Has your nest egg fully recovered yet?

[audreyh1]

I therefore conclude that we as a group hold stocks with a higher beta than the S&P500. Either that, or our "rebalance" hurt us during the downdraft but helped during the upswing somehow. Comments?

There are other explanations:

Most bond funds were severely hurt during the downdraft - I mean absolutely creamed, yet they recovered dramatically too. I had bond funds up 16% or thereabouts with one of them up 31% in 2009.

That's why I was down so bad, yet recovered so well. Plus I did rebalance in mid-Jan.

And the S&P500 is a really narrow slice of the market. Other equity asset classes had quite different downdrafts and recoveries.

Audrey

 

[W2R]

I don't want to sound insensitive, but wonder if many of us whose nest eggs have been scrambled would feel like posting here. The point is that most posters show better results than the market, whether the Dow or S&P500, as measured from trough till now.

And here is another point. It appears that many of us were shuffling money around in the last 2 years. Call it market timing or "rebalance" as you wish, but we as a group did quite a bit of that with various results.

Look at the S&P500, which peaked in Oct 07 at around 1550. The bottom was in March 09, at 735. It is now at 1145.

Now, suppose a person has 50% in SP500, and 50% in low yielding bond or cash at the top of the market. Suppose further that she did nothing and held on without adding money nor withdrawing. At the bottom of 09, she would be down 26% relative to the top in 07. At this point, she would still be down 13%.

Compared to the above, it looks like most people here were down more than 26%, and yet, recover at this point to better than 13%.

I therefore conclude that we as a group hold stocks with a higher beta than the S&P500. Either that, or our "rebalance" hurt us during the downdraft but helped during the upswing somehow. Comments?

I was in accumulation phase so I did deposit almost 2% of my present portfolio, and didn't withdraw my 3.5%, but more than that - - I had a financial plan and I stuck to it, even when people were talking about taking all of their money out of the market because this time is different, and so on. My plan was to DCA my inheritance from Vanguard money market into Vanguard equity and bond funds throughout the year, which I did. During much of that time the market was way down, which is why my portfolio increased more than just the sum of my 2% contributions plus 3.5% withdrawals that I didn't take. You don't have to hit the bottom precisely to benefit from investing in a nasty bear market.

Although my transactions had the same effect as market timing the result wasn't really due to market timing at all but just the boring process of following my plan. Actually, it was not nearly as boring as I had expected. It was hair-raising, and I was scared to death! But luckily it's what you do, not what you feel, that counts.

 

[LOL!]

Nest egg is higher than it was in 2/2007 and in 8/2008, but still about 10% below the 10/2007 high point. It will get back there eventually --- only to drop again.

Certainly an all-stock portfolio suffered more than one with a significant amount of bonds. Also folks in the accumulation phase may be back to highs easily especially if annual contributions amount to more than 5% of the portfolio or an inheritance or lottery showed up. Folks in the decumulation phase or with very large portfolios may be a little less recovered.

I suspect most folks on this forum are near or in the decumulation phase, so that they have at least 30% fixed income. If they didn't in 10/2007, maybe they do now.

 

[NW-Bound]

And the S&P500 is a really narrow slice of the market. Other equity asset classes had quite different downdrafts and recoveries.

Yet, the S&P 500 captures a huge portion of all US equities. I do not know the percentage, but remember reading that it was something like 80% market capitalization of all US equities. The S&P represents 80% of the stock market wealth!

So, if you beat the S&P 500, you beat a majority of pension fund and MF managers out there. You have found your way into the winning "other" equities, which are of course again only a portion of the remaining 20% US equities. Let's say that of the 20% market cap outside the S&P500, half beat it and half trailed it. Then, is it reasonable to assume that many of us have found a way to concentrate our portfolio into that good 10%?

By the way, you are right about the more volatile corporate bonds. I have little of that and was thinking of the super-safe government bond funds that I held.

I was in accumulation phase so I did deposit almost 2% of my present portfolio, and didn't withdraw my 3.5%, but more than that - - I had a financial plan and I stuck to it, even when people were talking about taking all of their money out of the market because this time is different, and so on. My plan was to DCA my inheritance from Vanguard money market into Vanguard equity and bond funds throughout the year, which I did. During much of that time the market was way down, which is why my portfolio increased so much more than the S&P. You don't have to hit the bottom precisely to benefit from investing in a down market.

Although my transactions had the same effect as market timing the result wasn't really due to market timing at all but just the boring process of following my plan. Actually, it was not nearly as boring as I had expected. It was hair-raising, and I was scared to death! But luckily it's what you do, not what you feel, that counts.

If you added to the portfolio during the downdraft, you would do well as many of our younger members have done.

However, I was comparing the typical poster here to an investor who did nothing. Such an investor would do better at the bottom, but would not recover as well. I believe that Bogle recommends rebalancing very infrequently, if at all. My hypothetical "lazy" investor would fit Bogle's model. No?

 

[audreyh1]

Yet, the S&P 500 captures a huge portion of all US equities. I do not know the percentage, but remember reading that it was something like 80% market capitalization of all US equities. The S&P represents 80% of the stock market wealth!

It may, but it is still just a slice, and it's a market cap weighted slice which may make it work quite differently from many mutual funds. REITs, international, small-cap, mid-cap, value-bias - an individual investor can have much bigger slices of those in his allocation and so have his portfolio behave quite differently.

I certainly saw this during most of the 2000s when it was so easy to beat the S&P500.

And only the bond funds which had pretty low exposure to corporate and foreign debt didn't get hurt in 2008/2009. Most broadly diversified bond funds did - even those invested in top quality corporates.

Audrey

 

[NW-Bound]

It may, but it is still just a slice, and it's a market cap weighted slice which may make it work quite differently from many mutual funds. REITs, international, small-cap, mid-cap, value-bias - an individual investor can have much bigger slices of those in his allocation and so have his portfolio behave quite differently.

Yes, but by definition only a small portion of all investors' money can be outside of the S&P500. The situation is similar to a poll where 75% or such of the people polled said they are better than the average driver. It just cannot be true.

My point again is that only a minority can be outside of the S&P500, and in the right slice at that, in order to beat it. And several here are in that minority. But many other forum members still remain silent.

 

[W2R]

If you added to the portfolio during the downdraft, you would do well as many of our younger members have done.

I didn't ADD to the portfolio, other than the 1.x% I mentioned - - only a small fraction of the gain that my portfolio experienced during this time. Had I added nothing I would still have experienced considerable gain.

I slowly moved my investments from one fund in my portfolio into others according to my plan. That is what resulted in the gain.

 

[audreyh1]

Yes, but by definition only a small portion of all investors' money can be outside of the S&P500. The situation is similar to a poll where 75% or such of the people polled said they are better than the average driver. It just cannot be true.

My point again is that only a minority can be outside of the S&P500, and in the right slice at that, in order to beat it. And several here are in that minority. But many other forum members still remain silent.

I guess I just don't get your argument, or think your "definition" applies to that extent. The S&P500 is a small number of stocks compared to total number of stocks available to the average investor through mutual funds. And then there is the weighting of the S&P500 which also makes a big difference in terms of behavior and makes it much more concentrated in an even smaller number of stocks.

I just know that during most of the 2000s, my portfolio - even the equity only portion of my portfolio - behaved quite differently than the S&P500, so I just don't think it matters how big the market cap of the S&P500 companies is for the investors on this forum.

Audrey

 

[NW-Bound]

Suppose the market consists of only two companies A and B. A has 100 shares outstanding at $8/share. B has 10 shares outstanding at $20/share. The total "market wealth" is $8x100+$20x10 = $1000. A represents 80% of the total market cap. B represents the remaining 20% of the "wealth".

An investor is free to choose any mix of A and B she wants, and our smart investor chooses to buy only B.

Now, suppose company B outperforms company A. By definition, our smart investor, by owning only B, will outperform 80% of the "money" out there, the money owned by the other not-as-smart investors. She is definitely in the minority.

The S&P 500 consists of only 500 companies out of something like 7,000 publicly traded companies, but their total market capitalization dwarves the other remaining bitty companies. The majority of the "money" is in the S&P500.

Actually, one does not have to go outside the S&P500 to beat it. She can choose the "good" sectors inside it. Either way, she beats the "majority" of the money. And that, according to the market efficiency theorists, is very hard to do consistently.

 

[Meadbh]

I suspect most folks on this forum are near or in the decumulation phase, so that they have at least 30% fixed income. If they didn't in 10/2007, maybe they do now.

20% actually (compared with 25% in 2007). But I have added other asset classes.

 

[Meadbh]

The S&P500 is a small number of stocks compared to total number of stocks available to the average investor through mutual funds. And then there is the weighting of the S&P500 which also makes a big difference in terms of behavior and makes it much more concentrated in an even smaller number of stocks.

Agreed. The S&P500, being defined on market capitalization, is biased towards large corporations, which are less likely to be growth stocks. Some of them, like GM, are shrinkage stocks.

 

[Maurice]

I therefore conclude that we as a group hold stocks with a higher beta than the S&P500. Either that, or our "rebalance" hurt us during the downdraft but helped during the upswing somehow. Comments?

In my case the furthest I was ever down off my peak was 29%. My peak was later than the markets peak, because I had a significant contribution in Feb 08. I also paid off my mortgage in July of 2008, using proceeds from stock sales, so there was some fortuitous (if unintentional) market timing there.



But in general I do think rebalancing is a huge factor. The 08-09 market proved its wisdom as far as I'm concerned, it actually forced me to buy low.

So I'm not surprised that people who rebalance formulaically beat the market. The losers would have been those poor folks who got scared last winter and sold to 'stop the losses'.


Having said all that, I agree the thread would naturally show some selection bias. Those who have recovered, or almost recovered, are far more likely to tell others about it than those who haven't.

 

[audreyh1]

Actually, one does not have to go outside the S&P500 to beat it. She can choose the "good" sectors inside it. Either way, she beats the "majority" of the money. And that, according to the market efficiency theorists, is very hard to do consistently.

Yes, that's true too. You can own plenty of the stocks in the S&P500, but if you have a different weighting/allocation of them and/or you buy some and sell others you will have a different performance during any given year.

Lots of mutual funds behave differently than the S&P500.

It was fairly easy to beat the S&P500 during the 2000s simply by being more diversified. The S&P500 is dominated by large-cap growth stocks. Large-cap growth stocks performed poorly during most of the 2000s, beaten by mid-cap, small-cap, value and REIT asset classes most years. If you had an allocation that gave a larger weighting to those asset classes than the S&P500 did, you probably outperformed the S&P500.

During the 90s, the large-cap growth stock asset class was the major outperformer, so a more diversified portfolio tended to underperform the S&P500 during that decade - sometimes by a wide margin.

It's been pretty well established that the asset class choices/weightings determine most of the performance of a given portfolio. This theory said nothing about where most of the $$$ in the total market were invested, so I don't see how that has anything to do with predicting performance of a given portfolio, and I have read no theory that says it does.

I don't know what believing in market efficiency theory or not has to do with anything. Different asset classes go through different cycles and you can't predict which asset class will outperform in any given year which is why people who use AA usually rebalance versus using some market timing method.

Audrey

 

[audreyh1]

Also, many posters have stated they were making contributions to their portfolios during this time period and it seems the folks closest to matching their Oct 2007 (or whenever) prior peak value are the ones who added during the period.

Adding money to your portfolio would also cause a difference in outcome compared to the S&P500.

Audrey

 

[audreyh1]

Look at the S&P500, which peaked in Oct 07 at around 1550. The bottom was in March 09, at 735. It is now at 1145.

Now, suppose a person has 50% in SP500, and 50% in low yielding bond or cash at the top of the market. Suppose further that she did nothing and held on without adding money nor withdrawing. At the bottom of 09, she would be down 26% relative to the top in 07. At this point, she would still be down 13%.

BTW, the S&P bottomed (closed) on March 9 2009 at 677.

And since both bonds and the S&P500 paid dividends over this entire period (bonds weren't super low yielding until recently), I'm not sure that you reasonably accurately compare the gains and losses over those periods without including the dividends.

Audrey

 

[rescueme]

Those who have recovered, or almost recovered, are far more likely to tell others about it than those who haven't.

I would agree. I don't have a problem with admitting that I'm still down -12.24% (when measured from 1/1/08 through Friday), but I also know that I did not adjust my returns based upon new/added money (since I'm retired). I also did not include the value of my MM (e.g. retirement cash bucket) accounts, used for current retirement income. My return for the period only reflects the return on the equity/bond portion of my retirement portfolio. BTW, my DW's retirement portfoio (measured in the same manner) is down -3.21% for the same period.

For me, what has happened in the last year (or several), mean little. By looking at my spreadsheet from my Traditional/Roth contributions over the last 20 years, it shows that I (along with my DW) have had positive returns (XIRR computed) 17 years, with losses in three. Average return over that 20 years is +9.18% for me, +8.21% for my wife (her portfolio is a bit more conserative). For me, it's the long term history that is important beyond recent (e.g. several years) market flux.

 

[LOL!]

Vanguard has updated its benchmark page to reflect 12/31/2009 prices.
https://personal.vanguard.com/us/funds/tools/benchmarkreturns

It looks like growth did better than value in recent years.

 

[audreyh1]

Yes, value has definitely underperformed recently. My large value funds sure trailed - it was painfully noticeable! All that finance company stock dotcha know!

Thanks for the handy link!

Audrey

 

[brewer12345]

The question was have you recovered. Nothing was asked about the depth of one's plunge and the level of risk one took. I believe that at the depths I was down in the region of 60% (did not look too closely, but it was pretty far down). When I was down there I took extremely aggressive actions (how many of you borrowed money to invest? how many doubled and tripled and quadrupled down on stocks that had lost 70 to 90%?). Fortunately I was rewarded for these actions, but they were very risky. Would I have been happier to still be down mid to high single digits if my bottom had been down 25%? Absolutely.

The lessons for me of this mess have been very clear, and I am taking the appropriate actions based on lessons learned. Sure, I am back to my peak, but it was not a fun ride by any stretch of the imagination. Never again.

 

[audreyh1]

I believe that at the depths I was down in the region of 60% (did not look too closely, but it was pretty far down). When I was down there I took extremely aggressive actions (how many of you borrowed money to invest? how many doubled and tripled and quadrupled down on stocks that had lost 70 to 90%?).

Brewer, it took every last drop of courage I had to rebalance (again) into stocks on 1/15/09 - especially since I had caught a falling knife (rebalanced to buy stocks) twice during 2008.

And I had to constantly remind myself that I had still 12 years left in cash/bonds to keep from panicking.

I can't imagine doing what you did - especially since I have no incoming wage to keep building the nest egg! That's great that it worked out so well for you, congratulations.

The lessons for me of this mess have been very clear, and I am taking the appropriate actions based on lessons learned. Sure, I am back to my peak, but it was not a fun ride by any stretch of the imagination. Never again.

When you say "never again" what do you mean exactly? Do you think you can anticipate the next time something like this happens and take action ahead of time? Or have you changed your investment approach?

I'm pretty nervous about another blow up (with little recovery) in just a few years if we don't have some serious structural changes in our financial system.

Audrey

 

[brewer12345]

When you say "never again" what do you mean exactly? Do you think you can anticipate the next time something like this happens and take action ahead of time? Or have you changed your investment approach?

I'm pretty nervous about another blow up (with little recovery) in just a few years if we don't have some serious structural changes in our financial system.

Audrey

I was unemployed until 12/08, so it was a scary time. I took some actions while I was on the street, but mostly did what I did once I knew I had a stable job and could ride things out or even start over if need be.

I am in the process of changing both my investment approach and my total financial picture to avoid the risk of another disaster. I sold off appreciated investments (individual corporates) to pay off my borrowed investment money, used some proceeds to further delever (blow out the car loan and a small student loan), keep more cash and fixed income around, refinanced to a cheaper mortgage that has a scheduled payment of less than 40% of what my old note was, and have become a lot more disciplined about when to sell investments (individual names). I also started tracking asset allocation, individual name and sector concentrations, and total net worth/indebtedness/overhead cashflow requirements in a more disciplined fashion.

As things recover to more reasonable valuation levels, I will be selling down my concentrated positions and redeploying the proceeds to debt paydown and a more diversified, less volatile portfolio mixture. I also now work for an employer that cannot go out of business and which offers a COLAd pension and very generous benefits if I can stand to stay here for the long term (can qualify for pension payments and subsidized retiree healthcare if I stay til age 50).

The 5 year plan is to have the portfolio completely remade and to have all debt (including the mortgage) gone, and have a wad of readily accessible cash (and CDs, etc.) at hand. I have gotten to the point where I care more about the certainty of getting to ER than the speed of such, and if I stay with my current employer I know with a high degree of certainty that I will get there by age 50, which is about the same time both kids will be launched to college. Since we do not plan on staying in our current area after retiring but do not really want to uproot the kids, this seems like a reasonable plan.

In short, when I say "never again" I mean that I never want to be staring down into my own personal financial abyss ever again.

As an aside, I am pretty sanguine about the recovery. All the data points that way and I am tilted toward the stronger economies that are recovering more quickly (China, India, Brazil), which gives me more confidence.

 

[LOL!]

On the topic of S&P500: A Fama & French / Merriman / DFA style slice & dice portfolio would have only 25% of equities in US large cap funds such as those in the S&P 500. 75% of the equities in such a portfolio would not be in the S&P500.

Instead the equity portion of the portfolio would be filled out with 25% US small cap, 25% large cap foreign and 25% small cap foreign.

While I do not think everyone on this forum is a slice-and-dicer, I think many more people tilt towards that way than they do towards total-market-index+little-foreign.

 

[LOL!]

..., so that they have at least 30% fixed income. If they didn't in 10/2007, maybe they do now.

It seems that brewer may be one of these folks with more fixed income now.

 

[ikubak]

Fully recovered and about 15% above the previous peak. This is the result of the contributions during the downturn and regular savings. Hopefully this next decade will be better than the last.

 

[skyvue]

I am finally back to where I was in Oct 2007. This is due to a lot of my own contributions as the individual funds aren't back yet to where they used to be. I never moved any money out of the market or my mutual funds during the downturn but I did change my new investments to be more conservative. I suppose if I had not done that I might be in a slightly better spot right now. However, the severe crash has changed me and I am less comfortable with risk than I used to be. When/if the market returns to the 2007 highs, I plan to rebalance all existing money into a more conservative picture (80% in stocks today).