Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Embrace the Pain-Bear Market Strategy from Finance Buff
Old 01-06-2009, 01:21 PM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,380
Embrace the Pain-Bear Market Strategy from Finance Buff

Embrace the Bear Market with Overbalancing - The Finance Buff

This method counsels increasing one's % allocation to equities as the equity market falls. I think the principle is good; it would have kept me from over-committing too early last fall. And it would help others who were tempted in the opposite direction from selling out or reducing their equity allocation.

I think a better metric might be some smoothed Price/Earnings ratio. I think an investor as opposed to a speculator is more interested in a gauge of value, than a gauge of what the loss has been, though they are both probably helpful and possibly both should be used.

Ideas?

Ha
__________________

__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is online now   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-06-2009, 01:25 PM   #2
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
I suppose it might be possible to look at something like where the current PE10 is relative to historical levels and figure appropriate allocations to equities off that. For example, if a PE10 of (say) 15 is about average historically, you might have a "default" 60/40 weighting to equities. As it approaches 20, you might slide it back to 40/60 and as it approaches 25, hold little if any. On the other side, you might go 80/20 when the PE10 is 12, and so on.

I don't know how well such "dynamic asset allocation" based on perceived equity valuations would have held in a backtest.

The problem is that interest rates complicate this; a PE of 12 when T-bills are yielding 2% is an attractive valuation, but a PE of 12 when T-bills are yielding 8% isn't.
__________________

__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 01-06-2009, 02:30 PM   #3
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,032
I think that the biggest lesson I have learned from this bear market is that it doesn't make much sense to DCA into equities regardless of valuation. The problems I have are: 1) how to establish proper and meaningful valuations (various sources seem to come up with various answers, for example some say stocks are way undervalued right now, while others say stocks are near their long term averages) and 2) at what valuation level do you turn on/off equity purchases. I am currently using value cost averaging for my taxable account but, as I come to realize, this has its limitations as well.
__________________
FIREd is online now   Reply With Quote
Old 01-06-2009, 02:32 PM   #4
Thinks s/he gets paid by the post
free4now's Avatar
 
Join Date: Dec 2005
Posts: 1,225
Doesn't seem like a safe approach for someone who is living off their portfolio. Increasing your equity exposure to 85% when the market goes down 50% surely will get you well positioned for a recovery, but if things go further south you'll have few options besides jumping out of a window. Kinda like "double or nothing".
__________________
free4now is offline   Reply With Quote
Old 01-06-2009, 02:48 PM   #5
Thinks s/he gets paid by the post
kyounge1956's Avatar
 
Join Date: Sep 2008
Posts: 2,171
Quote:
Originally Posted by ziggy29 View Post
I suppose it might be possible to look at something like where the current PE10 is relative to historical levels and figure appropriate allocations to equities off that. For example, if a PE10 of (say) 15 is about average historically, you might have a "default" 60/40 weighting to equities. As it approaches 20, you might slide it back to 40/60 and as it approaches 25, hold little if any. On the other side, you might go 80/20 when the PE10 is 12, and so on.

I don't know how well such "dynamic asset allocation" based on perceived equity valuations would have held in a backtest.

The problem is that interest rates complicate this; a PE of 12 when T-bills are yielding 2% is an attractive valuation, but a PE of 12 when T-bills are yielding 8% isn't.
If I understand you (and them) correctly, this is what Ben Stein and Phil DeMuth advocate in their book Yes, You can Time the Market. They suggest use of the 15 year rolling average of P/E (among other statistics)to decide when stocks are expensive and when they are not, and only buying them when they aren't. There are a lot of comparisons of what would have happened if an investor had done this over various historical periods with a one-time lump sum investment or with multiple increments over time. They apply this principle to indexes only, not to individual stocks, and over a long term only (>10 years, 20 is even better). I also don't know how or if the principle would apply to other kinds of investments like bonds or REITs.

I have been wondering recently whether just buying into a "value stock" mutual fund wouldn't have about the same effect. I have been plugging away at my asset allocation homework, and one thing I discovered looking at the data was that for the periods covered, value stocks always returned more and fluctuated less than either same-size growth stocks or their size category as a whole, and since this was true of all size classes, I assume it's true of the whole market too. That now has me puzzled about why/whether one should buy a broad market index. Why not just go for the value fund? Is it because "past performance is no guarantee", and just because value stocks have always been higher return/lower risk in the past is no reason to assume this will hold true going forward?
__________________
kyounge1956 is offline   Reply With Quote
Old 01-06-2009, 02:56 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2007
Posts: 7,526
I think it makes sense in principle. The devil is in the details of how you implement the strategy. I guess it isn't a lot different than folks who were thinking about upping their equity allocations when the Dow was hovering around 8000-8500 (thinking how much uglier could it really get).

Or folks (like me) who were already 100% equities considering refinancing the house or getting a home equity loan and investing even more in the market, effectively increasing their equities allocation to 130% or more.
__________________
FUEGO is offline   Reply With Quote
Old 01-06-2009, 03:35 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,380
Quote:
Originally Posted by FUEGO View Post
I think it makes sense in principle. The devil is in the details of how you implement the strategy. I guess it isn't a lot different than folks who were thinking about upping their equity allocations when the Dow was hovering around 8000-8500 (thinking how much uglier could it really get).

Or folks (like me) who were already 100% equities considering refinancing the house or getting a home equity loan and investing even more in the market, effectively increasing their equities allocation to 130% or more.
My all time high equtiy allocation was about 120%. But I didn't include my mortgage in the calculation. Also didn't include commodity futures, which might have pushed the leverage up quite a bit. I am too old for this now, and I do not see such a total wipeout that I would do it even if I were employed securely.

But really, all you are doing is upping your bet on yourself as a judge of values. Good character reference I'd say.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is online now   Reply With Quote
Old 01-06-2009, 05:23 PM   #8
Recycles dryer sheets
thefinancebuff's Avatar
 
Join Date: Dec 2008
Posts: 262
Quote:
Originally Posted by free4now View Post
Doesn't seem like a safe approach for someone who is living off their portfolio. Increasing your equity exposure to 85% when the market goes down 50% surely will get you well positioned for a recovery, but if things go further south you'll have few options besides jumping out of a window. Kinda like "double or nothing".
As the author of the referenced "strategy" I agree with you. I'm aspiring for ER, not there yet. Most of the overbalancing is done with new cash. This is also similar to value averaging. In value averaging, almost all new cash goes to stocks when the stocks go down. I also want to report that this has not worked out yet. I would have more money now if I stayed at 60/40. I have plenty of time though.
__________________
thefinancebuff is offline   Reply With Quote
Old 01-06-2009, 05:48 PM   #9
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,032
Quote:
Originally Posted by thefinancebuff View Post
Most of the overbalancing is done with new cash. This is also similar to value averaging. In value averaging, almost all new cash goes to stocks when the stocks go down.
I have followed that strategy since 2007. But I am finding some limitations. For example, in October 2007, as the stock market peaked, most new money for that month was invested in fixed income. Then in November 2007, as the stock market started declining, I switched and started investing most new cash in the stock market. Yet stocks were not exactly cheap at the time. They were just relatively "cheaper". By following this strategy, I started buying stocks too soon. So I think that valuation has to play a role in the decision making process. If stocks decline but valuations are still high, then should your cash really go to stocks? Or should you hold off until valuations become more attractive?
__________________
FIREd is online now   Reply With Quote
Old 01-06-2009, 06:04 PM   #10
Recycles dryer sheets
thefinancebuff's Avatar
 
Join Date: Dec 2008
Posts: 262
Quote:
Originally Posted by FIREdreamer View Post
I have followed that strategy since 2007. But I am finding some limitations. For example, in October 2007, as the stock market peaked, most new money for that month was invested in fixed income. Then in November 2007, as the stock market started declining, I switched and started investing most new cash in the stock market. Yet stocks where not exactly cheap at the time. They were just relatively "cheaper". By following this strategy, I started buying stocks too soon. So I think that valuation has to play a role in the decision making process. If stocks decline but valuations are still high, then should your cash really go to stocks? Or should you hold off until valuations become more attractive?
I like mechanical rules better than subjective criteria. If you are going to use valuation, pick your metrics ahead of time and write them down. Otherwise there will be too much second-guessing. "Is it low enough now? What about tomorrow?" Slippery slope to looking for the bottom.
__________________
thefinancebuff is offline   Reply With Quote
Old 01-06-2009, 06:08 PM   #11
Recycles dryer sheets
 
Join Date: Oct 2008
Posts: 295
Well, being Financialy able to retire, I have to ask myself Why Bother? If I'm very happy making my 7% or whatever apy on my current portfolio for the past several yrs and Many pro's are advising Not to allow 08' to influence change, but use past 10 yrs instead, if you have to change for the sake of change.. Why would I want to Take on the added Risks of moving out of my "comfort Zone" and into " the Dark Side, that has proven to be unstable at the least..?

If John Boggle starts Talkinga bout his changing his % allocattions and more into his Equites? And some others I follow say they are also? Then I might consider it as well..

However, for those still struggling to become able to ER? I made a killing in the last Bear market with Betting on Inverse Funds and then in early 03' moving that Profit into Small caps and Small caps Bull /Leverage funds..( UAPIX) but just for the avearge Recovery period of 18 -24 mos and then plan to sell. Now wether this will work this time around? I don't know, but sure is shaping up like it will..and just for adding to my charitable trust, I took 1% of my $ and have done this again Last Yr and now in that same UAPIX since 11/21/08'.. Hope it works again... Who knows..but, so far, so good..

"The things that come to those who wait will be the things left by those who got there first."
__________________
Dennis is offline   Reply With Quote
Old 01-06-2009, 06:16 PM   #12
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,032
Quote:
Originally Posted by thefinancebuff View Post
I like mechanical rules better than subjective criteria. If you are going to use valuation, pick your metrics ahead of time and write them down. Otherwise there will be too much second-guessing. "Is it low enough now? What about tomorrow?" Slippery slope to looking for the bottom.
I do like mechanical rules too. I currently use a spreadsheet to determine how to invest new money, so there is no guessing involved: plug in the current numbers, enter how much new money you want to invest and the spreadsheet spits out amounts to be invested in stocks, bonds, etc... No emotions or overanalyzing involved. And that's why I struggle with this idea of "valuation". Logically, I know valuations should be taken into account, logistically, it's a bit of a nightmare. Stock market valuations seem hard to pin down. And then, as pointed above by Ziggy, a P/E of 12 is not necessarily "cheap". So it's going to be hard to come up with a mechanical rule.
__________________
FIREd is online now   Reply With Quote
Old 01-06-2009, 06:49 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2007
Posts: 7,526
Another problem of relying strictly on valuations or other fundamental metrics is non-execution risk. Say you wait for PE 14 to invest all your cash into equities. Down, down, down the market goes. All the way to PE 14.1. Then back up, then back down, but never back below 14.1. Then it takes off to PE 17-20 for the next ten years. You're left in inflation, maybe inflation+1% investments for those ten years still waiting for PE 14.0. In the meantime, the stocks are growing earnings at an average of 3% above inflation each year and paying 2.5% dividends. Leaving your cash holdings in the dust.
__________________
FUEGO is offline   Reply With Quote
Old 01-06-2009, 07:01 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,380
Quote:
Originally Posted by FUEGO View Post
Another problem of relying strictly on valuations or other fundamental metrics is non-execution risk. Say you wait for PE 14 to invest all your cash into equities. Down, down, down the market goes. All the way to PE 14.1. Then back up, then back down, but never back below 14.1. Then it takes off to PE 17-20 for the next ten years. You're left in inflation, maybe inflation+1% investments for those ten years still waiting for PE 14.0. In the meantime, the stocks are growing earnings at an average of 3% above inflation each year and paying 2.5% dividends. Leaving your cash holdings in the dust.
True enough, but most would not do an all or nothing plan like this. And to be inclusive, last year's most successful investors on this board, including some who have since left, were 100% or close in fixed income. Not investing in equities might give a slow death (at least when TIPS are not available at good prices) but badly timed equity investing can really bash your head in.

For a retiree I think the most rational plan, which someday I hope to be rational enough to follow, is to establish bounds- say 20/80 to 80/20, (emergency funds not considered), make a farly steep transfer function based on a clearly stated and understood valuation function, and follow it.

For me it be would easy enough when interest rates were moderate to high. When rates are artificially pushed down as they are at present, I dunno. I think Bernanke and Co. would do anything to savers, so the past may not be a good guide to what you can expect from government fixed income.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is online now   Reply With Quote
Old 01-06-2009, 07:45 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2007
Posts: 7,526
Ha,

I would suggest mechanical rules would work well in sample (of historical market returns) but wouldn't do nearly as well out of sample in the future. But I agree that any changes based on relative valuation should be done gradually as thefinancebuff suggested in his article. Something like 5% increase to equities allocation for every 10% drop in market value. That way, whether we see a 10, 20, or 30% drop in values, you are increasing your equities allocation at a time when equities are relatively cheap. Since I'm 100% equities, I'm currently cash poor so don't have the "problem" of whether to increase my equity allocation. Although I do "market time" to a certain extent by going a little overweight in asset classes that really got pounded (this year these were Emerging markets, small cap international and international and domestic REITs). Ahh, the silver lining in the great volatility cloud.
__________________
FUEGO is offline   Reply With Quote
Old 01-06-2009, 07:52 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,457
Yes, I'm considering a similar strategy, but in the opposite sense - to rebalance to a lower equity allocation after a positive year or two, with the simple assumption that the market is "relatively" inflated after a positive run. Then, once the market has a bad year (or "corrected"), I'll rebalance to a higher equity allocation.

I don't intend to make large changes in the equity allocations, just a few percent, so this action if probably not worth the trouble. But maybe it'll make me "feel" better - LOL!

Audrey
__________________
audreyh1 is online now   Reply With Quote
Old 01-06-2009, 07:59 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,380
Quote:
Originally Posted by FUEGO View Post
Ha,

I would suggest mechanical rules would work well in sample (of historical market returns) but wouldn't do nearly as well out of sample in the future. But I agree that any changes based on relative valuation should be done gradually as thefinancebuff suggested in his article. Something like 5% increase to equities allocation for every 10% drop in market value. That way, whether we see a 10, 20, or 30% drop in values, you are increasing your equities allocation at a time when equities are relatively cheap. Since I'm 100% equities, I'm currently cash poor so don't have the "problem" of whether to increase my equity allocation. Although I do "market time" to a certain extent by going a little overweight in asset classes that really got pounded (this year these were Emerging markets, small cap international and international and domestic REITs). Ahh, the silver lining in the great volatility cloud.
The only difference I am proposing is to use a valuation metric, rather than a % down from top.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is online now   Reply With Quote
Old 01-06-2009, 08:01 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Dawg52's Avatar
 
Join Date: Feb 2005
Location: Central MS/Orange Beach, AL
Posts: 7,432
Quote:
Originally Posted by haha View Post

But really, all you are doing is upping your bet on yourself as a judge of values. Good character reference I'd say.

Ha
That's the problem......
__________________
Retired 3/31/2007@52
Full time wuss.......
Dawg52 is offline   Reply With Quote
Old 01-06-2009, 09:27 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,396
Quote:
Originally Posted by haha View Post
The only difference I am proposing is to use a valuation metric, rather than a % down from top.

Ha
That still does not solve all the problems, because what considered as the normal P/E ratio has been changing with time.

During the long bull market of the 90s, we had the phenomenon called "P/E expansion" that could have locked us out of the market, if we insisted on the lower P/E of earlier decades. In fact, some old-fashioned market mavens were derided then as permabears, since they kept calling the market as too expensive.

The dynamics of the market, as I described in another thread, makes it difficult to totally rely on old historical data as a guide.
__________________
NW-Bound is online now   Reply With Quote
Old 01-06-2009, 10:18 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,380
Quote:
Originally Posted by NW-Bound View Post
That still does not solve all the problems, because what considered as the normal P/E ratio has been changing with time.

During the long bull market of the 90s, we had the phenomenon called "P/E expansion" that could have locked us out of the market, if we insisted on the lower P/E of earlier decades. In fact, some old-fashioned market mavens were derided then as permabears, since they kept calling the market as too expensive.

The dynamics of the market, as I described in another thread, makes it difficult to totally rely on old historical data as a guide.
There are optimizers, and satisficers. I am one of the latter.

It is rare that there isn't one or more reasonable investment opportunities at any given time. Pick some. If none present themselves, wait. Your example of the nineties is a good one for my point. During the late 90s, the zenith of the bull market, commodity stocks and oil and gas were at extreme lows.

Someone will undoubtedly shout "But diversification!" True enough, but how diversified is a guy who owns a 7-11?

Ha
__________________

__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
The Bear Market is Over godoftrading Stock Picking and Market Strategy 19 07-17-2008 08:09 PM
Bear market background free4now FIRE and Money 14 07-11-2008 09:53 AM
Bear market perspectives clifp FIRE and Money 27 03-22-2008 06:35 PM
Another Bear Market Looming? Rosalita FIRE and Money 74 07-14-2006 10:45 AM
secular bear market NYCGuy FIRE and Money 55 03-14-2006 01:54 AM

 

 
All times are GMT -6. The time now is 10:29 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.