Going to 100% cash

[TooFrugal]

We have been switching mainly to fixed income investments for the last two years. My goal is to save enough to just be able to live off interest from things like TIPS and maybe CD ladders.

I realized the other day that part of the reason we hear so much about stocks as a good investments is because middle men make money from them so they get advertised more than investments like TIPS. It is kind of like prescription drugs where we see TV and magazine ads for prescription high blood pressure medication, but none for fruits and vegetables rich in potassium, even though the fruits and vegetables are cheaper and might work better for some people. It is just that the profit margins on bananas don't justify a lot of advertising.

 

[LARS]

Frankly I am a lot more dubious about the bond market these days than anything else. Tight spreads and low govt rates are not recipes for good returns in all but a few environments.

Now I can't imagine why you would say this other than maybe Norfolk Southern, a triple B credit, sold $250 million of 100 year bonds at a yield of 5.95% today!!!!

My stance is highly liquid currently as I see little upside in stocks and while I think there is money still to be made in 30 year tsys I'm concerned about the timing of everyone heading for the exit at the same time.

YMMV of course...

EDIT: Re: stock market I think the upside at this point is 500 points and the downside could be easily 2,500.

 

[Carnage]

"The time to buy is when there's blood in the streets."

 

[73ss454]

I'm sitting tight as I have no idea what is going to happen. I tried before to guess what will happen and I've never been right so I'll just sit and what happens happens...

 

[LOL!]

People question why get out of the market. My guess is they want to know what that person sees that they may not.

Why are there no questions on why people are staying in the market? What do the people staying in the market see that those getting out do not?

There are no questions because there are lots of studies about market timing and how well it works, so people tend to avoid it. Instead, they pick an asset allocation that they can live with through thick and thin and one that allows them to rebalance without emotions.

 

[traineeinvestor]

What am I risking if I am wrong - the opportunity cost if the market goes up?

Unless you expect deflation, parking your money in the bank is a strategy designed to produce a (hopefully) small annual decline in the real value of your investments as inflation does its thing. In effect you are accepting that decline in real value in exchange for removing both the possibility of a greater loss and the possibility of achieving a return which is better than cash in the bank.

Why are there no questions on why people are staying in the market? What do the people staying in the market see that those getting out do not?

I stay in the market for a number of reasons, not least my inability to see beyond (i) earnings yields on equities are higher than for cash or bonds and have the potential to grow over the longer term which leads me to expect higher returns over the longer term and (ii) as long as central banks continue to expand the money supply, I expect that there will be inflation over the longer term.

I fully acknowledge and expect there to be fluctuations along the way and I do play around the margins of market timing with parts of my portfolio but I have no wish to hold a lot of cash for anything other than relatively short periods of time.

 

[brewer12345]

Why are there no questions on why people are staying in the market? What do the people staying in the market see that those getting out do not?

Ah, well there, I can help you. I generally do not buy funds, preferring individual equities. I typically research each of my holdings and extensively model what they can generate in the way of cash flows and earnings. As such, I know my companies pretty well, but must confess ignorance to a greater or lesser degree on investor sentiment and macro conditions, although I generaly do have a view on the latter. So for the stuff I own, business is generally decent if not outright good. Valuations are extremely low on an asset value and earnings multiple basis, and balance sheets are stable to quite strong. Most companies I own have adapted to the current economic conditions and keep a very lean cost structure. So they are able to sustain themselves in current conditions to a downside scenario and would be printing money in the event that the economy starts to recover. So looking at the micro fundamentals, I find little to be worried about.

I think the biggest risk is investor sentiment. We are in relatively thinly traded markets and bonds are a lot more popluar than equities. So a change in sentiment could bop equity prices in the short term.

Dex, what do you see that is sounding alarm bells? The last few years have induced some humility in me so I am keen to hear it.

 

[Dawg52]

Might be time to buy a little VXX if your in the negative camp. I did earlier in the year and made a quick 40% profit. But instead of dumping all your stocks, this is one way to hedge your bets. I don't own it now.

 

[REWahoo]

... they pick an asset allocation that they [think they] can live with through thick and thin and one that allows them to rebalance [theoretically] without emotions.

[Edited to enhance reality].

 

[ls99]

In clicking about, I find a lot of noise being made about the "Hindenburg Omen". Well beyond my understanding or care. Google it or look on Wikipedia.

 

[Bikerdude]

I think the biggest risk is investor sentiment. We are in relatively thinly traded markets and bonds are a lot more popluar than equities. So a change in sentiment could bop equity prices in the short term.

According to this article the bond market is being driven in part by the "boomer factor".

Bonds aren't the new tech bubble Nick Godt's Market Medics - MarketWatch

 

[dex]

Dex, what do you see that is sounding alarm bells? The last few years have induced some humility in me so I am keen to hear it.

There are a few things you could look at - most of which are in the area of Technical Analysis. I'm going to be a bit lazy with some of my answers since I'm repeating myself - if you see LU = Look up for accuracy.

1. The general overview or macro - we are in a Secular bear market that started in 2000. The trend is down - don't fight the trend - Secular bear markets last from 13-18 years (LU). We have not seen the bottom yet. When we read as we did in the early 80s that the stock market is dead, it might be the bottom.

2. In early July the 50 day moving average crossed below the 200 ma for the S&P - a precursor of a large decline. (LU)

3. Find on the site below his 80 and 40 year stock market cycle theory. You don't have to buy into everything. The general concepts are good.

T Theory? Foundation: T Theory? Daily Updates, Forecasts, Charts and Data
Terry Laundry's T Theory? Observations: Terry Laundry's Weekly T Theory? Observations for August 22 2010

Listen to the audio that goes along with this.
http://ttheory.typepad.com/files/envelopettheory-20100820pdf.pdf

4. We are entering the 4th qtr - volatile

5. Stock market volume has been very lite - small things can move the market.

6. What good news is out there that will move the market up?

7. Just for the hell of it.

http://www.decisionpoint.com/ChartSpotliteFiles/090227_lows.html

MAIL
Hi Carl,
I really enjoy your service and have for about nine years. Thank you for all your hard work and dedication. I was wondering if you could tell me the potential technical "bottom" numbers for the Dow, S&P 500, and Nasdaq?
Thank you very much.

ANSWER: I don't follow the Nasdaq. I have rough targets of Dow 3000 and SPX 300 around late-2010. I wouldn't exactly call these "technical" targets -- I am guestimating a total decline of about 80%, using the 1929-1932 bear market 90% decline as a guide. The timing is based on the estimate for the next 4-Year Cycle low, which is due mid-to-late 2010.
While I can't swear by these estimates, I don't think I'm sticking my neck out too far.
Carl



This might be an up week.

I think I will sleep very well once I'm in cash.

 

[Dawg52]

I think I will sleep very well once I'm in cash.

Hard to argue with the sleep factor.

 

[dgoldenz]

Equity-linked index annuity, just saying. Let the flames begin!

 

[ziggy29]

Equity-linked index annuity, just saying. Let the flames begin!

I'll get the popcorn.

 

[W2R]

I think I will sleep very well once I'm in cash.

A diversified portfolio helps me to sleep well. And on that note, good night!

 

[runchman]

Why are there no questions on why people are staying in the market? What do the people staying in the market see that those getting out do not?

The minute I get out, I have to start losing sleep over when to get back in. Years ago I decided:
- pick asset allocation
- set it
- forget it
- rebalance occasionally
- ignore all financial news and stay the course

I'm either a genius or an idiot. Only time will tell.

 

[CyclingInvestor]

Why are there no questions on why people are staying in the market? What do the people staying in the market see that those getting out do not?.

I have been 100% in individual stocks since 1993 and see no reason to change that. I have absolutely no idea what market prices will be in the future, but feel confident that in 1 - 5 - 10 - 20 years from now [ PG / JNJ / ADP / ABT / KO / SYY etc] will have higher earnings and dividends than today, probably by a significant margin over inflation, resulting in a continuation and enhancement of a comfortable dividend-based retirement. The last market collapse caused my portfolio market value to drop significantly for a while, but resulted in no lost sleep as earnings and dividends kept right on rising.

 

[chinaco]

Honestly... I think all of us have those feelings and thoughts sometimes.

No one really knows what is going to happen short-term or mid-term.


Preservation of capital is important... especially if you need to spend it near-term.


At our age (DW and I), I intend to stay diversified and hold some stock. The stock represents money that we do not need to access for over a decade (upper end spending) or 15 years of mid (planned spending).

I do not try to time, because I believe it is futile.

IMO lightening up on stocks a little to lock-in some gains can be a prudent move. But it would be more of a permanent move than a timing move if I did it.

The bucket approach (BOM)... provides short-term, mid-term, and long-term investments to insulate you from near-term market shocks.


Some investors take this approach - "One way to have it both ways" (a yogi berra-ish statement) is to split the difference and reduce equity exposure. (e.g, move from 50/50 to 25/75). Some do this by averaging out in several steps over time and stop if things look better.


DW and I will eventually get out of stock (or hold very little) at some age (perhaps mid 70's)... I am working out the plan now. It will be an opportunistic move (when the market is riding high... but I will not wait on the peak) That will be a permanent move.

 

[cardude]

This may or may not make folks who are super jittery about the market feel a little better, but here is what Buffett said after 2008 in his shareholder letter:

Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20

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th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21 1⁄2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.​

Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time​

Another one.........​

Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable –in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time. Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier.​

Beware the investment activity that produces applause; the great moves are usually greeted by yawns.

 

[brewer12345]

Dex, thanks for the explanation. I guess I have always had a hard time giving much credence to technical analysis, but different strokes. I don't like the mad rush into bonds that is happening, but I also know we are in late august and have thin, directionless markets as people are on vacation. That being the case, I find it hard to draw any real firm conclusions from anything happening at the moment.

 

[Dawg52]

A diversified portfolio helps me to sleep well. And on that note, good night!

Did you sleep well a couple of years ago when the DOW was around 6,700? Congrats to those that did. My portfolio took a major step backward and I had an AA allocation of something like 45/55. When the DOW recovered close to 10k, I rebalanced and now have less than 25% in equities. Now I sleep much better. But, everyone has a different comfort level.

 

[donheff]

This sleep thing is interesting. Dex reads about a DOW 3,000 by year's end and can't sleep until he moves to cash. I think about the possibility of slow erosion of my life style (through inflation and depletion) and know I would lose sleep in all cash. I guess I would rather take a chance at a sudden disaster than a slow water torture.

 

[W2R]

Did you sleep well a couple of years ago when the DOW was around 6,700? Congrats to those that did. My portfolio took a major step backward and I had an AA allocation of something like 45/55. When the DOW recovered close to 10k, I rebalanced and now have less than 25% in equities. Now I sleep much better. But, everyone has a different comfort level.

Right, and as you point out having a diversified portfolio with the AA that corresponds to your comfort level can make all the difference in the world. I didn't *like* the crash, but I didn't suffer with it to the extent that you did. It certainly did test the appropriateness of our AA's with respect to our individual comfort levels though, I do believe.

Got a great night's sleep and I'm up early, ready for a pleasant Tuesday.

 

[ERD50]

A diversified portfolio helps me to sleep well.

This sleep thing is interesting. ....and know I would lose sleep in all cash.

I'm in the above camp. I would lose sleep with 100% cash. Would I be able to get back in at a good level? Who knows?

The only market timing that FIRECALC uses for its historical review is AA re-balance. And success rates are relatively insensitive to the AA you pick (similar form 35% Eq to 100% Eq).

PS - it would be interesting if FC allowed one to choose a variable AA, say 80/20 to start, 20/80 at end of the period (or vice versa), adjust linearly each year (2%/year for 30 years in this case, or X%/year until target is reached).

-ERD50