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learning from this market
Old 08-16-2007, 09:54 AM   #1
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learning from this market

I finally worked up the courage to look at our accounts yesterday after the market close. Down ~5% since 7/31.

We're both early semi-retirees (50 & 43). Asset allocation is very much along the lines of ESRBob's RIP portfolio: 40% equities (DFA funds, with typical value and international exposure), 13% (20% before this market turn) combined Vanguard REIT Index, DJP (commodities), Canadian Oil and Gas Royalty trusts, 52% bonds and cash (short-ish maturities, good chunk of non-US$ exposure)

All the reading I've done says we need at least this much allocation to equities to continue to take out ~4% annually given our relatively young ages. If we had the assets we'd doubtless be 75% fixed income, but 4% a year from that would prob. have us eating Alpo long before SS kicks in.

The currrent downturn has us spooked, perhaps largely because the advisor we access the DFA funds through has been talking Armageddon doom-and gloom for a year now and predicting exactly the sort of liquidity meltdown we've been seeing as the opening act. Seeing all these supposedly uncorrelated asset classes tank at once adds to the queasiness.

Have been rereading Errold Moody's "No Nonsense Finance" where he talks about DCAD ("Dollar Cost Averaging Down") - basically a stop-loss strategy where you have set bail out points for equities should their tanking continue on long past a "correction."

I realize I'm wading into old controversy here, but with even John Bogle bailing on "buy and hold" during the dot.com bust there's plenty of precedent. To put it another way, these may not be the unprecedented market conditions that would cause one to deviate from buy & hold, but they're making me think I ought to have a clearer plan in place for when correction turns into catastrophe. Anyone have any recommendations on books or other resources that address this?

AND, lest I forget (again) - thank you very much to all who post here. I've learned so much from this board and value it very highly.
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Old 08-16-2007, 10:25 AM   #2
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By cracky - it's time to get out the old Red Ryder notebook(anybody remember grade school?) and the no. 2 pencil.

Two quicky's: 1) Psssst Wellesley and 2) the current yield of your portfolio is >4% right?

Sooo - old school says you rock up and adjust your portfolio with a value tilt until your yield(divd and interest) covers expenses - and DO NOT couple it with inflation.

The modern portfolio - rebalances to your preselected asset classes and % according to your written policy statement. Stay the course, faith in history, revision to the mean and all that rot.

Riiiight!

Heh heh heh - young at heart Target Retirement 2015(age 64 - 14th year of ER) and 15% dividend type Norwegian widow stocks. 40% of income from pension/early SS, 60% from portfolio. Ballpark 3% current yield, taking 5% varible out. So perhaps some Micheal Jordon shorts(non white) is case I lose the grip in coming years - eh! Soldier on - hindsight will reveal everything.
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Old 08-16-2007, 10:38 AM   #3
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Quote:
Originally Posted by kevink View Post
Seeing all these supposedly uncorrelated asset classes tank at once adds to the queasiness.
I make jokes about underwear - but I believe(although I can't find it handy) - the Warren Buffett quote relative to times like this - 'oversexed teenager in a whorehouse'.

ie - time to go shopping.

I'm holding out till fall with my mad money and I like the full automatic of Target(after being my own genius for forty years).

heh heh heh - I think the Bernstein quote is 'every 25 years or so the markets just go plain bonkers'. or something like that.
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thanks for the real world perspective
Old 08-16-2007, 10:55 AM   #4
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thanks for the real world perspective

Hi Unclemick,

14+ years of real world experience with ER is something I really admire!
I like the Vanguard Target Funds (and Vanguard generally) very much, too. I see Target 2015 is 60:40 stocks:bonds, with just a smattering of international. I'd be find with it too if I had 40% of income coming in from pension, etc. but for us it's portfolio only with no safety net.

Guess if you don't like volatility better to keep most of the $ in illiquid stuff (maybe a couple of duplexes in Florida - RE is looking mighty illiquid at the moment).

K.
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Old 08-16-2007, 11:22 AM   #5
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kevink,

I have Moody's book, too, and really enjoyed it. Lots of good stuff. I remembering his DCAD, and thought it made sense. But once you start yanking $$ out, when you do you decide to get back in. I don't have all of the experience/insight that he does, so where does that leave me? I got hung-up on that part of it.
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Old 08-16-2007, 12:53 PM   #6
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What I don't get is: Do people expect the market to go in one direction - UP?
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Old 08-16-2007, 01:53 PM   #7
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Quote:
Originally Posted by unclemick View Post
Sooo - old school says you rock up and adjust your portfolio with a value tilt until your yield(divd and interest) covers expenses - and DO NOT couple it with inflation.
unclemick, what do you mean by the bolded phrase? :confused:
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Old 08-16-2007, 02:42 PM   #8
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I remember the 1970's and 80's where trying to increase portfolio withdrawals to compensate for inflation or buying and selling asset classes to 'catch up' was difficult. Taking what Mr Market gave you and working the expense side of the ledger was more productive. Play some games with FireCalc where you retire in the 60's and set the 30 year or so span thru the 70's and 80's - and you can see some of the effects.

I of course was working in those days - but 'The Man' did not automatically give me a large pay increase due to inflation - so I did feel some of the effects.

heh heh heh - long term dividends have a tendency to be competative against inflation. Interest rates
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Old 08-16-2007, 05:01 PM   #9
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Originally Posted by unclemick View Post
I remember the 1970's and 80's where trying to increase portfolio withdrawals to compensate for inflation or buying and selling asset classes to 'catch up' was difficult. Taking what Mr Market gave you and working the expense side of the ledger was more productive.
Ah, tightening the belt...gotta lessen the appetite and get the waist skinny to do this, figuratively speaking.

Thanks for explaining.
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