Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Market correction ... Just as I plan to ER
Old 05-12-2015, 04:00 PM   #1
Recycles dryer sheets
 
Join Date: Apr 2012
Posts: 149
Market correction ... Just as I plan to ER

I've never really defined my asset allocation but tend to stay around 70/25/5 equity/bond/cash. I've been a bit aggressive with this and done fairly well ... but my risk aversion is on the rise. I've been somewhat planning to ER in 2016 but fear doing so just after what many feel is an upcoming market correction. All our investments are in 401K / IRAs with about 1 year cash "stash" and a couple of smaller non-COLA pensions. Per various calculators we have better than a 90% success rate (about $1M total valuation and post-ER expenses at $55K - $60K before tax).

So, is there something we should do to reduce our exposure before/during a market correction ... I've always heard that having that happen in the first few years of ER can be devastating. Is it sufficient to adjust my AA to something closer to 50/50 or 60/40 and just hold on during the ride? Or would it be prudent to lock in some value by moving at least a part of our assets to a stable value fund or equivalent?

Any thoughts / ideas are appreciated.
__________________

__________________
Steelart99 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-12-2015, 04:08 PM   #2
gone traveling
 
Join Date: Oct 2007
Posts: 1,135
Most here do not recommend that you try to time ins and outs of the market.

So, Set you asset allocation percentages and then stick with it through the downs and ups.

A cash reserve is handy. An asset allocation closer to 50/50 is more conservative than 70/30 as well.
__________________

__________________
papadad111 is offline   Reply With Quote
Old 05-12-2015, 04:16 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Moemg's Avatar
 
Join Date: Jan 2007
Location: Sarasota,fl.
Posts: 10,035
Quote:
Originally Posted by Steelart99 View Post

So, is there something we should do to reduce our exposure before/during a market correction ... I've always heard that having that happen in the first few years of ER can be devastating. Is it sufficient to adjust my AA to something closer to 50/50 or 60/40 and just hold on during the ride? Or would it be prudent to lock in some value by moving at least a part of our assets to a stable value fund or equivalent?

Any thoughts / ideas are appreciated.

I retired in 2008 just as the market slide began & the mistake I made was not having at least two years in cash . Otherwise stock up on wine and hang on for the market rides.
__________________
Moemg is offline   Reply With Quote
Old 05-12-2015, 04:18 PM   #4
Full time employment: Posting here.
 
Join Date: Jan 2007
Posts: 585
Well, if you are saying that you have 'enough' money now, why risk it with a heavy stock portfolio? I have plenty of money and have 'won the game' and am 30/70 ...Stocks/Bonds.... But, I don't need to Grow my Portfolio. I am happy spending it down.

So, what is your objective by being 70% in stocks and being retired? If you have a Pension and can live on that alone and are trying to leave your heirs a bigger nest egg, that could be a valid objective.
__________________
Cut-Throat is offline   Reply With Quote
Old 05-12-2015, 04:26 PM   #5
Recycles dryer sheets
 
Join Date: Jun 2012
Posts: 72
I agree with Moemg. Increase your cash holdings to equal what you would normally withdraw over 2-3 years, and live off of that if the market corrects.

Since you said you had a couple pensions or other income streams, it's important to note that you don't need the cash balance to equal your estimated living expenses. Rather you only need a cash balance equal yo what you would normally withdraw from your investments over 2-3 years. Your other income streams and pensions will (presumably) not be affected by a market correction, so you don't have replace them if the market dives.

Sent from my SM-G900T using Early Retirement Forum mobile app
__________________
trapperjohn is offline   Reply With Quote
Old 05-12-2015, 04:37 PM   #6
Thinks s/he gets paid by the post
RetireAge50's Avatar
 
Join Date: Aug 2013
Posts: 1,121
I think it depends on if you are ok with a variable income. A 20% market correction would only reduce your income about 11% temporarily given the following income sources:

80% Portfolio 70/25/5
20% Pensions or SS

Income adjustment:
Stocks 70% * Income Weight 80% * Market Correction 20%=11.2%
__________________
RetireAge50 is offline   Reply With Quote
Old 05-12-2015, 05:05 PM   #7
Recycles dryer sheets
 
Join Date: Apr 2012
Posts: 149
Thanks for the input so far. My pensions will only cover about 1/3 of my expenses and SS at the earliest is 5-6 years away. It sounds like I should be more risk adverse and change my allocation ... something I'd been eying for a year or so anyway. Guess I didn't think to increase my cash holdings to cover any market downturn ... Doh ... sometimes the obvious get right by me ... sigh. I really don't "intend" to do market timing, just hate to take a hit just as I'm ER'ing.
__________________
Steelart99 is offline   Reply With Quote
Old 05-12-2015, 05:35 PM   #8
Recycles dryer sheets
 
Join Date: Mar 2014
Location: Islands
Posts: 330
Quote:
Originally Posted by Steelart99 View Post
Thanks for the input so far. My pensions will only cover about 1/3 of my expenses and SS at the earliest is 5-6 years away. It sounds like I should be more risk adverse and change my allocation ... something I'd been eying for a year or so anyway. Guess I didn't think to increase my cash holdings to cover any market downturn ... Doh ... sometimes the obvious get right by me ... sigh. I really don't "intend" to do market timing, just hate to take a hit just as I'm ER'ing.
You may consider dollar cost averaging into bonds right now. If you haven't noticed bonds are sliding and have been so for the past couple months. Many of us are expecting a rate hike in Sept. That will mean higher yields, but bond value will drop. Over time this will be ok provided you aren't heavy into long-term bonds.
__________________
Travelwanted is offline   Reply With Quote
Old 05-12-2015, 07:05 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,820
Quote:
Originally Posted by Steelart99 View Post
Thanks for the input so far. My pensions will only cover about 1/3 of my expenses and SS at the earliest is 5-6 years away. It sounds like I should be more risk adverse and change my allocation ... something I'd been eying for a year or so anyway. Guess I didn't think to increase my cash holdings to cover any market downturn ... Doh ... sometimes the obvious get right by me ... sigh. I really don't "intend" to do market timing, just hate to take a hit just as I'm ER'ing.
I retired before I started SS. We had assets in low risk stuff (CDs and I-bonds) earmarked to cover the heavy withdrawals in those pre-SS years.
__________________
Independent is offline   Reply With Quote
Old 05-12-2015, 07:43 PM   #10
Recycles dryer sheets
 
Join Date: Jan 2015
Location: Toronto
Posts: 179
If you are sure there will be a market correction, then cash out everything now, wait for the fall and buy back in. You'll make a killing. Of course if you're wrong then you will miss out on the continued growth that other investors are getting. You can only be sure if you are smarter than the market, which I wouldn't bet on. I don't think I can outsmart the market, so I'll remain invested and keep drawing my dividends. For protection, I will keep a nice cash cushion in CDs so that I don't have to sell my dividend stocks in a down market.
__________________
Davis65 is offline   Reply With Quote
Old 05-12-2015, 08:07 PM   #11
Full time employment: Posting here.
gcgang's Avatar
 
Join Date: Sep 2012
Posts: 927
Quote:
Originally Posted by Cut-Throat View Post
Well, if you are saying that you have 'enough' money now, why risk it with a heavy stock portfolio? I have plenty of money and have 'won the game' and am 30/70 ...Stocks/Bonds.... But, I don't need to Grow my Portfolio. I am happy spending it down.

So, what is your objective by being 70% in stocks and being retired? If you have a Pension and can live on that alone and are trying to leave your heirs a bigger nest egg, that could be a valid objective.

+1

How low can you go in stocks and still have an acceptable success %?

Once you've won the game, why keep playing?


Sent from my iPad using Early Retirement Forum
__________________
In theory, there's no difference between theory and practice. In practice, there is. YB
gcgang is offline   Reply With Quote
Old 05-12-2015, 08:24 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,620
I see no reason not to change your asset allocation to 60/40 tomorrow. Believe me, such a change will make a huge difference in your risk aversion. You have those pensions which also helps, but since you started this thread and are asking, it does mean you are not quite comfortable with where you have your asset allocation now.

If you don't want to get to 60/40 all at once, try 65/35. I found that even 5% change was helpful to me.
__________________
LOL! is offline   Reply With Quote
Old 05-12-2015, 09:01 PM   #13
Recycles dryer sheets
 
Join Date: Aug 2014
Location: Western Canada
Posts: 393
Quote:
Originally Posted by Steelart99 View Post
..... but fear doing so just after what many feel is an upcoming market correction. ...
Doesn't that make you a DMT?

Do you think a correction is coming and if so why? Do your own DD and don't worry about what the others (talking heads) say.
__________________
I'm not crazy. Honest, the judge had me tested.
Rick_Head is offline   Reply With Quote
Old 05-12-2015, 09:24 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,615
Quote:
Originally Posted by Steelart99 View Post
. . . but my risk aversion is on the rise. I've been somewhat planning to ER in 2016 but fear doing so just after what many feel is an upcoming market correction.
With this reasoning you might never get to retire--you'll always be worried it's the wrong time because stock prices are up (and therefore a correction is "just around the corner") or they are beaten down ("I need to work until the stock prices recover to avoid selling shares when they are low").
First, I'd check to see how much a reduction in your portfolio will really hurt your quality of life (assuming you are using a "% of year end balance" approach). If your expenses are flexible ( i.e. you can pay the "must do" bills with a 2% WR, but no Europe trip this year. Do a week in Las Vegas instead), then a temporary downturn might not not hurt you and volatility isn't a major concern.
But if a hit to the portfolio value and annual spending is gonna really affect you, consider decreasing your stock allocation permanently or reduce stocks to 40-50% and then dollar-cost average back to 70% over the first few years of your retirement until (historical) market returns can help you build a cushion. If the market goes down, at least you'll be buying new shares at cheaper prices, and you'll eventually benefit even more as prices go up. Maybe that will give you the emotional support you need to pull the plug.

But, on average, going to a lower stock allocation--short term or long term--does decrease your overall expected returns and your chances of staying ahead of inflation.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 05-12-2015, 09:34 PM   #15
Full time employment: Posting here.
UnrealizedPotential's Avatar
 
Join Date: May 2014
Posts: 573
Market corrections come like a thief in the night.
__________________
Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things. Charlie Munger
UnrealizedPotential is offline   Reply With Quote
Old 05-12-2015, 09:58 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,473
You should gradually transition to whatever allocation you plan to use during retirement. You might be able to do this by just adding new money to the assets that are underrepresented for your target retirement allocation, or you might have to so do some rebalancing.

Many of us keep a couple of years spending money in a cash equivalent not subject to market volatility.
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Old 05-13-2015, 06:32 AM   #17
Thinks s/he gets paid by the post
 
Join Date: May 2014
Location: Utrecht
Posts: 2,213
First off: Realize that statistically speaking one is more likely to retire just before a crash.

A high portfolio is a function (partially) of a good return. That return means you had some good years recently. And many good years mean it is likely some bad years soon will follow.

Second: +1 on the posts that encourage you to take off some risk if you lie awake right now.

Set your target allocation such that a 30% drop in the market will not cause you to sleep bad at night, or worry much about your financial future. Or if you invest in individual stocks, allocate some that do well in bear markets (typically consumer goods, tobacco).

Third: Once the drop is there (and it will come), have fun and the courage to rebalance or dollar-average back into equity markets.

Fourth: If you have won the game, no sense in risking your victory.

Good luck deciding .. and don't worry about when the market will drop. It's out of your control anyway. Look within for comfort
__________________
Totoro is offline   Reply With Quote
Old 05-13-2015, 08:41 AM   #18
Recycles dryer sheets
 
Join Date: Nov 2014
Posts: 381
Wade Pfau and Michael Kitces did a study a couple of years ago that indicated reducing equity as you approach retirement, then increase equity as you go through retirement - the idea being to reduce overall risk in just such an event of a market correction just after retirement starts.
Reducing Retirement Risk with a Rising Equity Glide-Path by Wade D. Pfau, Michael E. Kitces :: SSRN
__________________
big-papa is offline   Reply With Quote
Old 05-13-2015, 04:44 PM   #19
Recycles dryer sheets
 
Join Date: Apr 2012
Posts: 149
I appreciate all the thoughts (and pokes for MTing ... ). It has helped me move on increasing my cash fund beyond the 1 year I have now (obvious in retrospect) and to also approach a change to my AA. Generally speaking, I have not modified my AA regardless of what the market is doing, just got concerned about a correction happening just as/before/after I planned my ER.
__________________
Steelart99 is offline   Reply With Quote
Old 05-13-2015, 05:36 PM   #20
Recycles dryer sheets
Willers's Avatar
 
Join Date: May 2013
Posts: 480
Quote:
Originally Posted by big-papa View Post
Wade Pfau and Michael Kitces did a study a couple of years ago that indicated reducing equity as you approach retirement, then increase equity as you go through retirement - the idea being to reduce overall risk in just such an event of a market correction just after retirement starts.
Reducing Retirement Risk with a Rising Equity Glide-Path by Wade D. Pfau, Michael E. Kitces :: SSRN
If you consider this strategy understand that Pfau has changed his opinion on this somewhat in the face of additional data he hadn't considered:

To Rise or Not To Rise: Stock Allocation During Retirement
__________________

__________________
“If you don't do it this year, you will be one year older when you do.” - Warren Miller
Willers is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Market Correction in Retirement FedExCourier FIRE and Money 77 06-26-2014 09:32 AM
Recognizing an historic crash vs. correction or bear market. Snidely Whiplash FIRE and Money 82 02-08-2014 07:49 PM
Market Correction Allocation ferco Stock Picking and Market Strategy 15 05-05-2013 03:27 PM
Market Correction is Official retire@40 Stock Picking and Market Strategy 31 08-17-2007 12:27 PM
John Mauldin's column~Goldilocks?~906 days w/o a 10% correction mickeyd FIRE and Money 15 10-19-2006 08:08 PM

 

 
All times are GMT -6. The time now is 04:14 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.