going to go up
...It feels crazy to be saying this.
...How confident am I ... I guess not very...
.....So I don't feel highly confident that this is a good idea, ....
.... But I don't know much about that so I am just going to skip it.
....Hopefully I don't become a cautionary tale but if I am at least someone will learn something.
(tongue in cheek reply)
Edited out the irrelevant bits.
Seriously, though, fear resulting in a move to cash is not the worst fate, but maybe we can learn from it. Do you think you are smarter than all the other investment advisors and stock pickers?
Are you implying that investment advisors and stock pickers are smart about the market, and actually know something that other, non-market individuals don't? Because the vast majority of them frankly know sweet FA about what the market is going to do in future. Anyone who cares to learn technical analysis can figure out as much.
There is a reason most mutual funds fail to meet index returns
And how does technical analysis help exactly? Answer - it doesn't.
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As someone who is only going to seriosly start investing hopefully in November of this year, (pay will probably double before tax at my next job), I thought about this too.
Obviously there will be a correction within the next 1, 2, 3 or 4 years :-D I still plan on not timing, for two reasons:
1. Who knows, could be another great moderation coming next
2. If it goes down, I get to weather the emotional roller coaster with not-so-much-yet in the market. That should give me a real insight in my risk tolerance once there is not 30% of 5k at stake, but 30% of 20k or more.
Wait till it becomes 30% of 1 million + some day in the future and you will laugh in the face of such drops ;)
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frufledoc:
Are you implying that investment advisors and stock pickers are smart about the market, and actually know something that other, non-market individuals don't? Because the vast majority of them frankly know sweet FA about what the market is going to do in future. Anyone who cares to learn technical analysis can figure out as much.
Just had a thought. I wonder how many of them guys are doing the FI thing. They are exposed to money all day. They see dreams made and lost by Irrational Exuberance. They see that index funds like the turtle beating the hair are consistent winners. I can imagine these guys don't like their jobs. I mean, it's got to get dull after a while selling stocks, bonds and annuities to people who don't know this stuff any better than the crawl space beneath their trailers. You would think they would be screaming inside to get out, to get out. Yah,....how many of these financial advisor folk are going after the path to freedom?
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For decades I have followed the buy-and-hold philosophy. And I still think I mostly believe it, and am ready to do it for a couple more decades.
But somehow this particular market just seems to be screaming that it is overpriced.
I say that simply on the basis of earnings... a dollar just doesn't buy as much earnings as I somehow believe it "should" based on historic returns. It's not that I really know where _prices_ are going to go soon, but it just seems that the value isn't there. I didn't predict either of the last 2 stock market crashes (and luckily didn't try) but I did understand that real estate was overpriced before the big crash, not because I knew about lax mortgage standards or anything but just based on the price-to-rent ratios. They were too high. And I kind of feel like that again now with the stock market. (I'm sure some stocks are not overpriced but I don't feel knowledgeable enough to pick which ones.)
I don't know when the correction will be. I don't know if the market is going to go up another 15+% first (though, I guess if I really thought it was, I wouldn't move to cash).
I think my plan is this: to move 2/3rds of my portfolio sometime between today and then next few weeks (I've already moved about 1/3rd to cash today). The remaining 1/3rd will continue to buy-and-hold. [this does not have any significant tax implications.] The rest I'll hang on to and try to buy into the market after a correction... say, once the market has dropped 25% from the high. I know most corrections are more than that but I can't really predict the bottom (or the top).
It feels crazy to be saying this. I have been feeling the market was approaching a crash for the last 2+ years and I have felt fairly sanguine about it, having weathered a couple of these before. I know it will come back up. And I have looked at the "top is in" posts and been relieved I didn't miss out on the gains.
How confident am I that the market is near the top? I guess not very, otherwise I would sell everything instead of 2/3rds of it, and if one felt super-confident one might short the market. On margin! But I would never do that. So I don't feel highly confident that this is a good idea, but I guess I feel somewhat more than 50% confident. Maybe 65%?
I think I'll put the money in either money market accounts or perhaps 1-year cds that don't have particularly stiff early withdrawal penalties. Money market would be easiest, 1% and call it a day. I'll consider bonds but probably not.
One other thing I had considered is to move things to mainly international equities, where apparently valuations are not quite so high. But I don't know much about that so I am just going to skip it.
Just to make a record, SPY has been 278-279 today. I'd just like to say that regardless of how this adventure goes, I still feel ready to buy-and-hold for the rest of my life after this (even if I end up having to buy in higher because I screwed this up). Although I guess I would still consider doing this again if the signals were really strong for a long long time, though I hope not to.
I'm mainly writing to make a record of this. Hopefully I don't become a cautionary tale but if I am at least someone will learn something. Please don't hate me for being contrarian for once!
All I can say is one word, Repatriation
https://www.fool.com/taxes/2018/04/08/this-tiny-tax-rule-will-save-corporations-billions.aspx
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Also once you've converted to cash, if the market continues to rise, FOMO (fear of missing out) is really powerful and it might get you to buy back in at an even higher time that is more likely to crash.
try it out here: http://engaging-data.com/market-timing-game/
full disclosure: this is something I made and occasionally collect meagre ad revenues from.
Thank you CCCA. That was fun. An interesting improvement would be to add in growth of your "out" money at the rate of the average savings rate during the time of being out.
I got lucky 2 out of 3 times :)
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But somehow this particular market just seems to be screaming that it is overpriced.
Actually the market looks like it has shook off the little dip that we had from late January to late March. The bull market is resuming.
If you're worried about a correction then I would argue that you're over allocated into stocks to begin with. Put more into your total bond market index fund.
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What does your IPS say?
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What does your IPS say?
This. ^^
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frufledoc:
Are you implying that investment advisors and stock pickers are smart about the market, and actually know something that other, non-market individuals don't? Because the vast majority of them frankly know sweet FA about what the market is going to do in future. Anyone who cares to learn technical analysis can figure out as much.
Just had a thought. I wonder how many of them guys are doing the FI thing. They are exposed to money all day. They see dreams made and lost by Irrational Exuberance. They see that index funds like the turtle beating the hair are consistent winners. I can imagine these guys don't like their jobs. I mean, it's got to get dull after a while selling stocks, bonds and annuities to people who don't know this stuff any better than the crawl space beneath their trailers. You would think they would be screaming inside to get out, to get out. Yah,....how many of these financial advisor folk are going after the path to freedom?
A lot of them are glorified salesmen. They have to spend lots of money getting nice clothes, cars, houses; so that their clients believe them to be successful. They have to be members of the country club in order to get in with the wealthy clients. It's not a lifestyle conducive to saving lots of money. Their income can be pretty nice however.
There are many people out there who don't really have a concept of financial freedom. Working, making lots of money and buying lots of stuff is all that's in their frame of mind. 'Not working' is something that's so far off that it doesn't take up their thoughts. Being retired is only something they'll want once their friends are retired and enjoying themselves.
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As lots of other people have said on here. DON'T DO THIS.
Unlike some of the other posters I did not do anything at all before the last crash.
my portfolio peaked in May 2008 and overall for that year was down 43% (!)
but I kept on buying through it all.
in 2009 bottomed out in Feb 2009. Down a total of 56%.
I kept on buying.
The value of the portfolio was totally back above its peak by March of 2010.
Today I have more than 5x the value I had in 2010.
This includes my ongoing contributions, but you can see that it didn't kill me. I didn't have to make the hard calls to get out and get back in.
In fact, I credit the crash of 2008-2009 with being the best thing that ever happened to me financially. I was lucky enough to keep my job, not be in the housing market at all, and able to keep investing the entire time.
Don't try to time the market it's a fool's game.
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I understand why people are saying you need to get your timing right twice, but at the same time... I don't get it. Isn't getting back in at any market valuation that is lower than when you got out leave you better off? Yes, there are better and worse times to get back in and you don't know where the bottom is, but as long as you get back in at a lower market than when you got out you still "successfully timed the market".
That being said, I am never going to try to time the market myself since I'm in for the long haul, but I somewhat disagree with people saying you need to guess right both at the top and the bottom.
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I understand why people are saying you need to get your timing right twice, but at the same time... I don't get it. Isn't getting back in at any market valuation that is lower than when you got out leave you better off? Yes, there are better and worse times to get back in and you don't know where the bottom is, but as long as you get back in at a lower market than when you got out you still "successfully timed the market".
While what you say it technically true, it ignores the human behavior.
Market drops 10%. Do you buy back in or not? Surely, if you're holding cash, you're expecting the market to drop more than 10%, so you might as well wait until that happens. Markets rarely move in straight lines though. So you're always expecting it to drop more and this current upward trend is just a false positive. Repeat until you've watched years go by as you're sitting cash.
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+1
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I understand why people are saying you need to get your timing right twice, but at the same time... I don't get it. Isn't getting back in at any market valuation that is lower than when you got out leave you better off? Yes, there are better and worse times to get back in and you don't know where the bottom is, but as long as you get back in at a lower market than when you got out you still "successfully timed the market".
That being said, I am never going to try to time the market myself since I'm in for the long haul, but I somewhat disagree with people saying you need to guess right both at the top and the bottom.
If you perfectly timed the exit. But if the market went up after you got out, you're still behind, not better off.
I recognized the amazing peak in early 1996, when stocks hit record highs. The past year had gained 25%. The market had nearly tripled in about a decade, the Dow had more than quadrupled in 15 years. Shortly before the Super Bowl, my friend asked me whether to buy; I said "I wouldn't. Stocks are so high."
Aaaand the Dow went up another 25% or more that year. Another 20% plus the following year. Another 15% after that, with a further 10% in year four. The Dow doubled in four years after reaching its record high!
Had I sold at the time, then bought in later when it dropped, I would still have had only half the money of a buy and hold strategy.
One further detail. There've been two huge crashes since I told my friend not to buy. But they never got low enough for me to buy back in. The "top" that I called is the lowest the Dow has ever been, from then until now. If I'd waited to buy at a lower price, I'd still be in cash.
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I understand why people are saying you need to get your timing right twice, but at the same time... I don't get it. Isn't getting back in at any market valuation that is lower than when you got out leave you better off? Yes, there are better and worse times to get back in and you don't know where the bottom is, but as long as you get back in at a lower market than when you got out you still "successfully timed the market".
While what you say it technically true, it ignores the human behavior.
Market drops 10%. Do you buy back in or not? Surely, if you're holding cash, you're expecting the market to drop more than 10%, so you might as well wait until that happens. Markets rarely move in straight lines though. So you're always expecting it to drop more and this current upward trend is just a false positive. Repeat until you've watched years go by as you're sitting cash.
Have you considered the effects of taxes if this is in a taxable investment account?
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I wouldn't start trying to dance in and out of the market based on your feelings and/or beliefs. You are going to make a mess of your portfolio.
If your allocation to stocks is too high and makes you nervous, amend your IPS to change your allocation and rebalance every so often so you feel like you are taking chips off the table (and buying low). You might need to hire an RIA or use a balanced or target date fund if the discretion to allocate your own assets is making you unsettled and speculative.
Finally, you could look into a trend following allocation, if you don't want to allocate more to bonds. At least then you will have rules to apply.
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frufledoc:
Are you implying that investment advisors and stock pickers are smart about the market, and actually know something that other, non-market individuals don't? Because the vast majority of them frankly know sweet FA about what the market is going to do in future. Anyone who cares to learn technical analysis can figure out as much.
Just had a thought. I wonder how many of them guys are doing the FI thing. They are exposed to money all day. They see dreams made and lost by Irrational Exuberance. They see that index funds like the turtle beating the hair are consistent winners. I can imagine these guys don't like their jobs. I mean, it's got to get dull after a while selling stocks, bonds and annuities to people who don't know this stuff any better than the crawl space beneath their trailers. You would think they would be screaming inside to get out, to get out. Yah,....how many of these financial advisor folk are going after the path to freedom?
This is so cute and naive:D These are people, like most people, with no concept of "enough". Making more and buying more/better is the most important thing. If they make enough to buy a lexus they want more so they can buy a BMW. Once they do that they want a Jaguar. Extend this to all parts of their lifestyle. That's their "path to freedom", not retiring early with (in their opinion) a measly lifestyle. And if that's what they prefer and choose to do it's no less valid a life than FIRE. I have no problem that choice. Claiming everyone should follow one life path is what cults do..
Also, I doubt many of them see that index funds beat the managed funds. There are many ways they can convince themselves they do better. Smart people are very good at convincing themselves of things they believe for non-smart reasons.
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...
Pulling my money out before the Great Crash--even though I was absolutely right--is the single biggest investing mistake I have ever made. So, take all that for what it's worth.
Just a quick thank you to Roothy for posting to this thread. That was an amazing and helpful comment.
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Great thread. What I gather from your post is that you need to reevaluate your allocation, as it doesn't seem you're comfortable with the current risk threshold your portfolio has. There is nothing wrong with that, I think many people don't seriously consider this and then panic during a crash. As Warren Buffet said, "Only when the tide goes out do you discover who's been swimming naked". Evaluate your allocation, determine if you need to increase your bond percentage and international position as others have mentioned. Try to diversify your allocations to where you're more comfortable in terms of long term risk threshold. While good investing is purely a logical exercise, emotions should always be taken into account if they might be prone to lead you astray. I adjusted my allocation once I hit FI, and as my portfolio hits new levels, I continue to change my allocation/increase bonds as my risk tolerance changes due to being more financially secure.
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Great thread. What I gather from your post is that you need to reevaluate your allocation, as it doesn't seem you're comfortable with the current risk threshold your portfolio has. There is nothing wrong with that, I think many people don't seriously consider this and then panic during a crash. As Warren Buffet said, "Only when the tide goes out do you discover who's been swimming naked". Evaluate your allocation, determine if you need to increase your bond percentage and international position as others have mentioned. Try to diversify your allocations to where you're more comfortable in terms of long term risk threshold. While good investing is purely a logical exercise, emotions should always be taken into account if they might be prone to lead you astray. I adjusted my allocation once I hit FI, and as my portfolio hits new levels, I continue to change my allocation/increase bonds as my risk tolerance changes due to being more financially secure.
i think thats a poor decision - i think better education and understanding of markets to be ok with some volatilty is better than increasing a bond stance from fear of a crash. most people esp at your age should be more concerned about longevity of money and large bond allocations GREATLY increase that risk. and the large the bond allocation gets the better you need the markets to do to make your money last. large bond allocations are overstated here with the safety they provide- they only protect against SORR which is only a major deal in the first 5-10 years of FIRE.
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i think thats a poor decision - i think better education and understanding of markets to be ok with some volatilty is better than increasing a bond stance from fear of a crash. most people esp at your age should be more concerned about longevity of money and large bond allocations GREATLY increase that risk. and the large the bond allocation gets the better you need the markets to do to make your money last. large bond allocations are overstated here with the safety they provide- they only protect against SORR which is only a major deal in the first 5-10 years of FIRE.
Perhaps, but my stache is enough that I only need less than a 2% withdrawl rate to live on. For that reason, I prefer reducing my exposure to volatility while still getting comparable returns over the long run. I sacrifice a small amount of returns for more stability, I'll take it since my stache is more than double what I need. I would take a 4% stable return in a heart beat if it was available. Doing long term simulations, the drag is very minimal with my bond allocation (and rebalancing) + the portfolio is more stable. I'm in the Bogle camp on this one. Psychology and emotion play a big role when it comes to finances, and I'd like to reduce my stress. Many people on this forum have never had a substantial amount of assets go through a real crash, it will be interesting to see how they react when that happens -- I think many will be surprised when they find they aren't as comfortable and stoic as they thought they'd be. Ask anyone who had substantial assets in the great recession. Certainly I'm not advocating my specific allocation to everyone, the point is that it's very important to understand what you're comfortable with emotionally in combination with where you are at irt portfolio:expenses -- that cannot be stressed enough. There is nothing worse than going 100% stocks, then realizing you don't have the nerves required in the middle of a crash. This is very common, and I suspect even in this community there will be many that can't handle it. For that reason alone, I think it's irresponsible to blindly advise everyone to put everything into stocks. As Buffet said, let's see when the tide goes out who is naked.
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I prefer to leave 95% of our portfolio in the market (index funds and bonds) and trade with 5%. It gives me a sense of control even if there really is none.
On the plus side though, our overall accounts are up 17% this year almost entirely on the gains of that 5% of our portfolio. Amazing.
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I'm really glad you posted this as I was having some of the same thoughts.
You see, I was burned in 2008. I remember it. It was sucky.
I had just gotten my first well-paying job in 2007 and decided to invest in a bunch of Vanguard funds. I selected some OK ones that seemed really hot and popular.
Then in 2008 I lost up to 50-60% of my original deposits. Not the gains.. the original deposits. Ugh.
Luckily instead of panicking I just stopped logging into Vanguard. I tend to ostrich when things arent going my way.
Ten years later if I look at the numbers I still feel annoyed at the huge losses and the amount of time it took to recover. But if I do the math it seems I earned average 7% annual returns from 2007. Even though my portfolio went straight into the shitter it bounced back. 7% isnt awesome but negative 50% is much worse. haha
This makes me less concerned about trying to time the market. As many others have said it is about time IN the market. Also another important thing to focus on is that the losses/gains are only imaginary until you sell. Let's say I put the money in and never saw the peaks and valleys. Ten years later I could simply say "ooh yay look I have doubled my money!" :)
One lesson from 2008 - I think next time I will try to have some cash reserves so I can buy the dips too.
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I prefer to leave 95% of our portfolio in the market (index funds and bonds) and trade with 5%. It gives me a sense of control even if there really is none.
On the plus side though, our overall accounts are up 17% this year almost entirely on the gains of that 5% of our portfolio. Amazing.
You've made like 300% in less than 6 months on your 5%? I'm listening.
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I prefer to leave 95% of our portfolio in the market (index funds and bonds) and trade with 5%. It gives me a sense of control even if there really is none.
On the plus side though, our overall accounts are up 17% this year almost entirely on the gains of that 5% of our portfolio. Amazing.
You've made like 300% in less than 6 months on your 5%? I'm listening.
Well, 900% actually on one stock. I bought a lot of Endocyte for $1.20 and have been selling it for $13 to $15 a share.
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I prefer to leave 95% of our portfolio in the market (index funds and bonds) and trade with 5%. It gives me a sense of control even if there really is none.
On the plus side though, our overall accounts are up 17% this year almost entirely on the gains of that 5% of our portfolio. Amazing.
You've made like 300% in less than 6 months on your 5%? I'm listening.
Well, 900% actually on one stock. I bought a lot of Endocyte for $1.20 and have been selling it for $13 to $15 a share.
I also have a small bit of "fun money" but not in stocks. Last year I put $500 into a political prediction marketplace (predictit). Since I'm kind of a political junkie anyway I figured it'd be fun. I'm up more than 100% so far, but I don't intend to count this as part of my net worth or add new funds to my position. It's just to scratch the gambling itch so I don't do anything foolish with my "real money."
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I prefer to leave 95% of our portfolio in the market (index funds and bonds) and trade with 5%. It gives me a sense of control even if there really is none.
On the plus side though, our overall accounts are up 17% this year almost entirely on the gains of that 5% of our portfolio. Amazing.
You've made like 300% in less than 6 months on your 5%? I'm listening.
Well, 900% actually on one stock. I bought a lot of Endocyte for $1.20 and have been selling it for $13 to $15 a share.
Nice catch! I have a similar approach right now, made 80% on Tesla long options in 4 weeks because I saw the greed of the short sellers, and was lucky. But not with a large absolut amount either. I mean honestly, who bets against the best chance of clean future transportation against the guy who invented PayPal and build the Falcon Heavy strongest rocket on EARTH (with boosters returing to base) with a private enterprise for lot less than government agencies? What is to win? Two more decades of shitty ICE cars and the air is getting thicker and thicker.
But back on topic: Serious investing will start in late 2018 for me when I upgraded my job, and I wouldn't mind a bear market that doesn't kill anyone because I'm just starting and also to see what kind of drawdown I could really stomach.
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Perhaps, but my stache is enough that I only need less than a 2% withdrawl rate to live on. For that reason, I prefer reducing my exposure to volatility while still getting comparable returns over the long run. I sacrifice a small amount of returns for more stability, I'll take it since my stache is more than double what I need.
Sounds like my situation. I have double what I need, but it's what I want to enjoy FIRE, and then after 15 years of FIRE, I will add SS to the mix as well, which will then cut the stash funded income needed to less than half, meaning my original 4% SWR will drop below 2% after 15 years when I start receiving SS. I'm still 75% to 80% in stock funds but am moving slowly to a lower stock AA over the next year to my target FIRE date. cFireSIM still gives me 100% success with a more conservative AA.
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Are we there? I don't know. At 25x PE, I am buying only $4 of earnings with every $100. It's not outrageous but it seems steep for the risk involved.
How much risk is there? Serious question. If your investing horizon is longer than about 15-20 years (and all of us have investing horizons longer than that), the chance of losing money in the broad market is very close to, if not actually zero. You are correct in that your future returns are likely to be lower. But your actual risk is almost nothing.
You also making a mistake of assuming that because the markets are highly valued, there will be a large correction at some point in the future. That could be the case, but markets can trend sideways, or simply dribble down slowly over a long period of time too. That might be what we are seeing right now. In other words, the big drop you are trying to avoid might never happen.
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Then in 2008 I lost up to 50-60% of my original deposits. Not the gains.. the original deposits. Ugh.
Luckily instead of panicking I just stopped logging into Vanguard. I tend to ostrich when things arent going my way.
Ten years later if I look at the numbers I still feel annoyed at the huge losses and the amount of time it took to recover.
It took little more than 2 years to recover from the drop in 2008. Someone who isn't okay with that possibility needs to strongly reconsider whether investing in the stock market is right for them.
I think that earning 7% over the 10-year period that includes the largest drop since the Great Depression is pretty awesome, considering the long term historical average is only about 8.6%.
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In 1999, the S&P went over 13 years with no net real gain, which factors in dividends and inflation. There have been even longer periods where this has happened as mentioned in a couple posts here:
https://forum.mrmoneymustache.com/investor-alley/why-not-do-100-allocation-draw-4-at-retirement-and-yolo-it/msg2023973/#msg2023973
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Sounds like my situation. I have double what I need, but it's what I want to enjoy FIRE, and then after 15 years of FIRE, I will add SS to the mix as well, which will then cut the stash funded income needed to less than half, meaning my original 4% SWR will drop below 2% after 15 years when I start receiving SS. I'm still 75% to 80% in stock funds but am moving slowly to a lower stock AA over the next year to my target FIRE date. cFireSIM still gives me 100% success with a more conservative AA.
Yep, and anyone who thinks that they are fine with 100% stock allocation, should read this thread. Keep in mind that these are people just like those on this forum, that thought they were comfortable with their allocation. Thinking something in theory is very different than living through something. The biggest takeaway from this long thread is "My risk tolerance is lower than I thought."
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=28103
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"seems," "feels," "think," "believe."
Sounds like you are making emotional decisions that you're maybe two/thirds sure of.
Oh, the irony.
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frufledoc:
Are you implying that investment advisors and stock pickers are smart about the market, and actually know something that other, non-market individuals don't? Because the vast majority of them frankly know sweet FA about what the market is going to do in future. Anyone who cares to learn technical analysis can figure out as much.
Just had a thought. I wonder how many of them guys are doing the FI thing. They are exposed to money all day. They see dreams made and lost by Irrational Exuberance. They see that index funds like the turtle beating the hair are consistent winners. I can imagine these guys don't like their jobs. I mean, it's got to get dull after a while selling stocks, bonds and annuities to people who don't know this stuff any better than the crawl space beneath their trailers. You would think they would be screaming inside to get out, to get out. Yah,....how many of these financial advisor folk are going after the path to freedom?
Most FAs I know are young punks who took a 3 weekend course, spend too much on clothes to look wealthy, and know A LOT less about personal finance than the average forum member here.
They should really just be called “Mutual Fund Sales Associates” and not Financial Advisors, since many have absolutely zero knowledge of personal finance beyond the minimal education they are required to have about mutual funds and a bit about taxes.
I took the securities course out of personal interest...it took me 4 days and I DO NOT feel like an expert on investing despite having spent the last 5 years learning extensively about personal finance. Meanwhile, my neighbour just finished the course as well as part of his starting a job with a big chain investment company (something like Sunlife or Edward Jones) and he knows less than 5% of what I do about personal finance, taxes, withdrawal strategies, etc...and yet people are supposed to trust him to manage their entire personal wealth.
...cool
I would say that 9 out of 10 of the FAs I met in my 20s and early 30s were virtually clueless about personal finance.
Now that I circulate with a high net worth crowd and work in corporate finance with high net worth clients, I meet mostly really savvy finance people, but I wouldn’t call them the norm. Plus, my job exists because so many high net worth clients get terrible and inappropriate financial advice so often that they’re willing to pay us to help them get decent service.
they have to be clueless - or else human morals would come into play for too many people and it would be more difficult for them to staff it. People get up in arms at me scalping tickets. but yet are so ignorant about finances they will pay people at edward jones and work for companies like EJ and not be phased morally b/c they dont know they are just stealing money from people. At least the people buying from me are aware of the price they are paying
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Why not either:
(a) buy call options expiring in 2.5 years with ~10% of your money and put the rest in safe short term instruments.
(b) enter a protected put position (90% stock, 10% put options)
Either way, you'll catch all but about 10% of the stock market's upside for the next 2.5 years, and have limited your losses to about 10% in the event of a meltdown. You can select your own numbers to some extent. Also, either way you have a re-entry strategy.
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As it relates to this thread, I'd be curious to hear others thoughts on this recent article. It basically advises to get out of the market at certain moving average crosses (example given is the S&P crossing below the 12 month moving average).
http://realinvestmentadvice.com/the-myths-of-stocks-for-the-long-run-part-i/ (http://realinvestmentadvice.com/the-myths-of-stocks-for-the-long-run-part-i/)
http://realinvestmentadvice.com/the-myths-of-stocks-for-the-long-run-part-ii/ (http://realinvestmentadvice.com/the-myths-of-stocks-for-the-long-run-part-ii/)
http://realinvestmentadvice.com/the-myths-of-stocks-for-the-long-run-part-iii/ (http://realinvestmentadvice.com/the-myths-of-stocks-for-the-long-run-part-iii/)
http://realinvestmentadvice.com/copy-of-the-myths-of-stocks-for-the-long-run-part-iv/ (http://realinvestmentadvice.com/copy-of-the-myths-of-stocks-for-the-long-run-part-iv/)
The thought is that being out of the market during the huge corrections is more important than missing out on gains during the head fakes. Yes, I understand this is an attempt at market timing which most folks here strongly disagree with. I don't necessarily agree with the article, just thought I'd share as I did find it to be an interesting read.
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Lance Roberts is a hack who thinks he can beat the market ... http://www.businessinsider.com/lance-roberts-on-hard-assets-2012-4
If you listened to him in 2012 and went in on gold you would of lost 25% of the value today (not including inflation)
.... You would of missed the huge run up also. His charts are exaggerated. Buy and Hold is the best way to come out ahead.
He is a financial adviser radio host with a bad track record
http://www.city-data.com/forum/investing/407774-lance-roberts-streettalk-advisors-houston-area.html
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Are we there? I don't know. At 25x PE, I am buying only $4 of earnings with every $100. It's not outrageous but it seems steep for the risk involved.
How much risk is there? Serious question. If your investing horizon is longer than about 15-20 years (and all of us have investing horizons longer than that), the chance of losing money in the broad market is very close to, if not actually zero. You are correct in that your future returns are likely to be lower. But your actual risk is almost nothing.
You also making a mistake of assuming that because the markets are highly valued, there will be a large correction at some point in the future. That could be the case, but markets can trend sideways, or simply dribble down slowly over a long period of time too. That might be what we are seeing right now. In other words, the big drop you are trying to avoid might never happen.
This is not correct. Backtesting historical returns does not produce accurate odds for anticipated future returns. Markets do not work that way. if economic growth continues uninterrupted, then yes, very likely. That however depends on the odds of continued global finance and trade stability...some folks working to mess that up...so I think odds are not zero. However, no one actually knows.
Several time periods or specific markets have experienced extended, multi decade stagnation, drops or even complete collapse throughout history.
Hopefully, we would see it coming and adapt, so i am not worried personally. BTW, I am about 65% stock, 20% RE and 15% Cash/Debt (munis, corp bonds, savings bonds).
I might be missing what you are saying here (or maybe you are missing what I'm saying). There has only been one 15-year period when the S&P (with dividends reinvested) had a real return of zero. So the future would have to be worse than the past for skeptic to actually lose money over the next 15-20 years. The future being no worse than the past of course is the central assumption of the 4% rule. The future could be worse than the past of course, but then this years retirement contributions will be the least of any of our problems.
Valuations also have predictive value. The current CAPE certainly implies that returns will be below average over the next ten years or so years.
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Lance Roberts is a hack who thinks he can beat the market ... http://www.businessinsider.com/lance-roberts-on-hard-assets-2012-4
If you listened to him in 2012 and went in on gold you would of lost 25% of the value today (not including inflation)
.... You would of missed the huge run up also. His charts are exaggerated. Buy and Hold is the best way to come out ahead.
He is a financial adviser radio host with a bad track record
http://www.city-data.com/forum/investing/407774-lance-roberts-streettalk-advisors-houston-area.html
Thanks for this info. Was not familiar with the author. Looks like another doom and gloomer.
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I think we have common ground, but your statement was that the odds of poor returns was effectively zero, which is not accurate, as no one knows the odds. Your reasoning I believe is that backtesting performance data over the last 70 years or so (for US stocks) suggests no bad 30 year periods are possible). Saying this means the odds are zero, I believe is over stating the case.
Ah, i think I see the disconnect. I use the definition of "risk" as the chance of permanent loss of capital. Which I realize is not the way everyone defines it. Note, I didn't say the "odds of poor returns" was zero. I said the risk was close to zero.
Which I stand by. Over the next 15-20 years, I don't see any reason why investing in the broad market is risky, short of an asteroid hit or zombie apocalypse.
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Since you've decided to market time, have you watched the chart of the Dow and the S&P? Based on you wanting to wait for the dip, then buy, do you see those charts screaming at you right now: BUYBUYBUY!!!!
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Just get one of these portfolios and stop dancing in and out of the market.
https://portfoliocharts.com/portfolio/golden-butterfly/
https://portfoliocharts.com/portfolio/larry-portfolio/
Also, fidelity found the secret to the highest returns... Die or forget your password...
http://www.businessinsider.com/forgetful-investors-performed-best-2014-9
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I used to believe the story that dead investors and investors who forgot their accounts performed better. This morning when I tried to track down the source study, I failed. To my sadness, instead I found an article that appears to it:
https://www.marketwatch.com/story/why-the-buy-and-play-dead-investment-strategy-doesnt-work-2015-10-12
The article still agrees that moves should be few. I agree with the many posters who suggest a stable portfolio that can comfortably be maintained in both up and down markets.
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So what you're saying is you've been in cash until now and are moving to 100 percent equities?
If you're posting to publicly declare you are converting to cash, I'm here to do the opposite. It'll be interesting to compare in a few years.
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It sounds like you have roughly 20 years of investments under your belt with 15-20 years left of working and investing. This is a time where even the most conservative allocation recommendation would likely still have you with nearly 80% of your long term investments sitting in equities.
If you deviate from this path too much you can throw all those long term investment average return numbers out the window and you are in uncharted waters. Sidling 2/3 of your long term investments in cash is slamming the breaks on the long term investment philosophy in favor of speculation.
We all want cash to invest in a crash. This is part of the beauty of recognizing that a crash is an opportunity. But don't let that opportunity lead you into the rocks and crash your ship.
The first reality I think we all have to accept is that the majority of people who will be made rich by the next crash will be people who were already wealthy. They make a lot because they have a lot of liquid cash to invest in a down period. But because they are wealthy the risk they are taking is minimal as the majority of their money was still held in their long term investments.
As much as we would all like to, most of us average Joes can't emulate their future success without taking a massive risk with our long term investments. Cashing out 2/3 of your investments I think qualifies as a major risk.
The best we can hope to do I think is emulate a small portion of a truly rich persons gains in that situation. First figure out how much of your investment money you could truly live with not growing over the next 10-20 years. I doubt you can afford to risk losing money on 2/3's of investments in the form of potentially permanently reducing that moneys potential growth.
- Consider sidelining a much smaller portion of your investments as an opportunity fund to reinvest in something you think is a major opportunity. Like they say, gamble with at most 10%. But the real number is what you can afford to not have invested.
- Consider investing a little less going forward and diverting more money to your liquid savings in CDs or higher interest accounts. Think of it as saving up to buy a fire sale home. Or plunk down $100k on some equities in a recession.
May doing some of those less drastic things will help you feel like you are positioning yourself to turn a crash into a net positive event for yourself. Emotionally I understand that appeal. Realistically we would probably all be better off investing as much as possible while holding just enough cash to keep our emergency fund sound and our checks from bouncing between pay periods.
If you don't need this money to retire. Then by all means speculate away. But keep in mind we could all be very wrong about where the market is going. Don't underestimate our ability to double the market before it tanks. Crashes are built into the long term investment strategy. Ride the wave. If you cash out now and stay out too long you may permanently diverge from the gains that were likely to be yours by sticking to the strategy you have done so well with over the last few decades.
In the words of Admiral Akbar
(https://s3.amazonaws.com/lodcf/wp-content/uploads/2013/06/09141135/admiral-ackbar.jpg)
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“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch
http://awealthofcommonsense.com/2014/08/peter-lynch-stock-market-losses/