Market Correction in Retirement

[brewer12345]

The benefit of holding a large bucket of cash to "prevent having to sell equities during any market unpleasantness" is highly overrated IMHO.

For someone who covers expenses 50% pension/SS and 50% portfolio withdrawals, it's likely that interest and divs would cover withdrawal requirements. If not and you need to sell a few bux worth of something, I've never had a time when my broadly diversified portfolio didn't have something in it that wouldn't be painful to sell during an equity downturn.

I suppose for someone whose expenses are met 100% by portfolio withdrawals and the portfolio is non-diversified and consists completely of equities all of which have taken a big hit, then it may have paid off to have been holding a bunch of cash.

It would have been mighty expensive to have been holding cash beyond investment liquidity needs these past few years. For example, look at the opportunity cost of holding $100k in 2% CD's vs holding $100k in Wellesley the past 3 years. The difference would buy a bunch of groceries during the feared downturn.

We get about 1/3 of our living expenses from DW's part time small business and the rest from the portfolio. I intentionally went into ER with a bulked up position in cash and CDs partially because I do not like what the bond market offers and partially because I am trying to mitigate sequence of returns risk. If the markets remain benign in the next couple of years I will be increasingly comfy with drawing down the excess cash.

 

[Animorph]

We get about 1/3 of our living expenses from DW's part time small business and the rest from the portfolio. I intentionally went into ER with a bulked up position in cash and CDs partially because I do not like what the bond market offers and partially because I am trying to mitigate sequence of returns risk. If the markets remain benign in the next couple of years I will be increasingly comfy with drawing down the excess cash.

That's a good point. These days cash is not that far off bonds for investment returns. There may not be much cash drag for the next few years.

 

[ERD50]

I think it is possible to take a tidy sum out of markets knowing nothing more complex than if it is cheap consider it; if it is not cheap, pass.

You will miss most or all of the moon rockets, but almost never get skunked. Kind of like the difference between a baseball player who hits some homers, rarely gets a walk and whiffs pretty often, and a guy like the late Tony Gwynn or Pete Rose, who seemed almost to own a lease on the bases.

Ha

That always sounds reasonable to me, but when I've gone back and looked at inflation adjusted market charts, I have a hard time with it.

It seems there were many times that I would have felt that the market was 'hot enough - time to lighten up' (1997?), and it continued to rise for a year or three, and there never was a re-entry point at/below where I got out. Sure, you don't need to hit the home runs; avoiding some of a major downturn and capturing some of the ride up is a big win. I'm just not convinced that is assured by just moving in/out based on some measure of value. It's kind of a version of that old saying that 'the market can remain irrational longer than you can remain solvent'.

The benefit of holding a large bucket of cash to "prevent having to sell equities during any market unpleasantness" is highly overrated IMHO.

For someone who covers expenses 50% pension/SS and 50% portfolio withdrawals, it's likely that interest and divs would cover withdrawal requirements. If not and you need to sell a few bux worth of something, I've never had a time when my broadly diversified portfolio didn't have something in it that wouldn't be painful to sell during an equity downturn.

I suppose for someone whose expenses are met 100% by portfolio withdrawals and the portfolio is non-diversified and consists completely of equities all of which have taken a big hit, then it may have paid off to have been holding a bunch of cash.

It would have been mighty expensive to have been holding cash beyond investment liquidity needs these past few years. For example, look at the opportunity cost of holding $100k in 2% CD's vs holding $100k in Wellesley the past 3 years. The difference would buy a bunch of groceries during the feared downturn.

+1 (or n+1 as a few others have chimed in by now).

Yep, with a conservative WR%, divs/interest make up a good portion of the withdrawal, so we are talking about maybe selling off maybe 1%-2%. And the fixed side would be expected to take less of a hit than the equities, so even normal re-balancing would have one selling off fixed, not selling equities while they are down.

-ERD50

 

[TimSF]

I fully support the wise rule of "choose an AA and then buy-hold-rebalance." But few rules lack any exceptions. In Fall-Winter of 2008, during the steady monthly drumbeat of bad financial news and significant market losses, I DCA-sold about 30% of my equity holdings (mostly mutual funds) in my IRA over a couple months. I had three related reasons: (1) the downturn in the markets was so profound that I was reasonably confident that the following months it would be lower still and I could buy back in at a lower price; (2) I wanted to generate cash in my IRA so I could buy when market was lower; (3) I wanted a hedge as the market slumped lower. By the time the DOW had gone down another 1000 - 1500 points, I was back in at roughly the same equity % as before. I probably captured about a 5-10% delta but, more importantly, I felt better during the depressing slide, knowing that I would be able to take some advantage from the falling markets.
Would I do it again? Not easily for sure. But today I have more cash on the sidelines that I could use to take advantage of another profound implosion.

 

[brett]

We based our retirement on the worst case scenario. The opposite has occurred to our financial situation. I believe in preparing for the worst and hoping for the best. Kraft dinner and cat food does not appeal to me.

 

[ripper1]

The benefit of holding a large bucket of cash to "prevent having to sell equities during any market unpleasantness" is highly overrated IMHO.

For someone who covers expenses 50% pension/SS and 50% portfolio withdrawals, it's likely that interest and divs would cover withdrawal requirements. If not and you need to sell a few bux worth of something, I've never had a time when my broadly diversified portfolio didn't have something in it that wouldn't be painful to sell during an equity downturn.

I suppose for someone whose expenses are met 100% by portfolio withdrawals and the portfolio is non-diversified and consists completely of equities all of which have taken a big hit, then it may have paid off to have been holding a bunch of cash.

It would have been mighty expensive to have been holding cash beyond investment liquidity needs these past few years. For example, look at the opportunity cost of holding $100k in 2% CD's vs holding $100k in Wellesley the past 3 years. The difference would buy a bunch of groceries during the feared downturn.

+1.....Exactly.....Makes a lot of sense to me

 

[haha]

That always sounds reasonable to me, but when I've gone back and looked at inflation adjusted market charts, I have a hard time with it.

It seems there were many times that I would have felt that the market was 'hot enough - time to lighten up' (1997?), and it continued to rise for a year or three, and there never was a re-entry point at/below where I got out. Sure, you don't need to hit the home runs; avoiding some of a major downturn and capturing some of the ride up is a big win. I'm just not convinced that is assured by just moving in/out based on some measure of value. It's kind of a version of that old saying that 'the market can remain irrational longer than you can remain solvent'.



+1 (or n+1 as a few others have chimed in by now).

Yep, with a conservative WR%, divs/interest make up a good portion of the withdrawal, so we are talking about maybe selling off maybe 1%-2%. And the fixed side would be expected to take less of a hit than the equities, so even normal re-balancing would have one selling off fixed, not selling equities while they are down.

-ERD50

Well, I would never try to convince you. The only perfect answer is to keep generating earned income, then any drawdown is an opportunity.

Ha

 

[ERD50]

Well, I would never try to convince you. The only perfect answer is to keep generating earned income, then any drawdown is an opportunity.

Ha

Oh, that's OK - I can't even convince myself!

I don't think it's even close to black & white, so I won't try to 'convince' anyone, it's more along the lines of just questioning it and thinking about it. And then different people might act differently, even with the same information - no real right/wrong here, IMO. I do think there are times when it clearly would have worked, and times where you could have been left behind, wondering what to do next.

I guess my feeling is, markets have always recovered in the past, the worst cases in FIRECalc are based on simple re-balancing, not any value judgement AA changes (and even re-balancing probably makes little difference). So I personally feel that going on the roller-coaster ride is preferable to trying to judge a decent AA change point, and possibly be left standing at the station if the train pulls out w/o me.

But I might still do it, depending on circumstances, and I'd be more likely to do it as I age (a highly valued market, with fewer years to support might leave me in the 'already won the game' camp).

Oh, I want to clarify something I said earlier (in this thread, or maybe another related one, I'm too lazy to go back and look) - when I talked about 'capital preservation', I didn't specifically mean trying to preserve a nominal $ amount, or a buying power amount (though that would be great, or even better - growing it), I only meant 'preserving some of my capital for as long as I might live', and with the unknowns, that also requires some buffer.

-ERD50

 

[haha]

Oh, that's OK - I can't even convince myself!

I don't think it's even close to black & white, so I won't try to 'convince' anyone, it's more along the lines of just questioning it and thinking about it. And then different people might act differently, even with the same information - no real right/wrong here, IMO. I do think there are times when it clearly would have worked, and times where you could have been left behind, wondering what to do next.

I guess my feeling is, markets have always recovered in the past, the worst cases in FIRECalc are based on simple re-balancing, not any value judgement AA changes (and even re-balancing probably makes little difference). So I personally feel that going on the roller-coaster ride is preferable to trying to judge a decent AA change point, and possibly be left standing at the station if the train pulls out w/o me.

But I might still do it, depending on circumstances, and I'd be more likely to do it as I age (a highly valued market, with fewer years to support might leave me in the 'already won the game' camp).

Oh, I want to clarify something I said earlier (in this thread, or maybe another related one, I'm too lazy to go back and look) - when I talked about 'capital preservation', I didn't specifically mean trying to preserve a nominal $ amount, or a buying power amount (though that would be great, or even better - growing it), I only meant 'preserving some of my capital for as long as I might live', and with the unknowns, that also requires some buffer.

-ERD50

Perhaps I should clarify what I meant when I said if it's cheap consider it, and if it isn't pass on by. Overall, I meant issue by issue, not buying or selling the whole market. Although buying the whole market is likely the best set-up. Buy the whole market when it is giveaway cheap , something that we haven't seen for a while.

Also I did not mean to suggest selling if one's investment "is not cheap". I personally will not buy unless I think something is cheap. However, I own things that are no longer cheap. There are many reasons not to sell- not least of which is taxes. If my investments were mostly tax deferred or tax free, I wouldn't own much equity now. But that is not the case, so I do own a considerable amount of equity now, although I have sold a considerable amount too.

Ha

 

[daylatedollarshort]

We decided to focus on cutting our spending since we do not have the personality types to withstand big market swings like many of you here. Good for you market investors but we realized we just don't have the stomachs for it.

First we cut enough off our expenses to ER in our fifties and then we realized we could cut enough more without lowering our standard of living to ER without investing much in stocks and still save money in retirement instead of depleting the portfolio.

So that is our current "job" - trying to figure out how to live better yet spend less, like in this article by Juliet Shor, author of the Overworked American:

"People who have more time at home and less at work can engage in slower, less resource-intensive activities. They can hang their clothing on the line, rather than use an electric dryer. More important, they can switch to less energy-intensive but more time-consuming modes of transport (mass transit or carpool versus private auto, train versus airplane). They can garden and cook at home. They can meet more of their basic needs by making, fixing, doing, and providing things themselves.

People are returning to lost arts practiced by earlier generations—woodworking, quilting, brewing beer, and canning and preserving. They are also hunting, fishing, and sewing. People engage in these activities because they enjoy them and they yield better-quality products or products that are not easily available. Producing artisanal jams, sauces, and smoked meats, or handmade sweaters, quilts, and clothing makes these pricey items affordable."

Work Less, Live More by Juliet Schor YES! Magazine

I know it isn't the right lifestyle for everyone, and many here may be living quite sustainably already, but if you can't stand the big market swings and have some pad in the budget, going to a more sustainable, lower environmental footprint way of life may be a way to get by in retirement with lower volatility and lower investment returns and not have to worry about any big market corrections.

The flip side of this is this article from a blogger who went back to work and realized just how expensive work can be because with a 40+ hour on site job plus commute you have to outsource so much of your life -

http://www.raptitude.com/2010/07/your-lifestyle-has-already-been-designed/

 

[Totoro]

But that is not the case, so I do own a considerable amount of equity now, although I have sold a considerable amount too.
Ha

Where are you investing the rest?

Struggling with the "there is no alternative to equities", that's why I'm asking

 

[haha]

Where are you investing the rest?

Struggling with the "there is no alternative to equities", that's why I'm asking

Mostly cash, some short duration bond funds. Right now, piqued by the Barrons article someone posted this morning, I am trying to think through the vulnerabilities of even short duration bond funds. If it is a parking place for money that may be waiting for equity investments rather than permanent allocation to bonds, maybe I don't want to gamble on liquidity?

Ha

 

[brewer12345]

Mostly cash, some short duration bond funds. Right now, piqued by the Barrons article someone posted this morning, I am trying to think through the vulnerabilities of even short duration bond funds. If it is a parking place for money that may be waiting for equity investments rather than permanent allocation to bonds, maybe I don't want to gamble on liquidity?

Ha

The appeal of short term bond funds eludes me. The yield pickup is rounding error, so why bother?

 

[Lsbcal]

VFSUX, Vanguard Short Term Invest Grade fund has a 1.54% SEC yield. Better then cash unless rates take a big leap. Duration = 2.4 yrs.

I wonder what's in that Barrons article Ha mentioned? Something I should worry about?

 

[brewer12345]

VFSUX, Vanguard Short Term Invest Grade fund has a 1.54% SEC yield. Better then cash unless rates take a big leap. Duration = 2.4 yrs.

I wonder what's in that Barrons article Ha mentioned? Something I should worry about?

Basically, the rocket scientists at one of my former employers are worried about a blind panic retreat from bond funds in the event that QE-whatever stops. So they are considering/considered forcing a redemption fee on bond fund holders or restricting withdrawals, period. Now you, I and any drunken monkey with 5 minutes experience of the world know that this is exactly the thing that would precipitate a blind, panicky run on bond funds, but that seems not to have occurred to the fools that floated this idea. I suppose that it will probably die a quiet death.

I can get close to 1% in a savings account with no duration or credit risk. Why would I want to take the additional risk with parking space money for a few more basis points?

 

[H2ODude]

Yep, with a conservative WR%, divs/interest make up a good portion of the withdrawal, so we are talking about maybe selling off maybe 1%-2%. And the fixed side would be expected to take less of a hit than the equities, so even normal re-balancing would have one selling off fixed, not selling equities while they are down.

-ERD50

I think I just had an epiphany! I've always known that I was beyond conservative and likely didn't need the several years cash I have historically held. Currently about half of income comes from pension, other half from portfolio, SS awaits. The portfolio draw is ~2.4%. Based on what ERD50 just wrote I went back and looked at history on FIDO where all accounts are, and interest and dividends is almost equal to that 2.4% draw! So why do I even need a cash stash to draw on?

Well, it's because historically I've ALWAYS rolled div and int back into the fund that generated it; makes it easy to see from day I bought it to what overall it's worth to me in that time span. I still sort of like to think that way, but if I could wean myself off that I'd have a perpetual cash stream that meets my needs. Well, all except that over half our stuff is in tIRA and I can't really take those earnings without paying taxes; the bigger kind. Uncle Sam will love it when we turn 70.5; me not so much.

Anyway, just when my eyes start to glaze over on some of these never ending threads I'll come across an aha thought!

 

[Lsbcal]

...(snip)...
I can get close to 1% in a savings account with no duration or credit risk. Why would I want to take the additional risk with parking space money for a few more basis points?

A lot of our retirement money is at Vanguard. I'm not sure where your 1% savings account is but at VG the Prime MM is at 0.01%. It's an effort to move this money around so I'd rather not unless I was convinced it was safe and worth it.

My credit union allows us about 2% on the first $10k if we use their debit card but after that the rate is 0.16% on amounts greater then $10k.

 

[haha]

There are a number of internet bank savings accounts with interest getting quite near to 1%, with no tricky rules or limits. One is Symphony Optimizer Plus, formerly GE Retail Bank, I think offering .95% savings accounts.

ha

 

[aja8888]

Ally Bank offers 0.85% on MM and 0.87% on a savings account.

 

[Totoro]

Mostly cash, some short duration bond funds. Right now, piqued by the Barrons article someone posted this morning, I am trying to think through the vulnerabilities of even short duration bond funds. If it is a parking place for money that may be waiting for equity investments rather than permanent allocation to bonds, maybe I don't want to gamble on liquidity?

Ha

Thanks. Am parking in cash although quite lucky it seems that I have access to savings accounts yielding 1.6% (in EUR though).

Also have some legacy CDs yielding 3.4% or so. All are government insured. Not renewing them though (new CDs at 5 year yield 2.4%).

What I don't understand is the following

• Equity seem to be high priced
• Bonds are high priced
• Houses in most countries were seriously overpriced, now fairly priced

This should imply that some asset somewhere is undervalued by a large margin. Where is it?

Or are we finally experiencing such a capital glut that investing no longer will be highly rewarded in the future? Last one could make sense, debt deleveraging and all.

 

[audreyh1]

In Oct 1987 we had a 3 year old and DW had pneumonia in the hospital. I remember reading the Wall St. Journal and worrying, while waiting in the hospital on the weekend before that crash. I did sell out on Oct 20th. Exceedingly bad timing but repurchased about 1 year later at higher levels.

My take away, if you are going to sell have a strictly mechanical plan with sell and buy criteria. Do not use "feelings" in a crisis. If the markets sells off before your plan kicks in, then plan to ride it out.

BTW, one should have seen that crash coming. Not the exact timing of it but there was valuation concerns. Bond real rates were exceedingly high and SP500 PE was also high. One can look up "Fed model" in Wikipedia. Of course, I didn't have that perspective years ago. We live in a golden age with lots of available data and tools ... to get one in trouble or maybe not.

It's funny, you look at market history and are convinced that these crashes can be predicted. I look at market history and conclude that they aren't predictable at all - at least not enough to be actionable within a reasonable time frame. It's way too easy to take action too early. Thus I stick to my rebalancing strategy.

 

[NW-Bound]

• Equity seem to be high priced
• Bonds are high priced
• Houses in most countries were seriously overpriced, now fairly priced

This should imply that some asset somewhere is undervalued by a large margin. Where is it?

Gold? Or just plain cash? It's a conundrum.

 

[audreyh1]

I can get close to 1% in a savings account with no duration or credit risk. Why would I want to take the additional risk with parking space money for a few more basis points?

+1

Pretty much cash/CDs or intermediate term bond funds for me. I don't see the point on bulking up in short term bond funds with the yield curve so steep and offering so little compared to FDIC insured high yield savings accounts. I have a slice of them, but that's a position I have held for a long time.

 

[audreyh1]

Or are we finally experiencing such a capital glut that investing no longer will be highly rewarded in the future? Last one could make sense, debt deleveraging and all.

Yeah, more or less, that's my expectation, at least over the next decade.

If the economy improves (continues to improve), unemployment drops further, and inflation picks up a bit, the picture changes.

 

[Lsbcal]

It's funny, you look at market history and are convinced that these crashes can be predicted. I look at market history and conclude that they aren't predictable at all - at least not enough to be actionable within a reasonable time frame. It's way too easy to take action too early. Thus I stick to my rebalancing strategy.

Hi Audrey, I did not just take a look at the market history. I ran a lot of simulations and came up with a quantitative strategy. Many would call this datamining but I did take some precautions to avoid the worst of this type of objection.

Taking action too early is certainly an issue. The way I do things will not pick the exact top and is only checked monthly. Anyway I'm not suggesting this to others and not saying it will definitely work the next time we hit a bear market. Just mentioning the broad outlines.

For reference, here is the Fed paper I've mentioned on the yield curve as a predictor:
The Yield Curve as a Leading Indicator: Some Practical Issues - Federal Reserve Bank of New York