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What I learned Part II - My Investment Strategy
Old 05-10-2009, 10:07 PM   #61
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What I learned Part II - My Investment Strategy

What I learned - some details per my specific investing strategy:
  • My AA worked OK. I had let my equity allocation gradually drift upwards in 2006-2007 mainly because I was annoyed with the distributions being thrown off by my portfolio, and a higher equity allocation was slightly more tax efficient. The drift was tiny - just 55% to 58%. After this debacle I decided that such a drift was not a good idea, that I should be lowering my risk over time, and that once I reach 55 I will probably lower my equity exposure 1% per year.

  • I was shocked by how many times my rebalance triggers fired in 2008, it used to take a pretty good divergence! I rebalanced in July of 2008, and again in October even though I decided to wait for a wider margin for out-of-balance. Came very close again in Nov, but I decided to wait until mid Jan when I usually have to deal with distributions and taxes in my portfolio. I rebalanced in Jan. Triggered again in March, but recovered so fast that I didn't bother. If this rally continues (knock on wood), I will be rebalancing again soon - but fortunately on the recovery! I'm keeping my wider margin, but it still has my head spinning! Still, whether this is a bear market rally or the start of a new bull (who knows!?!) rebalancing on the up is a way to protect myself against possible future declines.

  • I ran up against my minimum bar of years needs in cash+bonds in my portfolio that I had established early in my investing plan. I never expected this to happen - or certainly hoped it wouldn't. I had initially set the bar at 10 years living expenses. When I started getting close in Oct 2008 and Jan 2009, I decided to keep it at 12 years, so that if things deteriorated further I would have more ammunition for rebalancing if I wanted. This limit then forced my hand in terms of my equity allocation. Late Oct of 2008, I could only rebalance to 56% without going below the 12 year limit. Mid-Jan of 2009 it forced the equity allocation down to 55%. I've decided that I will stick with 55% on the way (hopefully) up, and then in a few years start the gradual reduction of my equity allocation over time.

  • If I hadn't topped off my short term cash fund (outside of the AA portfolio) to 3 years of living expenses in mid 2008, I would have sat there like a deer in the headlights. Knowing that I shouldn't need to draw from my retirement portfolio until late 2010 at the earliest gave me the comfort level I needed to catch all those falling knives! And boy did I catch some, but it doesn't bother me because I figure they will eventually pay off.

  • I was really surprised and disappointed with the performance of my bond funds during this time period. In particular my core bond fund DODIX. These bond funds got hit hard at the same time my equity funds were creamed, so my portfolio suffered overall and rebalancing wasn't nearly so rewarding. And it meant I hit my minimum cash+bonds limit more quickly that I might have. I had no idea that DODIX has such a low exposure to Treasuries. Fortunately I went into this bear market with a relatively high allocation to cash in the portfolio - 10% - so that helped with the rebalancing. Even though DODIX ended up flat for 2008 and has performed very nicely year-to-date, I am looking for a core bond fund that is less correlated with my equity bond funds. Right now VBISX is looking like what I need - very high quality short duration bond fund less correlated to equity funds (as recommended by Armstrong). I will gradually transition over.

Audrey
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Old 05-11-2009, 08:47 AM   #62
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I learned that my Grandpa with only a fourth grade education was much more intelligent than I imagined. Many times he told me; stay out of debt, do not put all of your eggs in one basket and find pleasure in simple things. That's the way he lived his life.
That's another thing I've learned: as a society we largely forgot the "money lessons" learned by those who lived through the 1930s, and a lot of people are having to learn those all over again today -- all too often, the hard way.
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Old 05-11-2009, 09:25 AM   #63
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I think that is why these kind of things repeat every 70 years or so. As the generation which really learned the hard way fades away, the lessons learned from the experience is lost to their descendants.

Audrey
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Old 05-11-2009, 09:35 AM   #64
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Good idea for a thread, Brewer.

Here's what I've learned (so far) from this downturn:

1) Asset alloction: my current asset allocation is right for me right now, but I'm reminded of the importance of moving to a more conservative allocation as I get older and closer to FIRE. Not a new concept, but one that we all have a tendency to forget when times are good.

2) Rebalancing: I learned that I'm emotionally OK with ...
(a) watching the value of my portfolio plummet (given that my asset allocation is right for my age)
(b) switching new investments to all-equities to balance out my sinking stock holdings (even though it felt like throwing money down a big black hole, I kept up the contributions and actually switched them to 100% stock index funds back in the fall)

But, I learned that I'm too chicken to ...
(c) actively rebalance existing bond holdings into stocks during a crash like we've seen.

And therefore I'm glad I'm holding a target retirement fund as the core of my portfolio which handles the auto-rebalancing on its own. For whatever reason, I'm OK with watching my prior stock investments crash, and I'm OK with throwing new money into a crashed market, but I'm not able to muster up the courage to sell solid fixed-income assets and rebalance those into stocks after a crash. It doesn't make sense, but emotionally, that's how I reacted.

3) Emergency fund: a six-month emergency fund is not enough for my situation (married w/kids, single-income family), I've decided to keep it at 12 months of post-layoff expenses (which includes COBRA costs).

4) Trusting my gut: I learned that (a) my hunches about market bubbles are worth something but that (b) my tendency is to call the bubble far too early on in the business. What this tells me is that I should factor my beliefs into my long-term investment allocation, but not expect short-term confirmation. (i.e., and it tells me that if I spot a housing bubble and tell my wife over dinner that we should wait until this "crazy situation" corrects itself before buying a house, I should be prepared to wait five years before seeing said correction take place ... and that we'd better be able to factor that into our plans)

5) Misc: it's time to purchase a firearm and learn how to use it properly (but only after the bubble in guns & ammo prices is over); something I've wanted to do for a while anyway but never got around to it.
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Old 05-11-2009, 10:11 AM   #65
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I learned that predictions are unpredictable...
Or, as Yogi said, "It's tough to make predictions, especially about the future".

In terms of personal investing, it means that any investment plan that involves me outguessing the market is bound to fail. Like Lusitan, I call bubbles way too soon. I thought we had "irrational exuberance" even before Greenspan said it.

What I learned is that I shouldn't give up my skepticism and jump in when it looks like "it really is different this time". Fortunately, I didn't, but it was close.
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Old 05-11-2009, 10:53 AM   #66
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I think that is why these kind of things repeat every 70 years or so. As the generation which really learned the hard way fades away, the lessons learned from the experience is lost to their descendants.

Audrey
Give this crash a few years to recover. You still start seeing the posts. That should be the ultimate sell signal

"Why not 100% stocks?!!?"
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Old 05-11-2009, 11:16 AM   #67
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While I think this is a great idea, how do you suggest applying it?

Personally, I don't think we're anywhere near the end of this downturn. I think there is still a large amount of bad news to come, which will result in more significant drops in the various markets. So if you assume "the immediate flames are out", is now the time to be getting back in? I don't think so. However, I could easily be wrong (again). The March bottom may have been it. My point is, how can you know? The only way I can find peace of mind is sticking with my AA and rebalancing schedule, come hell or high water.

Of course, if anyone has a better suggestion that is easy to apply and pretty much foolproof from a future point of view, I'm listening.
You are 100% correct. When I bought in after the 2000-2002-03 fall values looked so-so but better than they had for a very long time. They were, and markets soared. In September 2008, values looked better than they had a for a long time, but that was really just the early stages of a waterfall decline. (And in Sept 2008 by objective measures they were better than in late winter 2003.)


I belive that one can avoid huge mistakes as to valuation, but over time he will never optimize timing.

Ha
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Old 05-11-2009, 11:30 AM   #68
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Give this crash a few years to recover. You still start seeing the posts. That should be the ultimate sell signal

"Why not 100% stocks?!!?"
Quite honestly - I do not expect to see such a post to be common for another 10 years yet. People really got burned badly this time. I think the average joe retail investor will be extremely skeptical about equities going forward. Burned badly twice in 10 years. That's a tough experience to get over. People can become quite irrational about it.

There has been a lot of cash on the sidelines since 2002. Pundits keep remarking on how much cash there is and how it could flow into the market. Well, that cash has kept building during the 2000s and built even more over the past year. I think it will stay on the sidelines for quite a while longer. People are so focused on not getting burned right now.

When that cash finely starts coming off the sidelines in a big way - that is the ultimate sell signal.

Audrey

P.S. Love your new avatar image! I need a sign like that to post inside my home-on-wheels.
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Old 05-11-2009, 11:47 AM   #69
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Quite honestly - I do not expect to see such a post to be common for another 10 years yet. People really got burned badly this time. I think the average joe retail investor will be extremely skeptical about equities going forward. Burned badly twice in 10 years. That's a tough experience to get over. People can become quite irrational about it.
Not only that, but it was possible to avoid getting burned badly in 2000-02 with a large stock allocation IF you were adequately diversified with small caps, emerging markets, REITs, value stocks and perhaps some gold miners.

This most recent bear, on the other hand, was pretty indiscriminate. All equity asset classes -- large and small, growth and value, domestic, developed international and emerging -- got creamed together with an unusually strong correlation.

Speaking of which, there's another lesson learned -- diversification, while definitely useful in the general case, may be of little use in the worst case.
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Old 05-11-2009, 12:03 PM   #70
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Well - if you had a chunk of cash as part of your portfolio AA and owned a US government bond fund like FGOVX as a big part of your bond stake, you did have asset classes that behaved well while every thing else tanked. This was a very good lesson in how different types of bond funds diverge during a crisis.

Audrey
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Old 05-11-2009, 12:12 PM   #71
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All my models of asset allocation, acceptable mortgage debt, and emergency fund size (and source) were based on assumptions that were too optimistic.

I failed to consider the possibility that job loss would occur at the same time as market meltdown at the same time as severe industry contraction - and also at the same time as maximum job burnout. I saw folks get hit by this triple (quadruple?) threat and they sometimes take a LONG time to find work.

What I propose to do about it:

1. stop counting untapped HELOC as part of emergency fund

2. build emergency fund to 4+ years expenses

3. lower equity AA, but only slightly, as I was mostly okay with the idea of riding out the horrible decline and had no urge to sell out at bottom

4. reduce mortgage debt further - ideally to zero asap
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Old 05-11-2009, 12:28 PM   #72
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Well - if you had a chunk of cash as part of your portfolio AA and owned a US government bond fund like FGOVX as a big part of your bond stake, you did have asset classes that behaved well while every thing else tanked. This was a very good lesson in how different types of bond funds diverge during a crisis.

Audrey
Yes, a very good lesson indeed. looking at returns from 10/9/07 thru last Friday I show the following IRR per Quicken:
Vanguard Inter Term Treas : +10.26%
Vanguard Inter term Bd: Flat
Vanguard Wellesley : -6.76%
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Old 05-11-2009, 12:29 PM   #73
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Well - if you had a chunk of cash as part of your portfolio AA and owned a US government bond fund like FGOVX as a big part of your bond stake, you did have asset classes that behaved well while every thing else tanked. This was a very good lesson in how different types of bond funds diverge during a crisis.
True. I should have been more explicit, but I meant to refer specifically to diversification among *equity* asset classes as being helpful in 2000-02 but nearly useless in 2008 and early 2009.
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Old 05-11-2009, 12:41 PM   #74
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Well, I certainly expected to go through periods where all equity asset classes were punished. That is not surprising during a severe economic downturn. And some were punished more than others. IMO 2000-2002 was a notable exception rather than what can be normally expected. What surprised me was how hard the higher quality bond funds were hit.

Audrey
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Old 05-11-2009, 10:11 PM   #75
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Lessons learned from the debacle:

1. Like so many others, I thought I was fairly well-prepared (and conservative) with my diversification plan--all neatly sliced and diced. Wrong. So, so wrong.

2. I thought I was reasonably well-prepared re: my equity/bond/cash allocations. Wrong. I could have done better holding only pssst Wellesley (as others have mentioned regarding their own situations).

3. That I'm not interested in percentages . I'm interested in being financially/psychologically comfortable. So, I want a to have good amount of cash coupled with high quality bond funds. Anything over maybe ten years worth of spending money can be put into equities.

4. I need to remember not to compare my investments to others. I need to keep on eye on my own goals and figure out how to accomplish them. I need to establish a game plan and stick by it unless I see it's not working (or it's obviously flawed--or I get a sudden surge of hormones kicking in).

5. And, other than the above, I really won't know if, or how well, I actually learned anything, especially if this incredible turndown turns out to be just a quiz worth 25 points and not the final exam which is worth, let's say 75 points. From my past history, I'm not ready to take the final exam and I'm guessing neither are most of us. It's like when the test has lots of questions on material that wasn't in the book and the prof never discussed in class...

And then most of the class complains, "Hey, the test wasn't fair." And, you know, guess what?: the prof. doesn't give a sh*t.
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Old 05-11-2009, 10:13 PM   #76
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Reading through some of these statements I get the feeling that people feel the worst is over and it's time to reflect now. I don't think there is anyway to know where we are at it in this chart pattern we will call history until a few years from now. You should look at the 1930's monthly returns to see how variable things can get. A few good months is (unfortunately) not a trend.

So here is what I've done to my equity plan since last year:
(1) identify a buy and hold percentage that is pretty much weighted towards the total stock market
(2) identify a percentage that will be allocated to international and will be moved into US funds if the trend reverses in favor of US over international
(3) identify a percentage that is market timed between
..(a) smallValue-midcap-treasury
..(b) largeValue-largeGrowth-treasury
..(c) international-US-treasury

Along with this I've done lots of hours of spreadsheet calculations using publicly available data to get at a reasonable monthly (not daily) market timing approach that has some possibility of working going forward. I think the algorithms are reasonably robust but can only be sure of the backtests -- not the future.

No guarantees unfortunately.
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Old 05-12-2009, 10:03 AM   #77
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"I also learned that retiring in the midst of a market and economic debacle makes people very jealous of you."

Im guilty of this one

My timing could not have been better

I was at a 100% employee owned company, ESOP... All of it in one stock was making me very uncomfortable, and the job sucked

Right after I left on 7/18/08 their business went to hell with everything else...

Some others left too, and the ones I've heard from that are still there wish they would have...

I have NO REGRETS

I went into cash and bought in pretty low

I haven't been at this long but Im ready to take a little off the table, and wait for another buying opportunity
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Old 05-12-2009, 01:19 PM   #78
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Learned again that slow and plodding works ok. I get all jealous of the flipper people that make 25% on a 3 month flip or shiny up a place and score $75k profit for paint, shutters & roll-out sod. I read about stock market folks that make 15% every year and seemingly are on auto-pilot, rebalancing once a year. All you do is have a diverse set of asset classes, an appropriate balance of bonds and equities, and Bob's your uncle! Makes me feel like a real dummy paying off places rather than maximising leverage to amass massive real estate holdings. Makes me feel stupid for having renters that i answer too rather than a REIT fund. Sheesh. Then along comes times like these and i don't feel so bad. You will pardon my sense of schadenfreude - for a brief time on this race i think i'm actually ahead of the pack.

('course i'm also not hiking in the Rockies, but am still wearing my slippers...)
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Old 05-12-2009, 02:20 PM   #79
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Reading through some of these statements I get the feeling that people feel the worst is over and it's time to reflect now. I don't think there is anyway to know where we are at it in this chart pattern we will call history until a few years from now. You should look at the 1930's monthly returns to see how variable things can get. A few good months is (unfortunately) not a trend.
Impossible to predict the future and the equity markets could easily be a rollercoaster for several years going forward, HOWEVER, the LIBOR is signaling pretty strongly that the worst of the credit crisis is over. It is finally normalizing. And the group that studies business cycles (Economic Cycle Research Institute - ECRI) says their indicators are predicting very strongly that the recession will be over soon.

Audrey
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Old 05-12-2009, 02:33 PM   #80
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Three words - "Stop Loss Trigger". I wish that I had put at least some in place last summer.
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