Recovery From a Mistake

[Vincenzo Corleone]

Hi,

Back in 2008-2009 during the financial crisis, I made a mistake - I let my emotions get the best of me and I moved all the money in my retirement accounts that were invested in stock mutual funds into short-term bond funds, where the money has been sitting since. In the news, all I kept hearing was that Greece was going to collapse and would cause a domino effect. The next to go was Portugal, Spain, etc., etc., and this all would have a negative effect on the US. I rationalized by saying, yes, I may miss out on a run-up but the risks were too great. Of course, after I moved the money, I never heard about Greece or any other part of Europe since, and the world didn't end.

So I missed the big equity run in my retirement accounts. Now, of course, I'm finding it difficult to move the money back into stock funds thinking a correction is inevitable. And because of the fed's quantitative easing, I can't help but think that this run-up was artificial.

I realize that different people will have different opinions, but I would like to hear them. Would you move it all back into stock funds at once, thinking "Time IN the market is more important/effective than timING the market", or would you move in little bits over time (dollar cost averaging)?

Thanks. And thanks for not telling me what I already know - that I'm a dolt.

 

[eytonxav]

Given your aversion to risk, you might be more comfortable to averaging back in over the next 12-18 months. Now, if you cannot come up with an allocation that lets you sleep well and rebalance, I think a good rule of thumb for very conservative investors that might pull their money when things look bleak, is to never take so much off the table as to drop below a 20% equity allocation.

 

[Dawg52]

Chances are if we have another crash, you may be prone to sell out again. I hung on, but it wasn't easy.

I would say slowly dollar cost average back in. If the market does correct during the process, keep buying so you are averaging in at lower prices. But hey, not knowing anything about your situation you may have enough to live on the rest of your life without stocks. If so, don't worry about it just stay conservative. Most can't do that though.

 

[LOL!]

This article was written with you specifically in mind:
Missed the big market rally? Here’s what to do now. - The Washington Post

What do you think after reading it?

 

[calmloki]

Take my advice - please. (credit to Henny Youngman)

Sold all stock thingies in 8/2012 and have had the proceeds sitting in our Vanguard Money Market fund since. Don't think we have made the threshold $10 amount in interest yet, so we are saving big time on taxes as well as avoiding the nosebleeds from sudden stock appreciation!

Good thing I'm pretty.

 

[AllDone]

"Get out" was the advice we got when we went looking for professional financial advice in early 2009. Happily we ignored them for reasons I won't go into, but you weren't alone back then. Anyway, I would second the advice to average. Pick a goal, 60/40, 70/30, whatever, and move a quarterly alloquat of money into stocks until you reach your goal.

If I have one regret, it is that as a young person I was good at saving, but way, way too conservative in investing.

 

[frayne]

What is your time horizon ? Don't beat yourself up too badly as we all have made errors along the way. Sometimes they work out to our benefit, sometimes they don't.
If you have a significant time horizon, I'd be prone to put whatever percentage you have in mind into a total market stock index fund, and then forget about it.

We are our own worst enemies when it comes to thinking rationally about investing. The market will continue to go up, down, and sideways, you just have to get use to it and try not to out guess what it is going to do. Just my two cents and YMMV.

 

[NW-Bound]

I would average into the market if I had a big chunk to invest right now. I would do it over perhaps 6 months.

Why? Although the short-term market movement, read daily price change, is random, it is not a true random walk like a coin toss. A coin does not remember if the last outcome was head or tail. Stock prices on the other hand are a function of the economy, corporate profits, and investor sentiments. Hence stock prices have "memory", unlike a coin. Else, we would not talk about reversion to the mean, P/E valuation, etc...

After a big run-up like what we have had (US small caps have been up 40% in the last 12 months), the chance of a 10% correction is getting higher and higher. People like myself who have participated in this bull market are willing to sit still, or to take some profits (euphemistically called rebalancing ). If we lose some from the top, we are still OK. However, if the correction is to occur after you have dumped all your money in the market, your psyche will get hurt again, and that's no good.

Another thing to do is to think of your AA. Do you plan to have any foreign exposure? If so, there are corners of the world market that have not gone up as much as the US equities. I suggest to put some money there first.

Take my opinion for what you pay for it.

 

[Chuckanut]

Given your aversion to risk, you might be more comfortable to averaging back in over the next 12-18 months. Now, if you cannot come up with an allocation that lets you sleep well and rebalance, I think a good rule of thumb for very conservative investors that might pull their money when things look bleak, is to never take so much off the table as to drop below a 20% equity allocation.

+1

If you are really risk adverse, dollar cost average over 3 years or even more.

 

[Lsbcal]

...(snip)...
I realize that different people will have different opinions, but I would like to hear them.
...

You got this sentence precisely right!

First, deeply think what your long term AA is going to be. Do not rush this decision. Check out the questionnaire on Vanguard regarding targeting your AA.

Regarding all in or slowly, one could have asked this question each year since 2009. The answer we know now is ... all in is the best number. We don't know the future. My feeling is that all in is going to be the best number. At this time I cannot convince myself to scale back equities.

 

[MichaelB]

Hi,

I realize that different people will have different opinions, but I would like to hear them. Would you move it all back into stock funds at once, thinking "Time IN the market is more important/effective than timING the market", or would you move in little bits over time (dollar cost averaging)?

Thanks. And thanks for not telling me what I already know - that I'm a dolt.

I would suggest something different. Instead of going back into stock funds, you might consider a balanced fund, such as Vanguard Wellesley, and a target date fund, such as Vanguard 2020. They won't go up in step with stocks during a steep rise, but they won't fall as much either, and the managers will rebalance in a disciplined way.

 

[NW-Bound]

+1

I did not think of balanced funds. Those are excellent for passive investors.

 

[audreyh1]

I would suggest something different. Instead of going back into stock funds, you might consider a balanced fund, such as Vanguard Wellesley, and a target date fund, such as Vanguard 2020. They won't go up in step with stocks during a steep rise, but they won't fall as much either, and the managers will rebalance in a disciplined way.

I agree - use a conservative balanced fund.

 

[karluk]

+2 about balanced funds. In my view, your biggest challenge is not so much the mechanics of moving back into stocks immediately or in step-by-step increments, but the very real risk that you'lll bail again the next time the market heads south. I'm fairly sure that studies of investor behavior indicate that holders of balanced funds are less likely to tinker with their asset allocation than those who have different funds for different asset classes.

 

[Vincenzo Corleone]

Thanks a bunch, everyone. A little more about me:

I'm soon to be 47, DW is 48, both working and we would like to retire yesterday, but, alas, not yet possible.

Our mortgage is paid off.

We both have retirement accounts and non-retirement, taxable accounts (I didn't touch the taxable accounts in my aforementioned emotional breakdown - in fact I faithfully added money along the way and doing quite nicely).

I think I gave the impression that I panic at any slightest pullback. I don't think that's the case. I think I'm right in saying that 2008-2009 was quite rare and probably once-in-a-lifetime; people saying it was the worst thing since the Great Depression, etc. Under less extreme circumstances, I don't think I would have panicked.

We live in a relatively high-cost-of-living area and this past year we had some unexpected, once-in-a-lifetime expenses. On average, I'd say that our annual expenses are approximately $80k. I'm working towards investing such that we can live off of the dividends and I think, given our current financial situation, it is do-able as long as I don't make any more bone-headed moves.

Although she would like to retire now, DW will probably work until the age of 65 so that 1) she can collect a small pension and some small medical benefits, 2) we don't have to worry about medical insurance before Medicare kicks in. I probably won't last as long as my wife in terms of waiting to retire, but who knows. We both contribute the max into our respective employer-provided retirement accounts.

Thanks again for your advice.

 

[NW-Bound]

...
I think I gave the impression that I panic at any slightest pullback. I don't think that's the case. I think I'm right in saying that 2008-2009 was quite rare and probably once-in-a-lifetime; people saying it was the worst thing since the Great Depression, etc. Under less extreme circumstances, I don't think I would have panicked...

Yes, it was indeed a scary time, and we were talking a lot about the Depression back then.

I did sell heavily in late 2008, and recently looked back to see that my cash AA went up to 65% in Dec 2008. However, differently than what you did, I bought back gradually in early 2009, and recovered much earlier than the S&P.

 

[Vincenzo Corleone]

@NW-Bound - Sure, rub it in ;-)

 

[karluk]

I think I gave the impression that I panic at any slightest pullback. I don't think that's the case. I think I'm right in saying that 2008-2009 was quite rare and probably once-in-a-lifetime; people saying it was the worst thing since the Great Depression, etc. Under less extreme circumstances, I don't think I would have panicked.

I think you have to distinguish between the mistake you made getting out of the market at the wrong time and the even worse mistake of taking five long years to decide to get back in. Using worries about a little country like Greece as a reason stay out of U.S. equities makes no sense to me at all. It makes me wonder how long it will be before you overreact to the next scary news headline and let it affect your investing decisions. That's why I think you're a good candidate for a balanced fund.

 

[NW-Bound]

@NW-Bound - Sure, rub it in ;-)

Oh, please God, one more stock crash. This time, I swear, I will go all in.

Easier said than done. People tend to have short memory. That's why I keep some records to judge myself afterwards.

 

[Vincenzo Corleone]

@karluk - your point is well-taken. But I look at it this way - I've been investing since the late 1980s. I didn't panic with the "Black Monday" crash of October, 1987. In fact, my mother called me all in a panic and I told her to relax (thankfully, she didn't touch anything and did quite nicely). I didn't panic with the "Friday the 13th" mini-crash in October, 1989. And I didn't panic when the dot-com bubble burst. 2008 was the ONLY time I panicked (and hopefully the last).

But, again, your point is well-taken. Now that I'm older, who knows if I can maintain this pattern.

 

[Options]

...
I think I gave the impression that I panic at any slightest pullback. I don't think that's the case. I think I'm right in saying that 2008-2009 was quite rare and probably once-in-a-lifetime; people saying it was the worst thing since the Great Depression, etc. Under less extreme circumstances, I don't think I would have panicked.

I did exactly what you did. Pulled completely out of the markets to cash in 2009, probably the biggest financial mistake I've ever made. Of course I didn't know what the hell I was doing at the time either.

What I did before making any moves back into the market quite frankly was to read. Me being me, I've now read enough books (highly recommended on this site and Bogleheads, among others) to fill a small library. I scoured BH and other sites every time I had a question about anything, from int'l investing to ROTH conversions to taxes to decumulation. Finally got to the point where I became saturated. Reading and becoming knowledgeable was the best financial investment I've ever made, and because the books came from the library, it didn't cost me a dime!

The above provided the confidence to create an ISP, have the AA and risk profile I'm comfortable with, can sleep at night, will allow me to FIRE in late 2015 and more than meet my investment objectives, and am (right now!) celebrating because I surpassed an investment "stretch goal" this month, one I doubted I'd make as recently as November.

Most importantly, I now realize there are people on this site and BH that spend an inordinate amount of time (IMHO) trying to optimize every last dime, and I tune out all of it. I've run enough scenarios such that even if we get another great depression, I will be fine. I spend my time living and planning the next great phase of this adventure called life. FIRE for me will very soon be a very expansive phase of my life, if not the most expansive. I am in the processing of changing every aspect of my life, and I can't tell you how exciting it is.

 

[audreyh1]

I think I gave the impression that I panic at any slightest pullback. I don't think that's the case. I think I'm right in saying that 2008-2009 was quite rare and probably once-in-a-lifetime; people saying it was the worst thing since the Great Depression, etc. Under less extreme circumstances, I don't think I would have panicked.

Perhaps - but the Greece brouhaha happened in 2011 and 2012, not 2008/2009.

 

[ducky911]

lump sum in and don't ever sell again

 

[pb4uski]

What is your current AA (stocks/bonds/cash)? I think you need to decide what your target AA across all your accounts should be given your appetite for risk. In fact, you may even want to memorialize your decisions in a personal investment policy that you can refer to in difficult times.

Then, what are the gaps and how do you get from your current AA to your target AA? A lot will depend on what options exist in your retirement accounts as some (like 401ks) are notorious for having poor choices. Do you have access to a stable value fund? If so and if it pays 2.5% or more, that may be a good place for your fixed income allocation given the possibility of higher interest rates and the interest rate risk associated with bond funds.

Once you decide what you best retirement plan choices are, then hopefully the rest will fall into place.

If you are light on equities, I would value average in over some period of time (say 12 to 24 months).

The valuable lesson you have learned is that it is relatively easy to decide to get out, the real trick is deciding when to get back in again.

 

[galeno]

We were at 60/40 when the storm hit in 2008. My wife freaked out and wanted to sell everything at rebalance time in Jan 2009.

I wanted to over rebalance to 80/20. We finally settled on 70/30 and rode the elevator back up. In Jan 2014 we will be back to 60/40.

Always be prepared to lose 50% of your equity allocation at all times. If you are not you need to dial stocks down to the level of your risk tolerance.