Dollar Cost Average During A Bear

[Senin]

I am sure that I am not the first one to ever bring this up-- but I have a theory about asset allocation.

How about 75% percent in good reliable stock mutual funds and 25% in good reliable bonds (of which can withstand a Bear Market, such as GNMA). Hopefully during the Bull Market, the good stock mutual funds will bring in a healthy income. But when the Bear Market hits (which nobody can really predict when), after a couple of months start dollar cost averaging out of the bonds and into the stocks. Hopefully you can dollar cost average to the bottom of the Bear then back up the other side. Then when things are normal again, you should have made a tidy bundle.

I know this seems simplistic and it has probably been tried before. Forgive me. I just don't see down side to this. Please enlighten me.
Thanks.

 

[clifp]

Well you've done an admirable job describing the beauty of rebalancing. It is generally advisable to try and rebalance every year or so rather than doing it on a monthly basis but it shouldn't matter much.

 

[Dawg52]

Yes, that's what rebalancing is all about. Easy to plan to discuss during not so volatile times, but not always easy to implement during emotional ones.

 

[REWahoo]

Yes, that's what rebalancing is all about. Easy to plan to discuss during not so volatile times, but not always easy to implement during emotional ones.

Yep, all that 'medicine' and head-banging does make it hard to think straight.

 

[W2R]

During the bear market of late 2008-2009, bonds went down too. I did DCA into the market (both equities and bonds) each month using cash reserves and that worked out nicely. But, the only reason I did it was that that was my plan all along in order to deal with a cash windfall that I received in mid 2008.

Also I did skip December and January 2008 due to being chicken. At least I didn't sell.

The problem with keeping a lot of money in cash, waiting for a bear market, is that you don't get any dividends and very little interest on your cash holdings.

 

[jkirzec]

Senin

I did that during the 2000-2002 bear market. I dollar cost averaged into my govt. 457b ($22,000 was allowed for me in 2002) into the highly volatile Fidelity Growth Fund with new money when I did not yet have a highly diversified portfolio. Turned out well after the rebound of 2003! I think my calculations showed I broke even from 2000-2004. Of course I was then sitting on a lot of shares (since diversified) that would benefit from any future increases.

I plan on doing the same now if there is any future correction; I'm thinking of a 20% decline, then I'll use up some of my extra cash/bond reserves. I have cash/bonds now as part of a roughly 50/50 stock/bond split, so I don't feel I have money sitting idle while out of the "stock" market. But I think I've learned enough to put $$ into stock mutual funds in a systematic manner when they decline or are declining.

Of course if the decline is due to really troubling world events, it takes some faith that a recovery will happen on the other side of the bad news. I think looking at historical disasters (pearl harbor, world trade center, cuban missle crisis, etc.) and the market rebound that followed would help you to maintain faith and hope and optimism about the strength of the economy.

Hope this helps!

 

[Andre1969]

I tried playing around with the allocation in one of the 401k's I still have from a previous employer, Boeing. As if 12/31/09, it was heavily weighted in Boeing common stock, about 89%. The remainder was in a small-company fund or something like that; I forget now.

Well, this 401k is a very small part of my overall portfolio, so I figured I'd fool around with it, and see it I could make it grow faster. Boeing stock is pretty volatile, and often changes by 10% or more at the drop of a pin. I figured I'd start selling off some after a spike, putting it into a bond fund, and then buying back after a drop.

Well, as of yesterday's close, I've got that 401k up about 45%, compared to 12/31/09. Sounds pretty good, right? Well, I estimate that if I had done absolutely nothing, I would still be up around 43%.

I was actually pretty far ahead of the game until the last couple months, when the share price shot up to the mid-70's a couple months ago, and pretty much stayed there. And now I'm at around 50% stock, 50% bond fund, and what I'm really hoping is for the stock to drop, so I can buy some back!

But, I guess right now, I'm still in a win/win situation. If the stock continues to go up, I still make money, just not as much as if I had more shares. And if the stock drops, I have a chance to buy more, to improve my chances of making money in the future!

And, I'm exposed to less risk now. With my 12/31/09 allocation, I figured that if the stock price went to around $32.70/share (it closed 2009 at $54.13), it would wipe out all my profits for that 401k. But now, it would have to plummet to under $17.86/share to wipe out my profits.

 

[youbet]

But when the Bear Market hits (which nobody can really predict when), after a couple of months start dollar cost averaging out of the bonds and into the stocks. Hopefully you can dollar cost average to the bottom of the Bear then back up the other side. Then when things are normal again, you should have made a tidy bundle.

The problem is that you don't really know when a bear market has started. Just because we have a down market for a couple of months (the time frame you mentioned) doesn't mean it will continue, reach a bottom and finally recover as you seem to be expecting. The markets might drop for a month or 2 or 3 and you start swithing from bonds to stock to dollar cost average through the bear. But, gosh, the market immediately reverses and starts back up. So you stop. But then the market starts heading down again. So you start. Etc. It's easy now to look at the charts for the recession and wonder why you didn't dollar cost average all the way down and all the way up. But at the time, it took a lot of fortitude to start buying when the talk was of continued drops, perhaps catastrophic drops. In other words, you can't look at historical data and formulate a plan for next time. You don't know about next time until next time is over!

I know this seems simplistic and it has probably been tried before. Forgive me. I just don't see down side to this. Please enlighten me.
Thanks.

Only looking at historical data and thinking you'll be able to predict when something similar is going to happen again is simplistic. It just isn't that easy.

 

[Patrick]

I am sure that I am not the first one to ever bring this up-- but I have a theory about asset allocation.

How about 75% percent in good reliable stock mutual funds and 25% in good reliable bonds (of which can withstand a Bear Market, such as GNMA). Hopefully during the Bull Market, the good stock mutual funds will bring in a healthy income. But when the Bear Market hits (which nobody can really predict when), after a couple of months start dollar cost averaging out of the bonds and into the stocks. Hopefully you can dollar cost average to the bottom of the Bear then back up the other side. Then when things are normal again, you should have made a tidy bundle.

I know this seems simplistic and it has probably been tried before. Forgive me. I just don't see down side to this. Please enlighten me.
Thanks.

OK, now your 100% in stocks. What's your plan to get some money back into the bonds?

 

[Andre1969]

OK, now your 100% in stocks. What's your plan to get some money back into the bonds?

Well, at some point, once you feel like you've made a good profit, couldn't you just reverse the process and start dollar-costing back into bonds?

 

[W2R]

Isn't this just frequent rebalancing, then?

 

[youbet]

Well, at some point, once you feel like you've made a good profit, couldn't you just reverse the process and start dollar-costing back into bonds?

At what point is that? Without the knowledge of historical data, how do you know when to do what? This assumption that when the market drops for a couple of months you know that a longer term downward trend has started and therefore it's time to begin your moves isn't as obvious as it's being portrayed.

 

[Animorph]

When I retired in 2007 I held something like 30% in cash, to be spent during the first few retirement years and with some expectations of a recession due to housing and mainly the negative consumer savings rate. Saving out about a year of expenses, I DCA'd roughly 20% of the rest of the cash at mostly evenly spaced steps as the market declined. I started when the S&P 500 reached -20% and bought equities at roughly each additional -5% drop, aiming to be fully invested at -40% (and borrowing to hit -50%!). That part is pretty mechanical, but it helps if you are more worried about not buying cheap stocks than you are about losing money. You might choose to invest more earlier if you're not expecting a full recession. If you run the math, this doesn't exactly make you fabulously wealthy even when the market fully recovers. But it beats normal rebalancing.

I start raising cash again when my portfolio is above my projections. Normally retirement projections assume you sell some equities to cover the next year's expenses. So anytime your portfolio reaches that sell level you can raise cash, even if it is a year or more early. I have about 10% cash right now. Still pretty mechanical, but I'm willing to adjust my projections if the cash gets to be too high. I'm still more of a 100% equities personality.

 

[Patrick]

Well, at some point, once you feel like you've made a good profit, couldn't you just reverse the process and start dollar-costing back into bonds?

To mind, then, you are "market timing." I hope you guess the tops and bottoms correctly.

 

[Gone4Good]

I know this seems simplistic and it has probably been tried before. Forgive me. I just don't see down side to this. Please enlighten me.
Thanks.

One of the practical problems that became obvious in 2008/2009 is that throwing your 'safe money' into the buzz-saw of a declining market chews up that 'safe money' pretty fast. Especially if you're already starting with a high equity allocation of 75%. That's assuming you have the intestinal fortitude to throw money at a buzz-saw in the first place. As it turns out, not everyone who thought they would, actually did.

My approach has evolved a bit. Rather than simply rebalance to a fixed AA, I'm adjusting my allocation based on valuation. Right now, valuations are high so I'm a seller of risk (which includes bond duration risk) and my AA is about as conservative as it has ever been. If asset prices (read valuations) fall, I'll probably rebalance to a more risky mix.

More precisely, my idea is not so much to target a fixed Asset Allocation, but a hurdle return (a.k.a. my withdrawal rate). With today's high asset prices (and associated high portfolio balances) the hurdle return I need from my portfolio has fallen. Said another way, I don't need the same 65% equity allocation I did when my portfolio was 30% smaller and my WR 30% higher. I can achieve my goals (earning a lower WR) with less risk. So that is what I'm doing.

 

[Andre1969]

To mind, then, you are "market timing." I hope you guess the tops and bottoms correctly.

Yeah, it is market timing, but I'm not getting that risky with it. At least, I hope I'm not! I'm not perfect at hitting the tops and bottoms perfectly, but I'm also not moving huge chunks of money at a time, either.

I guess the fact that with my "help" the portfolio's gone up around 45%, but would have gone up 43% if I had just left it alone, shows that I'm not so great at it!

 

[Dawg52]

Yep, all that 'medicine' and head-banging does make it hard to think straight.

The meds got me through it. Everyone won't take the med's I do though.

 

[Senin]

During the bear market of late 2008-2009, bonds went down too. I did DCA into the market (both equities and bonds) each month using cash reserves and that worked out nicely. But, the only reason I did it was that that was my plan all along in order to deal with a cash windfall that I received in mid 2008.

Also I did skip December and January 2008 due to being chicken. At least I didn't sell.

The problem with keeping a lot of money in cash, waiting for a bear market, is that you don't get any dividends and very little interest on your cash holdings.

I think there are a number of bonds that actually did okay during the last bear-- I was eyeing Vanguard GNMA. Perhaps keep a reserve there earning at least something at all times.

 

[W2R]

I think there are a number of bonds that actually did okay during the last bear-- I was eyeing Vanguard GNMA. Perhaps keep a reserve there earning at least something at all times.

You can usually find SOME stock, or SOME bond, or something that didn't drop as much as the others. But overall, the total bond market index dropped pretty badly. There were many articles at the time about how the practice of investing in asset classes that had previously not shown much correlation to one another, simply did not hold up well at all in 2008-2009, despite the relative efficacy of this strategy during 2000-2002.

 

[haha]

I think there are a number of bonds that actually did okay during the last bear-- I was eyeing Vanguard GNMA. Perhaps keep a reserve there earning at least something at all times.

We have had so many people come here and give us their certain not to fail prescriptions.

It is just data mining, and it is as likely to be worthless as it is to help.

A few people might just refuse to play when interst rates are very low and stock prices appear to be high by some standardized measure, but the huge majority of people will not stand by when things are going up, no matter how unlikely it is that this can long continue. People like upward movement more than a cheap valuation, or they do not trust themselves to decide when valuation is cheap.

But everyone knows when stocks are going up!

Ha

 

[GregLee]

... but I have a theory about asset allocation.

It's very possible that I don't understand AA at all -- I never heard anything about it until I started reading in this forum less than a year ago. What I have been able to make of it: it's a version of buy-low-sell-high, coupled with a simple cyclic theory of stocks that estimates the future behavior of the market by looking at the recent history of your portfolio. If the value of your stocks relative to your bonds has increased, stocks are probably high and so you should sell stocks (or, if dollar-cost-averaging, buy bonds in preference to stocks), because you should bet that stocks will decrease in value in the future. Or if your stocks have become worth less relative to your bonds, you should bet that they will rise in value in the future and buy more of them.

Is that sort of it?

If my rendition is reasonable, my reservation about it is that, while one can understand why it often works, the underlying theory of the market seems pretty crude. Stock values go up and down, is basically all it says. I think that sometimes I might have a better idea than this about when stocks values are high or when they are low.

 

[Gone4Good]

Is that sort of it?

The most common way to think about asset allocation has nothing to do with valuation and everything to do with risk tolerance. The conventional advice is to select an asset allocation that matches your tolerance for losses. The more tolerant you are, the more equity you should own.

That seems like a fine first step, but it misses the second part, which is equally important, in my view. And that is asking 'how much risk do I need to take?" It seems like the answer to that question changes based on a lot of conditions, and therefore, so might the appropriate asset allocation.

 

[DblDoc]

The most common way to think about asset allocation has nothing to do with valuation and everything to do with risk tolerance. The conventional advice is to select an asset allocation that matches your tolerance for losses. The more tolerant you are, the more equity you should own.

That seems like a fine first step, but it misses the second part, which is equally important, in my view. And that is asking 'how much risk do I need to take?" It seems like the answer to that question changes based on a lot of conditions, and therefore, so might the appropriate asset allocation.

Well put. Many think of the re-balancing part as a form of market timing that increases your returns. It does not do so in any significant manner unless you cherry pick your data. It is all about risk management.

DD

 

[yakers]

People like upward movement more than a cheap valuation, or they do not trust themselves to decide when valuation is cheap.


Ha

I do not trust myself to know when valuations are too high. Really low valuations are more obvious and haven't seen them recently. The other problem is what else to do with the $$$? The major other option is bonds and I distrust them more than stocks. And I think its too late for me to get into commodities. So unless I just want to sit on cash and wait for a major correction I just look for the best deal I can find in stocks and some still seem reasonable although not cheap.

 

[urn2bfree]

THIS IS A SORT OF MARKET TIMING THAT I WONDER ABOUT in moving cash to investments:
some sort of progressive betting /investing...in such a plan you invest some set amount into your portfolio-say monthly-but always adding--it is allocated appropriately according to set percentage- ie 60% stocks, 40% bonds--each month you add at least one UNIT(could be $100 could be $10,000 or whatever, but some monthly addition) YOU buy whichever to KEEP THIS PERCENTAGE ALLOCATION--nothing new here-simple asset allocation If at the end of the month the values of stocks are much higher you end up buying more bonds to keep the AA at 60% stocks and 40% bonds...
BUT here is the wrinkle- it involves varying how much cash you put in instead of DOLLAR COST AVERAGING always the same you also vary your investment based on the prior month performance-if up performance--no matter what--put in 1 unit...if down increase above 1 unit...( the most aggressive increase-2 units after the first month down, 4 units if a second month in a row is down, 8 units if 3 consecutive down months, 16 for a fourth down month, etc...obviously liquidity is key to be ready to make such exponential increases)
---a less expensive system might just go 1 unit, 1.5, 2, 2.5 or increase the monthly input equal to the percent loss in some way--but increasing for every consecutive down month-the idea is that the more months go down the more you want to be getting in more thh lower it goes-THEN if there is an up month you return to putting in 1 unit... I have no idea how this would work...for a simple gambling scenario it works but only if You have unlimited money to double the bet after every loss AND there are not upper bet limits --that is why they have upper bet limits at casinos what other reason would they care how much you bet if it is high...?) But as much as the markets can feel like a casino-- it is very different in that gambled money is not generally lost all at once and the remainder stays on the table and the payoffs vary so much anywhere from total loss to many x 100%