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Recovery From a Mistake
Old 12-28-2013, 10:06 AM   #1
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Recovery From a Mistake

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.
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Old 12-28-2013, 10:19 AM   #2
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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.
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Old 12-28-2013, 10:24 AM   #3
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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.
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Old 12-28-2013, 10:30 AM   #4
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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?
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Old 12-28-2013, 10:51 AM   #5
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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.
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Old 12-28-2013, 10:55 AM   #6
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"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.
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Old 12-28-2013, 11:05 AM   #7
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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.
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Old 12-28-2013, 11:43 AM   #8
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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.
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Old 12-28-2013, 11:56 AM   #9
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Originally Posted by DFW_M5 View Post
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.
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Old 12-28-2013, 11:59 AM   #10
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Originally Posted by Vincenzo Corleone View Post
...(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.
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Old 12-28-2013, 12:10 PM   #11
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Quote:
Originally Posted by Vincenzo Corleone View Post
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.
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Old 12-28-2013, 12:12 PM   #12
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+1

I did not think of balanced funds. Those are excellent for passive investors.
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Old 12-28-2013, 12:17 PM   #13
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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.
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Old 12-28-2013, 12:19 PM   #14
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+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.
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Old 12-28-2013, 12:20 PM   #15
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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.
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Old 12-28-2013, 12:26 PM   #16
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Quote:
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...
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.
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Old 12-28-2013, 12:29 PM   #17
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@NW-Bound - Sure, rub it in ;-)
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Old 12-28-2013, 12:33 PM   #18
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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.
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Old 12-28-2013, 12:36 PM   #19
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@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.
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Old 12-28-2013, 12:49 PM   #20
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@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.
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