Correction Imminent?

[REWahoo]

Quote:

Originally Posted by Sniggle I decided after the dot com bubble not to ride the market down again. If I think that the market is correcting, I will put everything into the backyard fund (no interest/no income), and wait until I feel it has bottomed. Do I miss some runs...yes. Do I succeed in selling high and buying low every time...no. But I did manage to make 10+% in 2007/2008 by missing 15% of the drop.

You are apparently much more accomplished at market timing than me. Too much conflicting noise out there and too tempting to listen to my emotions for me to try to follow your strategy. My attempt to avoid riding the market down could just as easily end up having me miss the ride up.

I have a round trip ticket.

[brewer12345]

Eh, I find it hard to get excited about purported impending doom. Do we have the back and forth seesaw? Yep. Does it mean much in the long run? Nope. I learned my lesson in the last collapse and rejiggered my portfolio to a more modest risk tolerance. I am still looking for bargain basement equities and will buy with both hands when I find them, but I can't see going overboard either to the positive or negative side. "Wouldn't be prudent." Some thoughts on risk management here: Life, Investments & Everything: Cutting Off The Tail, Part 2

Also look at the big picture. As Audery has mentioned, a lot of the bugaboos haunting the market have receded (at least for now). The European mess seems to be subsiding, Japan is stimulating to beat the band, China appears to be returning the corner, and the knuckleheads in DC have decided it is a bad idea to needlessly upset the apple cart. And look at the latest unemployment claims numbers and housing market info. With a ery accomodative (bordeing on extremely stupid) credit market, I would say we have the makings of another bubble, but it will take at least a few years of continued bad behavior before we really get there.

[NW-Bound]

+1

Speaking as a, ahem, part-time market timer, I do not see anything that would cause me to change my holdings. Yep, plenty of signs that the world-wide economy is recovering.

I am riding on, until something scares me to get off. If I get out any time the market goes up, well, wouldn't that make me "sell high" and "buy back even higher"? Some of my friends did that. They are still working.

[Midpack]

Quote:

Originally Posted by brewer12345 Some thoughts on risk management here: Life, Investments & Everything: Cutting Off The Tail, Part 2

As good an article on risk tolerance as any I've read thanks. It is mostly written for investors in the accumulation phase though (like yourself), a perspective I know too well from experience - and I've had to relearn what risk means to a retiree.

Risk tolerance in the drawdown phase is not the same, where sequence of returns has a much greater and potentially more harmful impact on a portfolio. I don't have the silver bullet, but it seems the guiding force for me now is not what level of risk can I tolerate (used to be very high), but what level of risk is necessary. Fortunately working past FI allows me to take less risk than I can tolerate, but I am still learning.

Not very eloquent today for whatever reason, apologies...hope I at least made my point. Clearly time to log off for a while...

[RonBoyd]

Quote:

Originally Posted by Midpack ... the guiding force... now is not what level of risk can I tolerate (used to be very high), but what level of risk is necessary.

Exactly.

[brewer12345]

Quote:

Originally Posted by Midpack Risk tolerance in the drawdown phase is not the same, where sequence of returns has a much greater and potentially more harmful impact on a portfolio. I don't have the silver bullet, but it seems the guiding force for me now is not what level of risk can I tolerate (used to be very high), but what level of risk is necessary. Fortunately working past FI allows me to take less risk than I can tolerate, but I am still learning.

Indulge me for a moment, if you will. I spend a lot of time (both personal and for pay) thinking about risk management and you are exactly right in that what you have to do to appropriately manage risk varies a lot between a person in accumulation stage, a retiree, an insurance company, a bank, etc. The key differences I see betwen the acumulation phase and the retiree are:

1. The sequence of returns is hugely more important for the retiree. An ugly swoon in the first 5 years of your retirement is the worst outcome possible and you must mitigate that risk (via a cash hoard, hedging, part time work, etc.).

2. For the retiree, being vigilent about your ability to take risk off the table as you become more secure due to a favorable path of returns is much more important than in the acumulation phase. I'd argue that this matters for the accumulator nearing their goal, but that is just the other side of the coin.

Am I missing any other big ones? Obviously longevity risk is a huge issue for the retiree, but that is more of a withdrawal rate/do I buy a SPIA issue than a portfolio management issue.

[Hamlet]

I think there is a interesting dicotomy about number 2. If you've had a favorable path of returns, and end up with a larger portfolio later in your retirement, your need to take risk is much lower, but your ability to take risks is much higher.

Some people would make the choice to move to a much more conservative asset allocation, saying "I don't need to take any additional risk", while others might move riskier, saying "I can withstand the volatility of more equities, and I will potentially increase my estate's value substantially."

I'm not sure that I can really argue usefully against either stance.

Quote:

Originally Posted by brewer12345 Indulge me for a moment, if you will. I spend a lot of time (both personal and for pay) thinking about risk management and you are exactly right in that what you have to do to appropriately manage risk varies a lot between a person in accumulation stage, a retiree, an insurance company, a bank, etc. The key differences I see betwen the acumulation phase and the retiree are: 1. The sequence of returns is hugely more important for the retiree. An ugly swoon in the first 5 years of your retirement is the worst outcome possible and you must mitigate that risk (via a cash hoard, hedging, part time work, etc.). 2. For the retiree, being vigilent about your ability to take risk off the table as you become more secure due to a favorable path of returns is much more important than in the acumulation phase. I'd argue that this matters for the accumulator nearing their goal, but that is just the other side of the coin. Am I missing any other big ones? Obviously longevity risk is a huge issue for the retiree, but that is more of a withdrawal rate/do I buy a SPIA issue than a portfolio management issue.

[Midpack]

Quote:

Originally Posted by brewer12345 Indulge me for a moment, if you will. I spend a lot of time (both personal and for pay) thinking about risk management and you are exactly right in that what you have to do to appropriately manage risk varies a lot between a person in accumulation stage, a retiree, an insurance company, a bank, etc. The key differences I see betwen the acumulation phase and the retiree are: 1. The sequence of returns is hugely more important for the retiree. An ugly swoon in the first 5 years of your retirement is the worst outcome possible and you must mitigate that risk (via a cash hoard, hedging, part time work, etc.). 2. For the retiree, being vigilent about your ability to take risk off the table as you become more secure due to a favorable path of returns is much more important than in the acumulation phase. I'd argue that this matters for the accumulator nearing their goal, but that is just the other side of the coin. Am I missing any other big ones? Obviously longevity risk is a huge issue for the retiree, but that is more of a withdrawal rate/do I buy a SPIA issue than a portfolio management issue.

I agree entirely. If my post seemed to suggest otherwise, it's probably my (poor) choice of words. Hence my last sentence in the previous post, when I read my post back to myself it seemed pretty clumsy, brain cells not firing today...

[RobLJ]

As a result of Europe and Emerging Markets, they have lagged. The Fidelity International Discovery fund in my wife's 401k, however, slightly beat the S&P over a year period.
I see a lot of foreign funds as more attractively valued than S&P and large-cap US.

[Major Tom]

Quote:

Originally Posted by RonBoyd And now you are a dedicated, fully-committed "Market Timer"?

Not in the slightest. I'm a passive index guy now. The difference is that, unlike the tech stock boom of the late 90's when I started paying attention to the market and tried all sorts of fancy stock picking schemes (thank you Motley Fool), I don't think I'm going to become a millionaire overnight.

[jebmke]

Quote:

Originally Posted by mpeirce That roughly $60M really did just evaporate.

Approximately one Sandy.

[samclem]

I know it is conventional jargon, but when we are talking about portfolios or assets and we say "risk" instead of "volatility" it can really obscure some important truths.

How does an 80 YO retiree with savings of 20x annual spending take risk off the table? Probably going to 100% TIPS would be good, even at a today's very low real rate.

A 45 YO with a portfolio of 20X annual spending needs a high stock allocation to decrease risk. A 100% TIPS portfolio would be very high risk.

Sorry, obvious I know.

[brewer12345]

Quote:

Originally Posted by samclem I know it is conventional jargon, but when we are talking about portfolios or assets and we say "risk" instead of "volatility" it can really obscure some important truths. How does an 80 YO retiree with savings of 20x annual spending take risk off the table? Probably going to 100% TIPS would be good, even at a today's very low real rate. A 45 YO with a portfolio of 20X annual spending needs a high stock allocation to decrease risk. A 100% TIPS portfolio would be very high risk. Sorry, obvious I know.

Absolutely agree. From the blog post I linked at Life, Investments & Everything: Cutting Off The Tail, Part 2:

"The second and more important risk is the risk of your portfolio failing to meet your goals. Most investors have specific financial goals in mind, either for their portfolio as a whole or for segments of it (a college fund for your children, for example). In the long run, the biggest risk investors face is failing to meet their goals. Which matters more: seeing your portfolio drop 25% in a year and taking two years to recover the losses, or not having enough money to pay for the kids' college tuition or fund retirement? Yet most risk measures and sensitivities are focused on the risk of short term portfolio drawdowns rather than the risk of failing to meet your goals."

[plex]

Well since its a market timing thread, I'll give my take. I agree with in your first five years of retirement you have to basically have at least a decent sized chunk of your portfolio in something safe, so you can absolutely ride out a recession without having to go back to work.

That said, I view the market from a statistical sense, in that bull markets generally tend to be quite a bit longer than bear markets. I also view the switch between a bull/bear from a probabilistic viewpoint. E.g., at the very beginning of a bull, the chance of a bear occurring basically starts out at 0%, and slowly edges up from there. However based on history, it is not until about 5-6 years into a bull before the chance of a bear happening reaches 50%, and of course it goes up from there. As such, I believe that before that 50% point is reached, if in the accumulating phase, it is ideal to have a higher risk allocation than your general ideal portfolio mix, and after that 50% point is reached, to be prepared to a lower risk allocation.

The other interesting thing is about bear's statistical 50% switch point, it seems to be only about 12 months after a bear begins, so it isn't all that smart to "stay out" for anywhere near the same period you need to be "staying in" and going long. You basically have a 6:1 chance of getting burned if you do it truly randomly, and obviously the odds are much worse if you have a very low risk tolerance, or better if you have a very high risk tolerance.

This is the timeline I setup for myself many years ago: 2009 heavy buy, 2010 heavy buy, 2011 heavy buy, 2012 light buy, 2013 light buy, 2014 neutral, 2015 light sell, 2016 light sell, 2017 heavy sell, 2018 heavy sell. Basically at 2014, around April, I will switch to my ideal mix, 70/30 from 100/0, in 2017 I will switch from 70/30 to 40/60, if a bear hasn't hit by April 2019, I may switch to 20/80. Once a bear hits, you can bet I will go 100/0 about 12-18 months into it, whenever I see a sustained 2-4 week upswing.

Just the way I've been investing for about a decade, and what I plan to do next decade as well. In retirement I will more quickly switch into and hold my ideal asset allocation than I would while accumulating. I likely would switch to 70/30 only 3-4 years into a bull.

[AndrewJackson]

Quote:

Originally Posted by brewer12345 Also look at the big picture. As Audery has mentioned, a lot of the bugaboos haunting the market have receded (at least for now). The European mess seems to be subsiding, Japan is stimulating to beat the band, China appears to be returning the corner, and the knuckleheads in DC have decided it is a bad idea to needlessly upset the apple cart. And look at the latest unemployment claims numbers and housing market info. With a ery accomodative (bordeing on extremely stupid) credit market, I would say we have the makings of another bubble, but it will take at least a few years of continued bad behavior before we really get there.

All of this mentioned is one gigantic kick the can worldwide orgy. It is going to end very badly and is only a matter of time until it all unravels. My guess is that it will probably end with bonds getting smoked and stocks rallying (all though going down in real terms).

[rembrandt]

Everybody here seems to be living in the future. For the people that want to invest in the here and now, and don't have time to recoup steep losses, is the stock market a sane choice?

[REWahoo]

Quote:

Originally Posted by AndrewJackson All of this mentioned is one gigantic kick the can worldwide orgy. It is going to end very badly and is only a matter of time until it all unravels. My guess is that it will probably end with bonds getting smoked and stocks rallying (all though going down in real terms).

Not if the asteroid hits first...

[REWahoo]

Quote:

Originally Posted by rembrandt Everybody here seems to be living in the future. For the people that want to invest in the here and now, and don't have time to recoup steep losses, is the stock market a sane choice?

Did you survive the steep losses in 2001 and 2008? I did and expect to survive the steep losses in 20XX.

I realize being positive and optimistic about the future is out of style, but I don't have time to put on a new coat of black paint at the moment so you'll have to overlook my comments.

[rembrandt]

Yes, I survived, but I am running out of energy and strength to go another round. I am treading water in GNMA's for the time being, until it is safe to go into the water again.

[brewer12345]

Quote:

Originally Posted by AndrewJackson All of this mentioned is one gigantic kick the can worldwide orgy. It is going to end very badly and is only a matter of time until it all unravels. My guess is that it will probably end with bonds getting smoked and stocks rallying (all though going down in real terms).

I have been hearing this same tune for years and I think I can finally call shenanigans on it. Yeah, stupidity in the credit markets will eventually not end well for someone, but as for the rest:

- Europe needed a coordinated policy response. It took them a long time to get their act together, but it is seriously in gear now and getting done what needs to be done.

- China has a new set of rulers who are very obviously pro growth and are just getting int otheir stride. If you want to see where China is headed, check out the price of iron ore (hint: to infinity and beyond).

- The US had an obvious way out of its mess: a little more tax revenue, a little less spending, and let growth pick up enough that the gubmint supports can gradually be withdrawn. We have the additional revenue in place, I suspect we will see the spending piece addressed with the new budget, and growth is coming back.

- Japan has floundered for a long, long time because policy response was always tepid to their problems. They still haven't figured out a way past their demographics (hint: immigrants, guys), but policy response has finally gone gonzo and everyone else in the world seems reluctant to fight it.

I imagine bondholders are in for some pain eventually simply because we are a "stupid pet tricks" area for interest rates. But a lot of things are finally looking positive.