Author Topic: When stocks go on sale...  (Read 5966 times)

jordanread

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When stocks go on sale...
« on: April 08, 2014, 08:43:49 AM »
Sorry if this has been posted elsewhere, but I wasn't able to find it. Since I've just started experiencing the positive side of net worth, I have opened up a Vanguard account, and started doing some serious research into investing (currently reading the Four Pillars of Investing), and it's making sense to me.

When the market crashes, I know that I should maintain my holdings, and focus on the long-term. Actually, as MMM said, I should buy more because it's all on sale. It wouldn't make sense to sell off my index funds as it crashed (just to buy more), since that seems like more market-timing then anything else. However, to truly capitalize on an opportunity like this, where is the best place to keep my non-index funds money? Essentially, I'd like to have the liquid capital to be able to buy a crap load more stuff when it's on sale, but I don't want it just sitting there when it could be working for me.

Does this make sense? It's almost like an opportunity fund, but I don't know that a savings account has good enough returns to justify keeping a fair amount of money in there, just in case stocks go on sale. Am I over-thinking this? Should I even have something like this setup? I'm about 6 years out from catching FIRE, and I imagine that the answer will change once I'm there...

matchewed

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Re: When stocks go on sale...
« Reply #1 on: April 08, 2014, 08:47:20 AM »
What you're talking about is having a cash position in your AA. When the market crashes you can just rebalance your AA by moving some from cash to stocks. That cash can be in a savings account, CD's, or TIPS and other treasury bills depending on just how liquid you want it.

I'd set something up in your Internet Policy Statement about at what level of a drop are you willing to rebalance. Leave it up to a specific line in the sand so you don't go around reacting to whatever drop happens.

Eric

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Re: When stocks go on sale...
« Reply #2 on: April 08, 2014, 10:54:46 AM »
It's my opinion that you shouldn't hold "extra" cash at all.  If it's money for investing, then you should invest it.  If the market goes up, keep investing your money as soon as you get it.  If the market drops, do the same.  MMM was referencing investing even more if possible during large drops, not holding a portion of your investment money waiting for a drop.  In that case, sell something, work more, start a side hustle, etc., in order to find extra money to dump into the market.

Since no one knows when the next sale will happen, the best way to get those employees working for you is to put them to work ASAP.

jordanread

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Re: When stocks go on sale...
« Reply #3 on: April 08, 2014, 10:59:26 AM »
Thanks for the responses guys. I just got to the chapter on portfolio strategies, so I may have been getting ahead of myself.

It's my opinion that you shouldn't hold "extra" cash at all.  If it's money for investing, then you should invest it.
I was going from more of a diversification piece, I think. I don't want it just sitting there, but I wanted it relatively liquid (able to get to it in a week or two with little to no penalties), and somewhat insulated from the Index funds, so if/when indexes go down, I can get liquidity from the other spot that isn't on sale, and move it to where it would do the most good.


kyleaaa

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Re: When stocks go on sale...
« Reply #4 on: April 08, 2014, 11:01:57 AM »
What you suggest is market timing. Better to stay fully invested all times. If you have extra money to invest, do so immediately. Don't hoard cash for a crash.

matchewed

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Re: When stocks go on sale...
« Reply #5 on: April 08, 2014, 11:16:40 AM »
I have to disagree that it is necessarily market timing. You can still hold cash and rebalance if certain limits are passed. The example IPS from bogleheads does just that. I see if you were going to only hold a short term position in cash because you thought a crash was going to come soon as market timing. But if cash was a portion of your portfolio and you had rebalancing triggers that is just a more advanced AA management.

jordanread

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Re: When stocks go on sale...
« Reply #6 on: April 08, 2014, 11:56:48 AM »
I have to disagree that it is necessarily market timing. You can still hold cash and rebalance if certain limits are passed. The example IPS from bogleheads does just that. I see if you were going to only hold a short term position in cash because you thought a crash was going to come soon as market timing. But if cash was a portion of your portfolio and you had rebalancing triggers that is just a more advanced AA management.

Yeah, I don't necessarily want it as cash, since that's just this side of useless as far as gains go, I was just thinking of somewhere to put it that wouldn't react to a crash that dropped indexes, but that I could make liquid quickly, at which point I could completely capitalize on the opportunity presented. Thanks again for all of the responses. I'm going to continue this book (and look at all of the resources I saw posted in another thread), and I'll get a better grasp of what I am trying to accomplish. I am pretty sure it's super basic Asset Allocation, and I just don't know enough yet to verbalize what I'm trying to do, or it's so basic that once you know, it's never thought of again. I'll do some more research on here as far as AA goes too.

matchewed

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Re: When stocks go on sale...
« Reply #7 on: April 08, 2014, 12:23:28 PM »
I have to disagree that it is necessarily market timing. You can still hold cash and rebalance if certain limits are passed. The example IPS from bogleheads does just that. I see if you were going to only hold a short term position in cash because you thought a crash was going to come soon as market timing. But if cash was a portion of your portfolio and you had rebalancing triggers that is just a more advanced AA management.

Yeah, I don't necessarily want it as cash, since that's just this side of useless as far as gains go, I was just thinking of somewhere to put it that wouldn't react to a crash that dropped indexes, but that I could make liquid quickly, at which point I could completely capitalize on the opportunity presented. Thanks again for all of the responses. I'm going to continue this book (and look at all of the resources I saw posted in another thread), and I'll get a better grasp of what I am trying to accomplish. I am pretty sure it's super basic Asset Allocation, and I just don't know enough yet to verbalize what I'm trying to do, or it's so basic that once you know, it's never thought of again. I'll do some more research on here as far as AA goes too.

Yeah now I just think you're asking how to time the market. Just having cash sitting waiting for the drop is a bad idea. Having a plan which has specific triggers isn't such a bad thing. The net effect may be the same but the former doesn't have that strict criteria for action and is vulnerable to emotional swings. Which may just mean that you don't really have an Asset Allocation nor an Investment Policy Statement which jives with your risk tolerance. The latter is a structured plan that reflects your risk tolerance.

jordanread

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Re: When stocks go on sale...
« Reply #8 on: April 08, 2014, 12:39:13 PM »
[...]
Which may just mean that you don't really have an Asset Allocation nor an Investment Policy Statement which jives with your risk tolerance. The latter is a structured plan that reflects your risk tolerance.

Haven't thought that far ahead at all, so maybe that is what I'm thinking (which I know is bad).
Let me try to phrase it another way and answer myself. I think the best answer may have been provided already by Eric.

To set myself up to capitalize on a market crash, I'm essentially trying to time the market. Asset Allocation will play a bit of a role as far as what I have to play with if that happens, but I shouldn't allocate with the intention of capitalizing on it, because I'm potentially losing gains while trying to maintain liquidity so I can time the market (facepunch!!). If an opportunity like a market crash does present itself, I should capitalize on it with stuff not already in use for investment. Cut back my spending even more, throw some of the emergency fund at it, beg|borrow|steal|hustle|sell|prostitute to increase my cash-flow. That would be the most effective way of handling it. Typing this out kind of cleared it up for me, and I suppose I can boil it down to the following:

Don't plan for an opportunity in the future if the money can work for me now. If an opportunity arises, get my ass out of the hammock, and do what I can to increase my cash flow, without touching money already invested.

Does that sound right?

warfreak2

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Re: When stocks go on sale...
« Reply #9 on: April 08, 2014, 12:42:16 PM »
Yeah, I don't necessarily want it as cash, since that's just this side of useless as far as gains go, I was just thinking of somewhere to put it that wouldn't react to a crash that dropped indexes, but that I could make liquid quickly, at which point I could completely capitalize on the opportunity presented.
Bonds.

matchewed

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Re: When stocks go on sale...
« Reply #10 on: April 08, 2014, 12:46:49 PM »
[...]
Which may just mean that you don't really have an Asset Allocation nor an Investment Policy Statement which jives with your risk tolerance. The latter is a structured plan that reflects your risk tolerance.

Haven't thought that far ahead at all, so maybe that is what I'm thinking (which I know is bad).
Let me try to phrase it another way and answer myself. I think the best answer may have been provided already by Eric.

To set myself up to capitalize on a market crash, I'm essentially trying to time the market. Asset Allocation will play a bit of a role as far as what I have to play with if that happens, but I shouldn't allocate with the intention of capitalizing on it, because I'm potentially losing gains while trying to maintain liquidity so I can time the market (facepunch!!). If an opportunity like a market crash does present itself, I should capitalize on it with stuff not already in use for investment. Cut back my spending even more, throw some of the emergency fund at it, beg|borrow|steal|hustle|sell|prostitute to increase my cash-flow. That would be the most effective way of handling it. Typing this out kind of cleared it up for me, and I suppose I can boil it down to the following:

Don't plan for an opportunity in the future if the money can work for me now. If an opportunity arises, get my ass out of the hammock, and do what I can to increase my cash flow, without touching money already invested.

Does that sound right?

It sounds fairly reasonable. It's still reactive but I can understand the drive for it, and it doesn't seem to have the side effects that the stance most people take has (most people being the "I'm waiting for the crash" mindset). It's kinda hands on and requires you to keep an eye on things. I'm turning more and more into a lazy investor where I'll just keep buying and move onto my other portions of my life. My IPS and AA will manage everything else when I do my monthly check. And those will get reviewed with a finer eye as I get closer to FIRE.

jordanread

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Re: When stocks go on sale...
« Reply #11 on: April 08, 2014, 12:50:11 PM »
Bonds.

Note to self: Even while in accumulation stage, research the hell out of re-balancing. Thank you! Not 100% yet, since I don't always know what I'm thinking, but it is possible that you just answered the question that I think I wanted to ask.

It sounds fairly reasonable. It's still reactive but I can understand the drive for it, and it doesn't seem to have the side effects that the stance most people take has (most people being the "I'm waiting for the crash" mindset). It's kinda hands on and requires you to keep an eye on things. I'm turning more and more into a lazy investor where I'll just keep buying and move onto my other portions of my life. My IPS and AA will manage everything else when I do my monthly check. And those will get reviewed with a finer eye as I get closer to FIRE.

By reactive and hands-on, I am assuming that you mean I'd have to relatively consistently check the market? If that's what you mean, I could see that. I was thinking more along the lines of '08 though, where it was damn near impossible not to hear about it.

Edited to add: And for Pete's Sake (it means something different here :-)) read the damn Bogleheads wiki.
« Last Edit: April 08, 2014, 12:52:29 PM by jordanread »

jordanread

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Re: When stocks go on sale...
« Reply #12 on: April 08, 2014, 01:01:50 PM »
[...]
read the damn Bogleheads wiki.
After work!!!

That being said, who are the main moderators around these parts (Investor Alley)? As I continue researching this stuff, I think I'm going to start a kind of index (like there is in the Real Estate section) for my own benefit, but if it's good, who would I send it to regarding turning it into a sticky?

skyrefuge

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Re: When stocks go on sale...
« Reply #13 on: April 08, 2014, 01:05:55 PM »
The concept of "buying stocks on sale" is one area where I think MMM was a bit less precise than he should have been, because it's very easy for readers to misinterpret it as a recommendation to market-time.

Don't plan for an opportunity in the future if the money can work for me now. If an opportunity arises, get my ass out of the hammock, and do what I can to increase my cash flow, without touching money already invested.

....so I think that this is actually an excellent and Mustachian way to rephrase it, that MMM himself would probably endorse.

I think his promotion of "buying stocks on sale" is less about *actually* pouring more money in stocks during a crash, than it is a mental trick to make you feel less nervous about continuing to pour the same amount of money in as you've always been doing. And if a crash just happens to coincide with a raise at work, or an inheritance, or finding a pile of money in the street, then sure, throw that into the market too.

Actually I guess he says this almost explicitly:

Quote
I still donít recommend trying to outsmart the stock market by timing a repeated series of buys and sells. But I still like following this evaluation method to determine if Iím crazy to add more to the stock portfolio at any given point in time. When the market strays quite far from the mean P/E ratio,  thatís something to get excited about.

(emphasis added). So more about the emotional reactions to market fluctuations rather than taking specific actions.

jordanread

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Re: When stocks go on sale...
« Reply #14 on: April 08, 2014, 01:12:02 PM »
The concept of "buying stocks on sale" is one area where I think MMM was a bit less precise than he should have been, because it's very easy for readers to misinterpret it as a recommendation to market-time.

I don't think that I got that from what he wrote necessarily, I think it was more my own hate of missing opportunities, which then led me down the dark path of Market Timing. I haven't caught FIRE just yet, so I haven't learned to pass up opportunities. Maybe that hammock will be just too damn comfy once I'm there.

....so I think that this is actually an excellent and Mustachian way to rephrase it, that MMM himself would probably endorse.

That is high praise, so thank you.

I think his promotion of "buying stocks on sale" is less about *actually* pouring more money in stocks during a crash, than it is a mental trick to make you feel less nervous about continuing to pour the same amount of money in as you've always been doing. And if a crash just happens to coincide with a raise at work, or an inheritance, or finding a pile of money in the street, then sure, throw that into the market too.
[...]
So more about the emotional reactions to market fluctuations rather than taking specific actions.

That makes sense.

matchewed

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Re: When stocks go on sale...
« Reply #15 on: April 08, 2014, 01:12:48 PM »
[...]
read the damn Bogleheads wiki.
After work!!!

That being said, who are the main moderators around these parts (Investor Alley)? As I continue researching this stuff, I think I'm going to start a kind of index (like there is in the Real Estate section) for my own benefit, but if it's good, who would I send it to regarding turning it into a sticky?

Just the same ol' mods you see everywhere. Send a PM or some-such.

Bicycle_B

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Re: When stocks go on sale...
« Reply #16 on: April 13, 2014, 11:07:19 AM »
Yeah, I don't necessarily want it as cash, since that's just this side of useless as far as gains go, I was just thinking of somewhere to put it that wouldn't react to a crash that dropped indexes, but that I could make liquid quickly, at which point I could completely capitalize on the opportunity presented.
Bonds.


One type of bond that might be very helpful for your purpose is Series I Treasury bonds.  After a year, you get liquidity if needed, but in the meantime you get income, inflation protection and a government guarantee.  Discussions and details at:

http://www.interest.com/cd-rates/news/series-i-bonds-interest-rate/
http://www.bogleheads.org/wiki/I_savings_bonds
https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm