In retrospect: How Did You Handle The Crashes?

[marko]

What has worked for me to do nothing other than some buying during downturns is to ensure my portfolio throws off more than enough cash to meet my "needs" budget. That puts my portfolio tilted more towards income than growth and likely reducing long term total return but I enjoy life a lot more knowing I won't be forced to sell while at the same time generating decent capital appreciation.

Heard this quote today: "...sometimes a fund wins by not losing..." (as in the case of many bond funds etc)

 

[pb4uski]

A question for those who were already retired during the 2001 or 2008 market crashes...

How did you handle them? I'm talking both financially and emotionally. Had you dialed down the risk in your asset allocation so that your losses were moderated? Dd you cut expenses further?

I'm just realizing that as a 30 something I have the luxury of saying "great, a buying opportunity" when things go south, but when you're living off those investments I imagine the stakes are much higher, and scarier. It must take guts.

Given that we're likely to go through similar events in the future as we retire, any lessons learned?

Appreciate it.

SIS

Stayed the course in 2001. Pretty much the same in 2008, though my AA was significantly off target and I should have sold bonds and purchased equities but I just didn't have the courage to do so but I didn't bail out on equities.

 

[ShortInSeattle]

Thanks for the replies everyone. Very useful and interesting.

SIS

 

[heyyou]

CRS

With quarterly statements and busy at work, 1987 was a non-event to me. I literally did not know that something had happened. In 2000, my large caps dived but I just kept buying them and small caps in my 401k. I was saving and investing almost half a multiple of my annual retirement expenses per year by then.

Luckily sold the paid off larger house to build a small retirement house early in 2005, then retired.

Didn't do much in 2008 because I was stunned. Laid awake some, knowing we were still better off than many, partly due to financial assets, and knowing that we are more adaptable to lower income than some people. Our self-esteem and happiness is not based on buying or owning more stuff than the neighbors.

 

[Huston55]

Stayed the course in 2001. Pretty much the same in 2008, though my AA was significantly off target and I should have sold bonds and purchased equities but I just didn't have the courage to do so but I didn't bail out on equities.

We did pretty much the same. But, I have to say that the second time around (2008), when we were 7 yrs older, it was more of a white knuckle ride. Our portfolio came through fine but, with a mix of angst and sticktuitiveness (the dominant one depending on the week). AA is now 60/35/5.

 

[easysurfer]

With quarterly statements and busy at work, 1987 was a non-event to me. I literally did not know that something had happened. In 2000, my large caps dived but I just kept buying them and small caps in my 401k. I was saving and investing almost half a multiple of my annual retirement expenses per year by then.

Luckily sold the paid off larger house to build a small retirement house early in 2005, then retired.

Didn't do much in 2008 because I was stunned. Laid awake some, knowing we were still better off than many, partly due to financial assets, and knowing that we are more adaptable to lower income than some people. Our self-esteem and happiness is not based on buying or owning more stuff than the neighbors.

1987 was before my investment days. I to was too busy with work to notice. I do remember some co-w*rkers in a panic. A couple of them came up to me and asked, are you gonna sell? I said something like "I don't invest in the market, have everything in cash" and they thought I was a genius .

I didn't really start investing until around 1989. In retrospect, wish I did sooner.

 

[Lsbcal]

In 2008 I was a buy-hold investor. We were at 55/45 AA. That changed to 40/60 at the market low in March 2009. I neither added equity money nor sold. Rebalanced in July 2009 to 55/45.

Major strategy changes going forward:
1) Current AA is 65/35, partly because of low bond real rates.
2) Have a very heavily research timing methodology. As an example, it would have been out of the market entirely in Dec 2007 and back in May 2009. Of course, that was the past. I'm not expecting that this will work 100% in the future. It is a risk reduction strategy first, maybe beat the market if I'm lucky.
3) The timing methodology includes moving some assets between US and international. Currently 100% US. So far, so good.
4) Bond timing for intermediate bonds moves between a bond fund like Vanguard Total Bond Mkt, Intermediate Treasuries, and cash. It has worked decently in the past but is not expected to work always over the short term (a few months).

Most people are better off with buy-hold. I'm probably not.

 

[Huston55]

In 2008 I was a buy-hold investor. We were at 55/45 AA. That changed to 40/60 at the market low in March 2009. I neither added equity money nor sold. Rebalanced in July 2009 to 55/45.

Ouch, 45% drop in equities. Takes fortitude to get thru that.

 

[friar1610]

It's a different story with my Dad's assets. I have no credible reason to take risks on his behalf. I've been selling off his expensive mutual funds (for decades-long capital gains) and socking the money away in CDs. He's at 40% equities now (down from 85%) and could stand to go down to 25%. I should probably sell more into the rest of this year, especially if share prices keep going up.

My spouse and I should probably do the same with our own assets over the next 30 years, but we just haven't addressed that conundrum yet...

Nords,

Would you mind telling us how old your Dad is? Right now my wife and I are a bit over 40% equities. I've set 40% - 45% as my desired equity allocation. Although I haven't made any actual moves, I have a frequent discussions with myself. On one hand, I think I should be higher in equities because my guaranteed flow of income is very stable and I can afford to take a bit more equity risk. On the other hand I think I should be where I am or perhaps lower on the equity side because my guaranteed flow of income means I don't have to take more equity risk. I'll probably just stay where I am but it would be interesting to know where your Dad is age-wise given that he has approximately the same AA as I do. (Disclosure: I'm 67; spouse is 65.)

If someone will just tell me where the market is headed for the next 5 years, I'm sure I can resolve that dilemma.




Edit: I just read the thread regarding Nords' experience with PenFed on behalf of his Dad. As a result I see that his situation is markedly different from mine and therefore decisions on AA are obviously quite different. Just ignore the original question.

 

[Lsbcal]

...(snip)...
If someone will just tell me where the market is headed for the next 5 years, I'm sure I can resolve that dilemma.

Most likely 5 years from now the market will be well up from here. But along the way there could be bumps in the road. Who knows.

I think you have to consider your own tolerance for risk when considering your AA. It is tempting to try to find a consensus among your age group but that would be a mental trap. BTW, I'm close to your age. Another way to handle this would be to define a part of your equity allocation that you would sell should some event be reach like (1) bonds reach historical real rate territories, or (2) equities climb to high valuations and businesses are doing very well.

 

[friar1610]

I think you have to consider your own tolerance for risk when considering your AA. It is tempting to try to find a consensus among your age group but that would be a mental trap. BTW, I'm close to your age. Another way to handle this would be to define a part of your equity allocation that you would sell should some event be reach like (1) bonds reach historical real rate territories, or (2) equities climb to high valuations and businesses are doing very well.

Oh yeah; I understand that. I just think it's interesting to learn how others in more or less the same boat handle things.

 

[Nords]

Although I haven't made any actual moves, I have a frequent discussions with myself. On one hand, I think I should be higher in equities because my guaranteed flow of income is very stable and I can afford to take a bit more equity risk. On the other hand I think I should be where I am or perhaps lower on the equity side because my guaranteed flow of income means I don't have to take more equity risk.
If someone will just tell me where the market is headed for the next 5 years, I'm sure I can resolve that dilemma.

You've framed a very good question, but I've never found an answer.

Even if we know where the market will be in five years, how much more money do we really need to risk for that goal?

The best answer I've been able to come up with is "diversify". When I convert my pension (and my spouse's pension) into the equivalent of TIPS or I bonds, it totally overwhelms our equity asset allocation. So I know that we don't need to invest in bonds because we're already way overloaded in annuitized income. The only other asset classes that I'm aware of which will keep up with inflation appear to be real estate and equities. There doesn't seem to be a need to have two of every asset class in existence, so we're not investing in commodities or gold or other "fringe" asset classes. We have a rental home, we keep enough cash in CDs to fund two years of living expenses, and we have the rest of our liquid assets in equities.

We take some extreme risks with a portion of our equities (selling call/put options, investing in startup companies) but again we try to limit the allocation that we put at risk. The purpose of investing in those asset classes is mainly to make sure that I understand them now and am not tempted by them when I'm in my 70s.

I can see that in 10-20 years we'll even have sold off our Berkshire Hathaway* shares in favor of an equity portfolio that's a third in a dividend ETF, a third in an international ETF, and a third in a small-cap value ETF. Maybe by then our startup companies will have had their "liquidity events", too.

*When Berkshire starts paying a dividend, we're keeping those shares forever.

 

[Danmar]

Thanks for the replies everyone. Very useful and interesting.

SIS

keep in mind it is a lot easier and fun to talk about this period if the financial hit was small, or non existant. Not representative of course.

 

[Danmar]

@Friar 610. I don't think there is a right answer to your question. I am in a similar position. Our pensions cover our basic needs. Could live very nicely on a fixed income type return on the portfolio but how much fun would that be? i have a natural disposition to take equity risk. That is after all how I got to our enviable current position. Really depends on your risk tolerance.

 

[Huston55]

The best answer I've been able to come up with is "diversify". When I convert my pension (and my spouse's pension) into the equivalent of TIPS or I bonds, it totally overwhelms our equity asset allocation. So I know that we don't need to invest in bonds because we're already way overloaded in annuitized income. The only other asset classes that I'm aware of which will keep up with inflation appear to be real estate and equities. There doesn't seem to be a need to have two of every asset class in existence, so we're not investing in commodities or gold or other "fringe" asset classes. We have a rental home, we keep enough cash in CDs to fund two years of living expenses, and we have the rest of our liquid assets in equities. [/SIZE]

Nords-

Do you keep 2 yrs of total expenses in cash or, 2 yrs of remaining (after accounting for guaranteed income like pensions) expenses?

I'm thinking of the Galeno model, which says keep 6 yrs of expenses (a little too much in my view) and wondering why you decided on 2 yrs.

 

[jerome]

I retired involuntarily in may 2007, so the crash of 2008 was very relevant to me. And it was a big break for us. I was very lucky in that I moved out of 90% of my equities in march 2007 due to the concerns I had with the sub-prime situation in the US. Not because I was wise but because I was reading and believing Moneyweek and a couple of internet sites. I dipped my toes in the market in March 2008, which was faaaaaar to early and lost some money. So I waited another year and re-entered with all my money in March 2009, which was a very lucky timing. I more than doubled my money in 2009. But more importantly, I now had enough shares to be able to live on the dividend alone. Since 2010 I have a stable portfolio of high dividend shares and I now wait out the rest of the storm. Most of our money is invested in shares and we have a 20 month emergency buffer. We are not rich, living on about 3k a month with 2 adults and 5 kids, and living in a small house, but it is mine. The money my wife makes in addition with her business is mostly put into a college-fund for the kids and a retirement fund. And we spend some of that extra money on silly things. Happy? Yes! Bored? Never! (5 kids aged between 14 and 0 take care of that) Back to work? Never!

 

[friar1610]

Nords-



I'm thinking of the Galeno model, which says keep 6 yrs of expenses (a little too much in my view) and wondering why you decided on 2 yrs.

Just out of curiosity, is Galeno actively posting anywhere now? I used to enjoy his posts on the old Motley Fool Retire Early Home Page years ago. He was a bit irreverent and annoy you at times, but his posts were entertaining and his financial advice pretty sound.

 

[Nords]

Do you keep 2 yrs of total expenses in cash or, 2 yrs of remaining (after accounting for guaranteed income like pensions) expenses?

We just keep two years of cash on hand to cover the gap between our income (pension, dividends, net rental income, selling call/put options) and our spending.

We keep one year of that cash in a money market account, and we keep the second year of it in a five-year CD ladder. At the end of the first year, we sell off some equities to replenish the money market. If the market is down and there's no equity gains to support the replenishment, then we grit our teeth and start spending out of the five-year CD ladder. When the market comes back, then we replenish the money market and rebuild the CD ladder.

We picked two years of cash because that's the length of most (most) bear markets. We picked a five-year ladder because we figure we'll only be breaking into it a couple times a decade.

When we started this system, PenFed only had a six-month early-redemption penalty on five-year CDs. They've since raised it to 12 months, so we might cut back from a five-year ladder to three. Considering today's interest rates, the dollar difference hasn't been enough to get excited about.

 

[Huston55]

Just out of curiosity, is Galeno actively posting anywhere now? I used to enjoy his posts on the old Motley Fool Retire Early Home Page years ago. He was a bit irreverent and annoy you at times, but his posts were entertaining and his financial advice pretty sound.

Friar-

Not that I know of. I learned of him from an old " best of" post on this site.