Author Topic: What will be the next bubble? Whatís your plan when/if it does happen?  (Read 5300 times)

ctuser1

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Itís notoriously difficult to predict what will form the next bubble. Bubbles are sentiment driven, and fickle.

Iím feeling bored, however. So here is my guess as to what will play out!

There is an enormous amount of capital sloshing around in the private markets. Not all of that is smart money, as evidenced by the valuation climb-down of the recent unicorns.

Once these disappointments add up to a sufficient degree, while the public markets show a lot more resiliency, that money will come chasing the public markets. It wonít surprise me if we start seeing stratospheric 1999-era valuations come back for a year or two, before the eventual crash!!

Coming back to my individual portfolio, what would I do about it??

If I am not yet ready to lean-FI @my ultra-conservative SWR, nothing!! I donít arrogate unto myself the ability to time bubbles, so wonít try!!
If the bubble takes me to a stage where I am ready to lean-FI, but not fat-FI, I will actively look for a much more conservative asset allocation. Maybe, 60-40!!
If the bubble takes me to fat-FI and beyond, then the way I think about my asset allocation strategy will change. Iíll probably create a bond tent (or CD-ladder-tent, if bonds are too expensive) that is a couple of decades long, and let the rest play in the market!!

When I think hard, what I plan to do is only indirectly linked with the formation of a bubble. It is directly linked only with what stage of FI I am at. Bubbles can get me to FI faster, but then take me out of it when they burst!! By linking how conservative I am in asset allocation with the FI stage, I hope to increase the probability that I will catch the upside with an aggressive allocation (while <FI), and the cushion the burst stage (by becoming more conservative once >FI).

This plan sounds plausible, but then smells very much like market timing. Any holes in my plan that I am missing? It *should* not be possible for me to indirectly ďtimeĒ the markets this way. So, what am I missing here?

bacchi

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #1 on: November 02, 2019, 10:07:46 AM »
A bond tent of a couple decades? I'm hoping that's an exaggeration because that's a lot of wasted money. 10 years is plenty.

I agree with you. If you base your plans on what your portfolio is vs what your FI number is, it's not really market timing. You're not trying to predict what the market will do. You're simply changing your AA based on a known number or ratio (portfolio value:lean-FI).

Write the plan down. When is lean-FI? When does Phase 3 start?

Malcat

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #2 on: November 02, 2019, 10:40:13 AM »
Umm....

That's a really complicated way of saying you want to be extremely conservative when you retire.

And yes, it actually has nothing to do with any kind of bubble timing or any nonsense like that. You just want to be really, really, really conservative.

That's okay, go ahead and plan to be conservative if it reassures you. Then when you actually hit FI, you can decide then what to do.

Buffaloski Boris

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #3 on: November 02, 2019, 11:07:50 AM »
Speaking for myself, I think that what weíre facing is a multi asset bubble.* Equities, especially large cap equities in the US I think will take a hit. But the big one in my opinion is corporate debt. Companies are very heavily leveraged right now and the hunger for yields is seeing a lot of folks buying dodgy debt for not much premium. Also the average quality of bonds seems to have gone down. While Iím not a fan of US equities right now I do own some. I donít own any corporate debt** that Iím aware of. Interestingly I think the US banks are doing pretty well so I donít expect a repeat of the GFC, but the financial sector might well get dragged into any problems.

My crystal ball is just as fuzzy as the next person, but if I were forced to bet on a scenario Iíd bet on a slow slump and slower recovery. Not a dramatic crash.

As for strategies, Iím not a financial advisor and am loathe to advise others. I will share what Iím looking at.  I think this is a really good time to look at alternative investments. Paying off debt including the mortgage. Home insulation has a great payback. Maybe that solar system is a good idea. Iím salivating over a used Prius or Leaf.  Overseas equities in some countries are relatively inexpensive. So are individual US stocks in hated industries. Tax subsidized investments such as 529s are good. Otherwise cash and treasuries isnít a bad place to be in my view.

* Iím a contrarian in most senses of the term so the more I hear about impending doom, the less I think itís credible.

** Distressed bonds are beginning to catch my interest.

shinn497

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #4 on: November 03, 2019, 12:47:04 AM »
I don't have a plan. I have a 6 month emergency fund and practically no expenses. If the market crashes or there is a bubble I'll just smile and watch people lose their shit on twitter. Investing is behavioural. You lose more money anticipating and dodging recessions than you do compensating them. Lots of research shows this.

ender

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #5 on: November 03, 2019, 01:37:39 AM »
student loans

MaaS

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #6 on: November 03, 2019, 08:03:14 AM »
I agree that there's a potential disaster brewing in private markets. For all we know, valuations are already higher than the dotcom era because the numbers are well, private. A combination of this and corporate debt defaults are my guess.

Your plan is reasonable as long as you stay disciplined on the numbers. People fail with plans like these, even when luck goes their way, because they get greedy. It's hard to sell when every week brings a new high.

It would take one hell of a bubble to get me to any sort of FI in the next two years, so I have no plan.

js82

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #7 on: November 03, 2019, 08:59:33 AM »
Speaking for myself, I think that what weíre facing is a multi asset bubble.* Equities, especially large cap equities in the US I think will take a hit. But the big one in my opinion is corporate debt. Companies are very heavily leveraged right now and the hunger for yields is seeing a lot of folks buying dodgy debt for not much premium. Also the average quality of bonds seems to have gone down. While Iím not a fan of US equities right now I do own some. I donít own any corporate debt** that Iím aware of. Interestingly I think the US banks are doing pretty well so I donít expect a repeat of the GFC, but the financial sector might well get dragged into any problems.

My crystal ball is just as fuzzy as the next person, but if I were forced to bet on a scenario Iíd bet on a slow slump and slower recovery. Not a dramatic crash.

As for strategies, Iím not a financial advisor and am loathe to advise others. I will share what Iím looking at.  I think this is a really good time to look at alternative investments. Paying off debt including the mortgage. Home insulation has a great payback. Maybe that solar system is a good idea. Iím salivating over a used Prius or Leaf.  Overseas equities in some countries are relatively inexpensive. So are individual US stocks in hated industries. Tax subsidized investments such as 529s are good. Otherwise cash and treasuries isnít a bad place to be in my view.

* Iím a contrarian in most senses of the term so the more I hear about impending doom, the less I think itís credible.

** Distressed bonds are beginning to catch my interest.

To some extent I share your view re: things being in a "bubble".  The question is if/how the things that have contributed to the current state will be unwound: particularly protracted low interest rates that have led to the high degree of leverage that you mentioned, as well as the unfunded corporate tax cut that was passed in late 2017.  I'm not sure interest rates go back up, but at some point we'll have to pay for those tax cuts(or the individual portion of them will unwind by default over the next decade), which will take money out of the economy.

Also, I don't know how it will ripple, but I think student debt has the potential be a train wreck during the next economic downturn.  With unemployment <4%, most people are keeping up with their student debt payments.  If unemployment hits 6, 7, 8% student debt defaults will go through the roof.  What I don't know is whether the effects of this will be relatively confined, or if they'll ripple throughout the economy.

I'm not sure I'm with you on large-cap equities taking a greater hit than the rest of the market, though.  In general people in broad-index funds are more or less cap-weighted, which in theory should skew all investments equally.  However in investment circles there tends to be a bit of a bias towards smaller-cap and/or "value" oriented funds.  The presence of small-cap/value ETF's has the potential to distort the value of smaller companies that don't have the "base" to absorb that influx of cash without distorting their prices.

That said, In general I'm heavier than most people in international equity and mid/small-cap investments.  It hasn't been great(relative to large-cap domestic equity) in the trade-war-by-tweet era of the past couple years, but in my opinion it's likely that at some point the pendulum will swing away from US equity back towards international.  I'm also consciously drifting my allocation to be a little heavier in bonds/cash than it's historically been.

I share your opinion regarding alternative investments.  Guaranteed ROI moves like paying off a mortgage seem attractive considering how frothy the market is(in my opinion) right now.

nereo

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #8 on: November 03, 2019, 09:14:51 AM »
...if?

SwordGuy

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #9 on: November 03, 2019, 10:33:14 AM »
What's my plan when the next bubble(s) pop?

Depends on the bubble.   Some of them, like crypto-currency, I want nothing to do with so their price doesn't matter to me.

If house prices for somewhat distressed houses plunge in our area we'll snap up a few and get them ready to rent out.

If it's stocks, we'll buy more stocks.

If it's farmland where we already own farmland, we'll buy some.

Otherwise, we'll probably be oblivious to it.


ChpBstrd

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #10 on: November 04, 2019, 10:17:27 AM »
My baseline scenario is the US has entered an era of stagnant productivity growth, reductions in consumption driven by the indebted millennial and Z generations, reductions in consumption due to subsidized/inflated real estate (a zero sum game that nonetheless consumes the discretionary income of consumers), reductions in consumption due to demographic graying, rising savings rates, deflationary undertow, and highly indebted zombie corporations. In terms of debt burden and demographics we are Japan circa about 1992, minus the real estate and stock crash - so far.

So while todayís low interest rates are rational for a low growth, disinflationary economy with 1990s Japanese demographics and productivity growth, those low rates have also pushed up corporate leverage, pushed down earnings yields on stocks, and pushed up real estate prices. As Japan showed, this seemingly unbalanced new normal can persist for decades. A relevant question is whether the S&P 500 in a declining growth environment deserves a PE ratio of 23, or if real estate deserves low-single digit cap rates (or the negative cap rates is common in HCOL areas!)?

Japan crashed when people realized it was priced for high growth it could not deliver, and was in fact ensnared in a debt trap. A wise investor once observed that in the event of a disagreement, the bond market is usually right. Nonetheless the odds are high. If the government succeeds at pushing up inflation/ rates, the value of bonds will plummet in a way the US has never seen at the same time the government experiences a debt crisis. That would itself crash the economy on a scale far bigger than subprime home loans 2008. If the bond market is right, stocks do not deserve anything close to their valuations, and average PE ratios should be in the 12-14 range.

The plan? Iím tilting our 401ks towards bonds/cash and our brokerage accounts toward option-protected equity positions (Note: option prices are mathematically derived and therefore unaffected by the bubble, yet can offset equities risk! Bargain!). This is similar to the bond tent approach except (1) I am more exposed to the upside in equities than a majority bond portfolio, (2) I am less exposed to the risk of bond values falling if interest rates rise, (3) I am less exposed to the risk of a broad flight from risk- or a correlation between stock and bond values, and (4) my hedge value has a guaranteed inverse relationship with the underlying, a leveraged negative correlation rather than an unleveraged hypothetical weak correlation as expected with bonds, gold, etc. Our mostly equities NW fluctuates with market movement more like a 30/70 stocks/bonds portfolio, and yet even that overstates the risk and understated the returns because the options donít move 1:1 with stocks while there is still significant time value remaining. Personal Capital shows our personal rate of return running close to the S&P.

When weíre 25% down, our IPS says our AA shall shift back toward equities.


ROF Expat

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #11 on: November 05, 2019, 03:10:30 AM »
ctuser1,

I had the same question you do when I FIREd about three years ago.  I had been 100% in equities and thought stopping work should probably also mean a new asset allocation.  At the same time, I was concerned about a  market downturn, so about  six months after retiring I rebalanced to 65% bonds and 35% stocks.  In hindsight, I realize that reworking my asset allocation became an excuse to subconsciously engage in market timing.  That caused me to miss out on substantial gains in the market. 

With this realization, I have decided to keep my current allocation until the market does drop.  When it does, I plan to go back to a 100% equity allocation and just leave it there. 

I am not recommending that you go to 100% equities.  My situation is probably quite different from yours.  What I am recommending is that you look at your proposed asset allocation very hard and be sure that it is based on appropriate factors, not an excuse to try to time the market. 

ZMonet

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #12 on: November 05, 2019, 03:56:37 AM »


With this realization, I have decided to keep my current allocation until the market does drop.  When it does, I plan to go back to a 100% equity allocation and just leave it there. 



Isn't this just market timing too?  How will you know when the market has sufficiently dropped?

ROF Expat

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #13 on: November 05, 2019, 06:55:11 AM »


With this realization, I have decided to keep my current allocation until the market does drop.  When it does, I plan to go back to a 100% equity allocation and just leave it there. 



Isn't this just market timing too?  How will you know when the market has sufficiently dropped?

ZMonet,

Yes, it is market timing.  I've wrestled quite a bit with this decision and I'm not entirely happy with it.  In this case, I've tried to portray myself to the OP as a horrible warning, not a good example. 

I understand the mistake I've made and that, on average, the highest returns come from being fully invested in the market.  On the other hand, I also understand that most investors do far worse than market averages because they tend to jump into the market when it is high and then sell in a panic when it tanks.  I haven't quite made that rookie mistake.  Although I missed out on some gains, I had made quite a nice profit at the point I sold, and I've earned a little interest on my bonds.  Buying back into the market today at a historic high just seems like it would compound my error. 

My plan right now is to wait for a market correction of ten percent or more and then buy back in.  Maybe the S&P will rocket up to 4000 and a 10% correction will bring us back to 3600, and I will miss out on more gains.  Or maybe it will drop by about 20% tomorrow and I will wind up about where I started.  Or maybe it will drop by 10% and I will buy back in and the market will drop by another 20%.  I don't know.  My bet (and that is exactly what it is) is that I am likely to do better by exercising some discipline and waiting for a market drop than not.  We'll see.  Fortunately, I have a fat FIRE with a withdrawal rate of 0% from my portfolio, so I can afford my mistakes. 


Linea_Norway

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #14 on: November 05, 2019, 07:08:42 AM »
When our house is sold, and we receive the money, probably somewhere around April 2020, we will have 2/3 of our stash in cash and 1/3 in 100% stocks. From January 2020 we will have little to no income.

My DH thinks that we shouldn't invest that other 2/3 into the stock market at it's current high number, as we couldn't afford a downfall that would last. Also, in 2021 or thereabout, we plan to buy another house, from 1/3 of our stash. So therefore we will that much just put in a back account. But what to do with the other 1/3 during that time. We could like to receive the market growth, but there is an equally big chance of the market going down some time soon. I think we will keep it and sort of time the market if there is a big crash. I mean, if it comes, we will notice it. And no, we cannot know when it is at is lowest. We must only assume that the market will go up again after a dip. And then the timing is not so vital, as long as we buy inside the dip.

ChpBstrd

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #15 on: November 05, 2019, 07:14:24 AM »


With this realization, I have decided to keep my current allocation until the market does drop.  When it does, I plan to go back to a 100% equity allocation and just leave it there. 



Isn't this just market timing too?  How will you know when the market has sufficiently dropped?

I know Iím arguing with @ROF Expat on this, but I donít think it is necessarily market timing. The thing that would trigger a change in an AA held for a long time would be the past occurrence of a market drop, not a prediction about the future. This is opportunism, not crystal ball reading.

From a value investing perspective, it could be said that the S&P 500 is more risky at a PE of 22 than it would be at 15. Therefore portfolio risk management requires we dial back on stocks the more expensive they get, and to back up the truck if and when valuations are more reasonable- such as after a market drop. The right AA according to this perspective depends on valuation. Isnít that @ROF Expat ís stayed rationale?

blue_green_sparks

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #16 on: November 05, 2019, 08:08:09 AM »
Does anyone have insights into "Innovator" ETF funds which track an index like the SP 500 and cap the max earnings but also limit to a range of losses (e.g. -5 to -30 %, so a -40% drop year over year is limited to  a loss of 15%)? Seems like a good idea for older investors who can't wait years and years for a recovery.
« Last Edit: November 05, 2019, 08:22:07 AM by blue_green_sparks »

Villanelle

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #17 on: November 05, 2019, 09:42:27 AM »


With this realization, I have decided to keep my current allocation until the market does drop.  When it does, I plan to go back to a 100% equity allocation and just leave it there. 



ZMonet,

Yes, it is market timing.  I've wrestled quite a bit with this decision and I'm not entirely happy with it.  In this case, I've tried to portray myself to the OP as a horrible warning, not a good example. 

I understand the mistake I've made and that, on average, the highest returns come from being fully invested in the market.  On the other hand, I also understand that most investors do far worse than market averages because they tend to jump into the market when it is high and then sell in a panic when it tanks.  I haven't quite made that rookie mistake.  Although I missed out on some gains, I had made quite a nice profit at the point I sold, and I've earned a little interest on my bonds.  Buying back into the market today at a historic high just seems like it would compound my error. 

My plan right now is to wait for a market correction of ten percent or more and then buy back in.  Maybe the S&P will rocket up to 4000 and a 10% correction will bring us back to 3600, and I will miss out on more gains.  Or maybe it will drop by about 20% tomorrow and I will wind up about where I started.  Or maybe it will drop by 10% and I will buy back in and the market will drop by another 20%.  I don't know.  My bet (and that is exactly what it is) is that I am likely to do better by exercising some discipline and waiting for a market drop than not.  We'll see.  Fortunately, I have a fat FIRE with a withdrawal rate of 0% from my portfolio, so I can afford my mistakes.

If you want to get away from the market-timing, which you realize is ill-advised, then why not at least start dollar cost averaging your money back in to the market.  Every month you move 2% (or 1%, or whatever number) of your bonds into equities.  You could also include a caveat in the plan where a drop of 10% (or X% of your choosing) triggers the automatic movement of all remaining bonds into equities, if you like.  That seems to make much more sense than just waiting. 


ChpBstrd

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #18 on: November 05, 2019, 09:56:02 AM »
Does anyone have insights into "Innovator" ETF funds which track an index like the SP 500 and cap the max earnings but also limit to a range of losses (e.g. -5 to -30 %, so a -40% drop year over year is limited to  a loss of 15%)? Seems like a good idea for older investors who can't wait years and years for a recovery.

You can do this yourself rather than paying someone to do it for you. Google ďprotective put strategyĒ and ďcollar strategyĒ.

v8rx7guy

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #19 on: November 05, 2019, 10:08:00 AM »
Whatever it is, I'm going to try my best to take advantage.  Buy rentals, buy stocks, buy used cars, buy gold... not sure what it will be, but I'll be ready.

blue_green_sparks

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #20 on: November 05, 2019, 10:25:45 AM »
Does anyone have insights into "Innovator" ETF funds which track an index like the SP 500 and cap the max earnings but also limit to a range of losses (e.g. -5 to -30 %, so a -40% drop year over year is limited to  a loss of 15%)? Seems like a good idea for older investors who can't wait years and years for a recovery.

You can do this yourself rather than paying someone to do it for you. Google ďprotective put strategyĒ and ďcollar strategyĒ.

Thanks. That is the next level of investor capability that I need to get educated on. The ETF may have an advantage as a managed fund not based on hard limits and not requiring any investor effort at all. Could be worth the extra cost. However, if the market does crash there is also the possibility of the ETF going bust. That risk is very unappealing as the shareholders would likely suffer.

Aggie1999

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #21 on: November 05, 2019, 02:22:27 PM »
I have ~5 years of normal spending in total market US bond funds and cash (around a 50/50 split). At normal spending, my current withdraw rate of my portfolio as of today would be ~2% if I wasn't working. I feel pretty safe in these numbers to make it through the next recession while FIRE'd.

js82

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #22 on: November 06, 2019, 06:22:29 PM »


With this realization, I have decided to keep my current allocation until the market does drop.  When it does, I plan to go back to a 100% equity allocation and just leave it there. 



Isn't this just market timing too?  How will you know when the market has sufficiently dropped?

I know Iím arguing with @ROF Expat on this, but I donít think it is necessarily market timing. The thing that would trigger a change in an AA held for a long time would be the past occurrence of a market drop, not a prediction about the future. This is opportunism, not crystal ball reading.

From a value investing perspective, it could be said that the S&P 500 is more risky at a PE of 22 than it would be at 15. Therefore portfolio risk management requires we dial back on stocks the more expensive they get, and to back up the truck if and when valuations are more reasonable- such as after a market drop. The right AA according to this perspective depends on valuation. Isnít that @ROF Expat ís stayed rationale?

While some may call it "market timing", if you have a plan to dynamically adjust your asset allocation based on objective metrics, you're not attempting to "time" anything, so much as adjusting asset allocation based on pre-defined criteria for evaluating whether assets are "cheap" or "expensive".

Most warnings against "market timing" are, fundamentally, warnings against going by "feel"/avoiding emotional investing.  Adjusting your asset allocations based on a predefined set of criteria does not qualify as market timing, in my view.

nancyfrank232

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What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #23 on: November 06, 2019, 08:13:24 PM »
Weíre in a giant bond bubble

Who knows how long it will last
« Last Edit: November 06, 2019, 08:16:18 PM by nancyfrank232 »

shinn497

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #24 on: November 06, 2019, 09:19:36 PM »
I don't have a plan. 100% stocks. Yeet

Vashy

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #25 on: November 08, 2019, 04:59:27 AM »
I should live in a paid-off house by then, so expenses will be low while I wait for the recovery. If I were already retired, I could sell the house and buy something cheaper further out. I also keep some cash around.

ROF Expat

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #26 on: November 08, 2019, 11:53:21 AM »


With this realization, I have decided to keep my current allocation until the market does drop.  When it does, I plan to go back to a 100% equity allocation and just leave it there. 



ZMonet,

Yes, it is market timing.  I've wrestled quite a bit with this decision and I'm not entirely happy with it.  In this case, I've tried to portray myself to the OP as a horrible warning, not a good example. 

I understand the mistake I've made and that, on average, the highest returns come from being fully invested in the market.  On the other hand, I also understand that most investors do far worse than market averages because they tend to jump into the market when it is high and then sell in a panic when it tanks.  I haven't quite made that rookie mistake.  Although I missed out on some gains, I had made quite a nice profit at the point I sold, and I've earned a little interest on my bonds.  Buying back into the market today at a historic high just seems like it would compound my error. 

My plan right now is to wait for a market correction of ten percent or more and then buy back in.  Maybe the S&P will rocket up to 4000 and a 10% correction will bring us back to 3600, and I will miss out on more gains.  Or maybe it will drop by about 20% tomorrow and I will wind up about where I started.  Or maybe it will drop by 10% and I will buy back in and the market will drop by another 20%.  I don't know.  My bet (and that is exactly what it is) is that I am likely to do better by exercising some discipline and waiting for a market drop than not.  We'll see.  Fortunately, I have a fat FIRE with a withdrawal rate of 0% from my portfolio, so I can afford my mistakes.

If you want to get away from the market-timing, which you realize is ill-advised, then why not at least start dollar cost averaging your money back in to the market.  Every month you move 2% (or 1%, or whatever number) of your bonds into equities.  You could also include a caveat in the plan where a drop of 10% (or X% of your choosing) triggers the automatic movement of all remaining bonds into equities, if you like.  That seems to make much more sense than just waiting.

Thanks, Villanelle,

I think dollar cost averaging is the way I will get back in.  I haven't quite convinced myself that I should do it at a current market peak, though...

Leisured

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #27 on: November 10, 2019, 05:47:19 AM »
A bubble is usually affects only one part of the stock market, although other parts of the stock market will get dragged in. For a while. Other sectors of the economy may be badly affected by negative sentiment, the bubble pAe stock market, but industries that actually provide goods and service should be sieled from the bad sentiment in the bubble sector.

stock prices are less important for retirees than dividends. 

ands as Warren Buffet has said: it is difficult to go broke betting on the American economy.

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #28 on: November 11, 2019, 09:15:41 AM »
A bubble is usually affects only one part of the stock market, although other parts of the stock market will get dragged in. For a while. Other sectors of the economy may be badly affected by negative sentiment, the bubble pAe stock market, but industries that actually provide goods and service should be sieled from the bad sentiment in the bubble sector.

stock prices are less important for retirees than dividends. 

ands as Warren Buffet has said: it is difficult to go broke betting on the American economy.

I remember 1999-2000 when I was a very young investor and I could tell the valuations of the .com stocks were insane. I thought I was safely invested in Wal-Mart and other blue chips with positive earnings, but as it turns out a falling tide drops all boats too.

shinn497

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #29 on: November 11, 2019, 09:20:14 AM »
Remember. Pretty much all academic researching states that market timing produces lower results, regardless of market conditions, regardless of time, etc. etc. etc. The biggest driver of lower returns is being emotional. Looking at the market and believing you can have any control of your returns by assessing certain limited metrics is being emotional. Almost none of us has perfect information about the market. Most don't even have a sliver. And most of our conjectures are already priced in. You earn returns by taking on risk. The sooner you accept that the better.

nancyfrank232

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What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #30 on: November 11, 2019, 10:37:51 AM »
Remember. Pretty much all academic researching states that market timing produces lower results, regardless of market conditions, regardless of time, etc. etc. etc. The biggest driver of lower returns is being emotional. Looking at the market and believing you can have any control of your returns by assessing certain limited metrics is being emotional. Almost none of us has perfect information about the market. Most don't even have a sliver. And most of our conjectures are already priced in. You earn returns by taking on risk. The sooner you accept that the better.

When Warren Buffett allows $128 billion in cash to sit at Berkshire Hathaway, is he market timing?

https://markets.businessinsider.com/news/stocks/four-analysts-on-berkshire-hathaways-128-billion-cash-pile-2019-11-1028659828

What if I allow $128k in cash to sit in my account. Am I market timing?
« Last Edit: November 11, 2019, 10:45:50 AM by nancyfrank232 »

shinn497

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #31 on: November 11, 2019, 11:12:02 AM »
Warren buffet just factor invests with leverage.

https://www.cfainstitute.org/sitecore/content/CFAI/Home/research/financial-analysts-journal/2018/ip-v3-n1-13-demystifying-buffetts-investment-success?sc_lang=en

Also his implementation is really good. Taking one aspect of his investing process, without his dscipline, information, and experience, isn't gauranteed to replicate his results.

He also suggests to never market time.

https://www.cnbc.com/2018/05/08/warren-buffett-says-he-never-tries-to-time-stocks-i-never-have-an-opinion-about-the-market.html

Now, he does keep a heavy cash cushion. I take that to mean that his asset allocation is cash heavy. So if you are cushioning for a similiar reason that is fine. But, if you are cushioning for an expected future dip in stocks, you are market timing,

nancyfrank232

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What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #32 on: November 11, 2019, 12:36:01 PM »
Now, he does keep a heavy cash cushion. I take that to mean that his asset allocation is cash heavy. So if you are cushioning for a similiar reason that is fine. But, if you are cushioning for an expected future dip in stocks, you are market timing,

What if cash is stacking up because the retirement accounts are maxed and I canít find anything else worthwhile to buy?

What would this be called? Probably also market timing?

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #33 on: November 11, 2019, 12:56:28 PM »

Now, he does keep a heavy cash cushion. I take that to mean that his asset allocation is cash heavy. So if you are cushioning for a similiar reason that is fine. But, if you are cushioning for an expected future dip in stocks, you are market timing,

Buffet is not hoarding that much cash because it is his preferred asset allocation. It is because he can't find enough good ways to spend it whether that is buying shares of companies or making big deals. That in itself is illuminating. All assets are highly valued and it's possible that we are in an "everything bubble".

shinn497

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #34 on: November 11, 2019, 01:21:15 PM »
Any decision based on your current assesment of the market is market timing. That includes decisions made based on current valuations. Valuations may be what they are, but we don't have any reasonable way of using them to predict future returns. And yes I am aware of things such as the correlation between the Shiller CAPE and returns. This correlation is historical and not robust. Remember if you know  what valuations are, so does everyone else. Trying to keep your money in and/or out of the market is assuming you have better information than them. And they have crazy amounts of expertise.

Research on the priced risk of the market IS robust. And pretty much your only driver of returns is the depth and length of your market exposure. Its funny. We always talk about how you need to weather the uncertainty and jitters of the market to stay in and make a return. If you are not putting money in the market at the same pace than you were previously due to some assesment of the market, regardless of what that assessment is, than you are feeling those fears and acting on them. Given that the market is by its nature risky, and accepting this risk is what you must do to earn a return, attempting to avoid this risk, while also expecting a return, is irrational.

Maybe another way way of saying this is that keeping money in cash isn't wrong, but in doing so you must expect a lower return on your money and a lower probability of portfolio success over the long term.
« Last Edit: November 11, 2019, 01:24:06 PM by shinn497 »

Mr. Boh

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #35 on: November 11, 2019, 01:23:37 PM »
In answer to the original question, I agree with nancyfrank232 that we're in a bond bubble. You don't have to think very hard about negative interest rates to determine that things have gone haywire. Although rates have backed up recently I'm still a little bit freaked out by bonds.

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #36 on: November 11, 2019, 01:41:16 PM »
Buffets purchases tend to be a bit differnt than ours. we invest in a fund/bonds/cash or maybe some individual shares.
he could take bristol myers squibb private tomorrow if he got the right terms and still have 30 billion left over.

nancyfrank232

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #37 on: November 11, 2019, 02:14:38 PM »
Any decision based on your current assesment of the market is market timing. That includes decisions made based on current valuations. Valuations may be what they are, but we don't have any reasonable way of using them to predict future returns. And yes I am aware of things such as the correlation between the Shiller CAPE and returns. This correlation is historical and not robust. Remember if you know  what valuations are, so does everyone else. Trying to keep your money in and/or out of the market is assuming you have better information than them. And they have crazy amounts of expertise.

Research on the priced risk of the market IS robust. And pretty much your only driver of returns is the depth and length of your market exposure. Its funny. We always talk about how you need to weather the uncertainty and jitters of the market to stay in and make a return. If you are not putting money in the market at the same pace than you were previously due to some assesment of the market, regardless of what that assessment is, than you are feeling those fears and acting on them. Given that the market is by its nature risky, and accepting this risk is what you must do to earn a return, attempting to avoid this risk, while also expecting a return, is irrational.

Maybe another way way of saying this is that keeping money in cash isn't wrong, but in doing so you must expect a lower return on your money and a lower probability of portfolio success over the long term.

+1 awesome post

I agree. Personally I consider myself to be a market timer

I also mindlessly shovel money into a low-fee S&P index via retirement and pension accounts

However, when retirement accounts are full, I will stack cash

nancyfrank232

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What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #38 on: November 11, 2019, 02:18:25 PM »
Buffets purchases tend to be a bit differnt than ours. we invest in a fund/bonds/cash or maybe some individual shares.
he could take bristol myers squibb private tomorrow if he got the right terms and still have 30 billion left over.

The question isnít centered on the dollar amounts involved as much as the tactic of stacking cash. And whether Buffett or any individual is considered a market timer by doing so

Using myself as an example, once all my retirement accounts are full, I start to stack cash. Now, is this market timing? Should I pour every extra incoming penny into a low-fee S&P index to avoid being a market timer?

Personally I stack cash because I hate being on the sidelines when a market tanks. And I KNOW that the market will tank. Things are NOT different this time
« Last Edit: November 11, 2019, 02:26:39 PM by nancyfrank232 »

shinn497

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #39 on: November 11, 2019, 04:02:54 PM »
To be fair, if you are filling up both your 401(k) and roth IRA in a low cost diversified index fund you will be fine.

Now as for stacking cash to wait for a market dip or doing anything to 'prepare' for a future drop that is market timing. And again, it has lower expected returns. One thing to bear in mind is that you must consider the opportunity cost of not investing.

The market either goes up or goes down. When you are sitting on the sidelines, you miss out in potential growth. Not only that but the market tends to go up very quickly so missing out on of these spurts hurts you a lot. Like i get that market timing is attractive and feels good but it is such a tall order to believe you can use it to achieve gains higher than the market. Remember to do so you must be correct twice.

Now, if you want to have a less volatile portfolio, keep an asset allocation that is bond heavy. Then remember to be consistent about rebalancing to this allocation. While this will earn you lower returns it is consistant. Practicing it will more than likely keep your behaviour in check. Remember that rebalancing effectively ensures that you will buy low and sell high without any kind of behavioral bias.

Me personally. I plan on retiring with an emergency fund and a paid off house. And will rebalance the former.  That is in essence my asset allocation. The way i see it, it is way more useful, behaviourally, to make investment choices over personal life events that way you can work in a regime where you have more informatipn and more control .

nancyfrank232

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What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #40 on: November 11, 2019, 08:20:27 PM »
To be fair, if you are filling up both your 401(k) and roth IRA in a low cost diversified index fund you will be fine.

Now as for stacking cash to wait for a market dip or doing anything to 'prepare' for a future drop that is market timing. And again, it has lower expected returns. One thing to bear in mind is that you must consider the opportunity cost of not investing.

The market either goes up or goes down. When you are sitting on the sidelines, you miss out in potential growth. Not only that but the market tends to go up very quickly so missing out on of these spurts hurts you a lot. Like i get that market timing is attractive and feels good but it is such a tall order to believe you can use it to achieve gains higher than the market. Remember to do so you must be correct twice.

Now, if you want to have a less volatile portfolio, keep an asset allocation that is bond heavy. Then remember to be consistent about rebalancing to this allocation. While this will earn you lower returns it is consistant. Practicing it will more than likely keep your behaviour in check. Remember that rebalancing effectively ensures that you will buy low and sell high without any kind of behavioral bias.

Me personally. I plan on retiring with an emergency fund and a paid off house. And will rebalance the former.  That is in essence my asset allocation. The way i see it, it is way more useful, behaviourally, to make investment choices over personal life events that way you can work in a regime where you have more informatipn and more control .

+ 1

Another good read. Thanks

Iím invested. Retirement accounts are maxed. But I also know that Iím market timing by stacking cash

Thereís no logic to it. A bad habit that Iíve had for decades

Warren Buffett is probably aware of the opportunity cost of $128 billion. He could put it all on the S&P. Heís had the same bad habit of stacking cash for over a half century

Old habits die hard
« Last Edit: November 11, 2019, 08:22:30 PM by nancyfrank232 »

shinn497

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #41 on: November 11, 2019, 08:50:17 PM »
It is what it is. I am of the big belief that stock selection and portfolio construction are not big problems in investing.

Controlling your emotions, having a reasonable budget and getting a large enough income to build a nest egg is far more important and impactful. Also things like taxes, real estate buying, insurance, etc. etc. The nice thing is that these are the things that are further under your control.

nancyfrank232

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What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #42 on: November 11, 2019, 09:22:13 PM »
It is what it is. I am of the big belief that stock selection and portfolio construction are not big problems in investing.

Controlling your emotions, having a reasonable budget and getting a large enough income to build a nest egg is far more important and impactful. Also things like taxes, real estate buying, insurance, etc. etc. The nice thing is that these are the things that are further under your control.

+1

Agree. Especially the part about managing emotions. Large enough income combined with LBYM is also helpful

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #43 on: November 12, 2019, 10:19:15 AM »
When Warren Buffett allows $128 billion in cash to sit at Berkshire Hathaway, is he market timing?
With Warren Buffet's track record, he can do whatever he likes.  If people say don't market time, and you point to Warren Buffet, you're implicitly saying that if the best investor of our era can do it, so can you.  But you're not Warren Buffet.

nancyfrank232

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What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #44 on: November 12, 2019, 10:37:59 AM »
When Warren Buffett allows $128 billion in cash to sit at Berkshire Hathaway, is he market timing?
With Warren Buffet's track record, he can do whatever he likes.  If people say don't market time, and you point to Warren Buffet, you're implicitly saying that if the best investor of our era can do it, so can you.  But you're not Warren Buffet.

Nah. Not the point

The question is if stacking cash after being invested is considered market timing

Is it market timing when Buffett didnít have a track record?

Consensus says it is
« Last Edit: November 12, 2019, 10:39:48 AM by nancyfrank232 »

talltexan

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #45 on: November 12, 2019, 12:35:55 PM »
Does Buffet's track record include when he was twelve years old and already owning/operating three businesses?

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #46 on: November 12, 2019, 12:55:09 PM »
Buffet isn't waiting for the market to take a tumble before he scoops up stocks on the cheap. He's looking for a company to buy. If the shit hits the fan, as it did in 2008, he's happy to take advantage but he's no Taleb.

nancyfrank232

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What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #47 on: November 12, 2019, 03:48:54 PM »
Buffet isn't waiting for the market to take a tumble before he scoops up stocks on the cheap. He's looking for a company to buy. If the shit hits the fan, as it did in 2008, he's happy to take advantage but he's no Taleb.

If somebody is holding $128 billion in cash or $12.8 million in cash or $1.28 million in cash, etc. and looking for a ďbusiness to buyĒ, theyíre not market timing

I can see that perspective

I can also see people calling it market timing
« Last Edit: November 12, 2019, 04:31:26 PM by nancyfrank232 »

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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #48 on: November 13, 2019, 02:28:40 AM »
I don't think it would be fair to call Warren Buffett a "market timer."  He's fundamentally a value investor.  He buys equities (and whole companies) when he feels they are good values based on real analysis.  When he believes the price is relatively low and presents good long-term value, he buys.  If he believes an asset or company is overpriced, he does not buy.  If he were a market timer, he'd be buying or selling large portions of his portfolio based on whether he believes the market is going up or down, but I believe most of Berkshire Hathaway stays in place for a long time as more of a "buy and hold" strategy (particularly when buying entire companies) because he is buying companies that he believes will provide long-term value. 

Buffett's style is all about picking stocks and companies because he believes there is value in them that the market is not recognizing.  I think  his long-term track record shows that he is one of the very few people who can do this consistently.  He is not a Bogle-style low fee index-fund investor, but he absolutely advocates that for the vast majority of people.  I think his recommendation that his wife's inheritance be placed in an index fund (and some government bonds) and his bet that hedge funds couldn't beat a low-cost S&P 500 index fund make his beliefs clear. 

Ironically, Buffett's success is Berkshire Hathaway's biggest problem these days.  The company is so big that it is increasingly difficult to find value deals big enough to affect the bottom line of the company.  Outperforming the broad index has become increasingly difficult.  In fact, BH has not outperformed the market in recent years, and I would not be surprised to see Buffett rethink how BH operates, perhaps by paying dividends or implementing a stock buyback. 


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Re: What will be the next bubble? Whatís your plan when/if it does happen?
« Reply #49 on: November 13, 2019, 04:32:19 AM »
There are bubbles everywhere, but the biggest of them all is in sovereign debt.

It makes absolutely NO sense at all that you would lend money to an entity and be charged for the "privilege" of doing so, yet this is where we are at with a growing chunk of the debt market. The only reason it is going is that people believe that someone else will buy it off them for even more ridiculous terms. That's the bigger fool in action, and that is a common feature in asset bubbles.


BTW it's not as simple as "I'm passive, he's active." you can be both a market timer, AND a passive investor.  You can buy active investments in a passive manner, or you can buy passive funds in an active manner.  Either way, I doubt either Buffett or Joe Schmoe gives two hoots about which tickboxes you may or may not think they fit. We all have to swim in the same waters.