Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Risk Reduction
Old 11-08-2004, 07:45 PM   #1
Recycles dryer sheets
 
Join Date: Oct 2004
Posts: 214
Risk Reduction

As an aspiring ER guy I recognize the necessity for
long term equity exposure but I am unhappy with
current market valuations. *"Expected" market returns for the next several years do not seem to be worth the risk in my view. A deep correction and/or ensuing bear market could cripple our FIRE worthyness before we ever get started. Ultimately, a 50% equity exposure is the goal, but starting about five years out. With this in mind, I have actually considered selling down to a token equity position with the idea of DCA'ing back in over the next five years. No, it's not very Boggleish and it would limit the upside but it would also preclude the chance of a show stopping hit to our finances during a critical period.
__________________

__________________
RockMiner 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!

Re: Risk Reduction
Old 11-08-2004, 09:00 PM   #2
Thinks s/he gets paid by the post
 
Join Date: Dec 2003
Posts: 1,375
Re: Risk Reduction

Quote:
As an aspiring ER guy I recognize the necessity for
long term equity exposure but I am unhappy with
current market valuations. *"Expected" market returns for the next several years do not seem to be worth the risk in my view. A deep correction and/or ensuing bear market could cripple our FIRE worthyness before we ever get started. Ultimately, a 50% equity exposure is the goal, but starting about five years out. With this in mind, I have actually considered selling down to a token equity position with the idea of DCA'ing back in over the next five years. No, it's not very Boggleish and it would limit the upside but it would also preclude the chance of a show stopping hit to our finances during a critical period. *Hmm, i can almost hear the raptors sharpening their talons...
RockMiner:

There isn't anybody on this board that has a crystal ball, (a few with brass ones maybe).
You didn't ask a question, and with reference to Boggle, it indicates to me that you understand the principal of diversifying your portfolio.
Don't know your age, but I'm sure you do.
We could possibly have a run-up in the next 5 years, and we could also get creamed for 5 years, and then have a strong market for a while after that.
I personally try to use an age appropriate diversification, and pretty much stick with it.
Good luck, Jarhead

__________________

__________________
Jarhead* is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 02:35 AM   #3
Full time employment: Posting here.
 
Join Date: Oct 2003
Posts: 570
Re: Risk Reduction

Ultimately, a 50% equity exposure is the goal, but starting about five years out.

I share both your appreciation of the long-term benefits of stocks purchased at reasonable price points and your concerns over the long-term risks of stocks purchased at not-so-reasonable price points, RockMiner. In the mid-1990s, when I was putting together my Retire Early plan, I developed the concept of the Data-Based SWR to guide me in coming up with reasonable strategies for building safe long-term income streams from investments in stocks and in alternate asset classes.

There's a discussion board devoted solely to study of the Data-Based SWR Tool. It's the SWR Research Group board, at NoFeeBoards.com. We could use some new posters, so you will get a warm welcome if you put your question up over there.

The short version of the advice you will probably get if you do so is to put a good percentage of your assets into TIPS and then use SWR analysis to know when it is reasonable to again go with a high stock allocation with an expectation of obtaining appealing long-term returns from the portion of your portfolio invested in stocks.
__________________
hocus is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 03:23 AM   #4
 
Posts: n/a
Re: Risk Reduction

We are soon to be awash in cash (a very rare
situation). It will need a home, but no equities of course. I'm guessing a combo of real estate, CDs
and highly rated bonds/notes. Sure makes it simpler
if you take all equities out of the mix.

John Galt
__________________
  Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 04:04 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,409
Re: Risk Reduction

75% age based balanced index - roughly 60/40. Note that ER can make 'age' a bit of a judgement call. 25% - dinking around at the edges.

Don't count home(fish camp) as an asset - only an expense - like a dryer sheet.
__________________
unclemick is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 05:54 AM   #6
 
Posts: n/a
Re: Risk Reduction

Quote:
I have actually considered selling down to a token equity position with the idea of DCA'ing back in over the next five years. No, it's not very Boggleish and it would limit the upside but it would also preclude the chance of a show stopping hit to our finances during a critical period.
This plan assumes that we will have a crash in the next 5 years. If we don't and the market continues to rise, at the end of 5 years you will be in situation worse than you are today.

Of course, if we get a crash, you'll be able to put all your money in and you will be better off.

This is almost like a Las Vegas roulette wheel. Put all of your money on red and spin the wheel. If it ends up black you lost, If it ends up red you win.

Bottom line - no one can predict the future and there is no method to protect you from what might happen.

Conventional Wisdom of today is that stocks are overvalued. In 1958 when Stock dividends became less than Bond Dividends, the conventional wisdom was that stocks were overvalued and that you should wait for stock dividends to exceed Bonds before buying stocks. Not sure where people put their money while they were 'waiting'. - They are still waiting, but mostly dead by now.
__________________
  Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 06:18 AM   #7
Thinks s/he gets paid by the post
 
Join Date: Jul 2004
Posts: 1,505
Re: Risk Reduction

Rockminer,

All i would suggest is always consider the risk of not owning stocks. *Personally, I think that risk is higher. *We've all heard "Past performance doesn't equal future return." *But i retort - what the hell else are we going to base the decision on?

The power of compounding increases exponentially, not linearly, as you add an extra % to an expected return rate. *Because of that, going 100% non-equity vs 100% equity could mean the difference between a 333K dollar next egg and a 1M dollar one though the return rates in this comparion might have actually been 7% and 12% respectively. *Point: *looks like only 5% difference, not even half, right? *But the end effect is 3 fold or more difference.

I will never understand how someone thinks they're playing the ER game safe by deciding to not use equity at all. *That one decision right there just automatically added 5-10 years to their ER date. *Yes, those holding large equity portions might not be able to tell you with certainly they'll end up getting that 10-12% return rate. *But those that conceed to hold only debt intruments from the start, know without any doubt they have already lost the race. *That wouldn't make me feel "safe" at all.

Azanon

(amendment: Now if something, like the 70s was it?, happens where we return to insane interest rates like 17% and they're falling as well, by all means own some bonds, or a good ole money market fund, and dont touch stocks).
__________________
azanon is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 06:44 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,409
Re: Risk Reduction

Azanon

You were right in the first place - time in the market is a powerfull risk reducer in and of itself.

Hindsight - had I been 100% stocks via DCA during the minor flat from 1966 - 1982 : I'd be sitting in a villa in the Bahamas.

50/50 in IRA and 401k ala Ben Graham - high interest was a deceptively good deal at the time. Not to mention pissing away money on real estate, gold coins, dirty blonds, sports cars, etc. Oh well - had some fun and made modest amounts.

If you have thirty years and plan to DCA - take a hard look at the stock data over the long term.
__________________
unclemick is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 06:57 AM   #9
Thinks s/he gets paid by the post
 
Join Date: Jul 2004
Posts: 1,505
Re: Risk Reduction

Quote:
You were right in the first place - time in the market is a powerfull risk reducer in and of itself.

Hindsight - had I been 100% stocks via DCA during the minor flat from 1966 - 1982 : I'd be sitting in a villa in the Bahamas.
My ammendment was just exposing a personal bias that i'm not a 100% devoted buy-and-hold, but i'm close to that. *I think you have to at least consider the sign of the times, so when you recognize extreme scenario's such at the frenzied internet stock buying in 1999, OR those really high interest rates of the 70s, it might make sense to make some short term adjustments then reevaluate a year later. *I mean heck, 17% interest rate? *I know what i'd get!

Going back to the 90s example i just used, if you knew the 100 year average of the market was about 12%, and you had just earned 20% in the market for the previous 9 years (1990-1999), a person skilled in mathematics might rationalize it might make sense to bank some of those profits for the short term, because they might rationalize its gonna take a nasty dip to return to an average 12%.

The only thing i see relatively extreme now is the still unusually low interest rates. I interpret that as a strong stock bullish signal if, for no other reason, because the alternatives (bonds, fixed rate returns) suck when interest rates are low.
__________________
azanon is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 08:27 AM   #10
Thinks s/he gets paid by the post
Hyperborea's Avatar
 
Join Date: Sep 2002
Location: Silicon Valley
Posts: 1,008
Re: Risk Reduction

Quote:
My ammendment was just exposing a personal bias that i'm not a 100% devoted buy-and-hold, but i'm close to that. *I think you have to at least consider the sign of the times, so when you recognize extreme scenario's such at the frenzied internet stock buying in 1999, OR those really high interest rates of the 70s, it might make sense to make some short term adjustments then reevaluate a year later. *I mean heck, 17% interest rate? *I know what i'd get!
The problem with that is that we know how it turned out. That 17% was the peak (or close to it). How would you have reacted at 12% on the way up? That might look good at the time but then the interest rates and inflation would have blown past you.

There was nothing pre-determined that 17% was as high as it would go. Plenty of countries have had much higher interest rates. You may very well have locked it in at 17% and the interest rates would have blown past you with inflation following close behind.

Remember that hindsight isn't foresight.
__________________
Hyperborea is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 09:46 AM   #11
Thinks s/he gets paid by the post
 
Join Date: Dec 2003
Posts: 1,375
Re: Risk Reduction

[quote]Azanon

You were right in the first place - time in the market is a powerfull risk reducer in and of itself.

Hindsight - had I been 100% stocks via DCA during the minor flat from 1966 - 1982 : I'd be sitting in a villa in the Bahamas

But then again, the board would have missed your entertaining posts.
__________________
Jarhead* is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 10:02 AM   #12
Thinks s/he gets paid by the post
 
Join Date: Jul 2004
Posts: 1,505
Re: Risk Reduction

Quote:
The problem with that is that we know how it turned out. *That 17% was the peak (or close to it). *How would you have reacted at 12% on the way up? *That might look good at the time but then the interest rates and inflation would have blown past you.
At 12% and on the way up, i'd be in something interest bearing, like a money market account. *What's the alternative? *Risking buying stock when its average historical return is only 12% too, but at a mugh higher risk? *LT bonds when the principle of those fall regardless of the interest rate? *Besides, if you look at some historical figures, I think you'll find stocks do quite poorly when the interest rates are high, such at 10% or better. * My guess as to the "why" on that, is that companies tend to be discouraged from borrowing money when it costs so much to do so, so it tends to stagnate growth of companies alltogether.

Inflation i'm not going to worry about cause there's nothing i can do about it. *I'm always shooting for the best return, with risk considered in the decision. * If my choices now are average 12% in stock market with some risk, or 5% in fixed investments with no risk, i'll take the former. If its 12% vs 12% though, well.... :-).

Quote:
There was nothing pre-determined that 17% was as high as it would go. *Plenty of countries have had much higher interest rates. *You may very well have locked it in at 17% and the interest rates would have blown past you with inflation following close behind
Well, for one, i wouldnt lock in until the interest rate trend reversed directions first. *In other words, i wouldn see it go from 16.5 to 17.0 then declare "i dont think its going higher". *No i'd wait for it to start a pattern of falling THEN lock in. *

I've looked at interest rate charts and they tend to go in trends, not just random changes with each announcement. *Take now for example. *IMHO, it doesnt take a rocket scientist to realize the interest rate trend now is up. *

Hindsight may be 20/20, but i dont believe foresight is blind.
__________________
azanon is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 10:12 AM   #13
Thinks s/he gets paid by the post
 
Join Date: Jul 2004
Posts: 1,505
Re: Risk Reduction

Quote:
I am posing a method to limit risk over a fairly short time interval (several years) *with the specific goal of avoiding damage from a potentially extended bear market which could prevent my ER.
Let me answer your question very directly with an opinion then: *If you dont have enough equity (cash) to comfortably retire now with a stock weighting of at least 50% and all the risk such a weighting would entail, you dont have enough money yet to retire. *

I know that opinion is harsh, but i just cant see how one could be comfortable with the safety of their ER if they dont have enough cash to offset the risk of a 50/50 portfolio. *Worrying every single day (do i have enough?) i dont think would bring one happiness. *Now if you had no choice but to ER (medical reasons or otherwise), that's another story alltogether, and I extend my sympathy.
__________________
azanon is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 11:04 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,409
Re: Risk Reduction

ok,ok - two more ways to skin the cat - do a TH type Ben Graham - Wellesley (40/60) - or Vanguard Retirement 2005 or Income Series if you like Indexes.

Less traveled - individual dividend stocks(utilities,oil,food,drug,financial,insurance ,etc) plus some TIPs,and fixed income of your choice.

If you are worried about the downside - there's more than one way to damp SD. But also recognize the long term.

__________________
unclemick is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 11:15 AM   #15
Thinks s/he gets paid by the post
 
Join Date: Jul 2004
Posts: 1,505
Re: Risk Reduction

Balanced funds put into perspective how low risk a 50% equity position really is, if you pick a good one and look at its long term track record. *Historically, a balanced fund only has a negative return about 1 years in 10, and they have remarkably steady return since most of them have equity portions that are very conservative anyway (blue chips that pay dividends).

One of the neatest funds i'm aware of (but dont use cause its too conservative for my tastes) is USAA Cornerstone fund. *It has a nice mix of us equity, international equity, various bonds, precious metals, and some other things i'm forgetting. * Returns arn't overly flashy, but it wont put you in the poor house under any economic environment.
__________________
azanon is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 11:33 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Risk Reduction

Quote:
The raptors have not dissapointed me * *Clearly, most posters here embrace a buy and hold philosophy which is hard to fault for the very long run. However, I am not targeting the long run. I am posing a method to limit risk over a fairly short time interval (several years) *with the specific goal of avoiding damage from a potentially extended bear market which could prevent my ER. To provide a little more information, I anticipate that even low, interest bearing type returns would suffice to preserve my ability to ER. Note that I haven't actually decided to sell all my equities yet but it was interesting to run it up the flag pole and watch it get shredded! I do expect to maintain a 50% stock allocation during the retirement years, but I find it difficult to hold my nose and own the market right now. *I think ***** understands my point of view. I don't *presume to know the future of the stock market, but I might still decide to get very defensive for a while. Risk reduction can be a valid goal IMO, depending on the situation.
Rockminer, I sometimes struggle with wanting to remain in a stock for the long term, yet knowing that the short term outlook isn't all that pretty. If its a small position, I usually just ride it out. If it is a large position, I will either sell down to the point where I am comfy, or hedge. In your case, you might consider one of two strategies:

- Continue to hold your equity position, but buy some protective puts on the relevant index. This way you experience the upside, but are protected in the case of a market crash. Naturally, you have to pony up the option premiums either way.

- Sell out of equities and buy a low risk bond (say, a 5 year treasury or rolling T bills) paired with index call options equal to your notional equity market allocation. This is very similar to an equity indexed annuity except that you get a better deal since you aren't paying the insurer's overhead and profit.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 12:31 PM   #17
Recycles dryer sheets
 
Join Date: Feb 2004
Posts: 178
Re: Risk Reduction

Quote:
However, I am not targeting the long run. I am posing a method to limit risk over a fairly short time interval (several years) with the specific goal of avoiding damage from a potentially extended bear market which could prevent my ER. To provide a little more information, I anticipate that even low, interest bearing type returns would suffice to preserve my ability to ER. Note that I haven't actually decided to sell all my equities yet but it was interesting to run it up the flag pole and watch it get shredded! I do expect to maintain a 50% stock allocation during the retirement years, but I find it difficult to hold my nose and own the market right now. ... I don't presume to know the future of the stock market, but I might still decide to get very defensive for a while. Risk reduction can be a valid goal IMO, depending on the situation.
In this one paragraph, you are "not targeting the long run" but "do expect to maintain a 50% stock allocation during the retirement years." You "don't presume to know the future of the stock market" but have "the specific goal of avoiding damage from a potentially extended bear market."

Why not just come right and admit that you're risk averse and are tempted to resort to timing to avoid the risk? If you think that will work for you, go ahead. You know already that most cannot do it successfully. Perhaps you're the exception.

Re brewer's suggestion of options, they are just insurance in disguise. There's a reason they call what you pay for an option a "premium". It's a negative-sum game and, just like other insurance, useful only if you cannot stand the risk. Worse, if you really can't stand the risk, it's always cheaper to shed it by selling, a la RockMiner, than by paying the optioneers' vig.
__________________
I'd rather be sailing.
nfs is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 12:58 PM   #18
Recycles dryer sheets
 
Join Date: Oct 2004
Posts: 214
Re: Risk Reduction

Wow. Opinions do run strong in these parts. Maybe I am rather risk averse, with closet market timing tendencies. I feel so unclean Thanks to all for the diversity of suggestions.
__________________
RockMiner is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 01:32 PM   #19
Recycles dryer sheets
 
Join Date: Feb 2004
Posts: 178
Re: Risk Reduction

Kewl. See how easy that was.

Just to be consistent in the future, never let these phrases pass your lips again, unless you're sneering at the person who says them.

"buy and hold philosophy"

"I do expect to maintain a 50% stock allocation"

"I don't presume to know the future of the stock market"
__________________
I'd rather be sailing.
nfs is offline   Reply With Quote
Re: Risk Reduction
Old 11-09-2004, 01:37 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,409
Re: Risk Reduction

Tell all your friend's you are a value oriented bargin hunter - heh,heh- not one of those silly market timers - it has more cache.

As for diversity of opinion - well we all have the horse we rode in on - ah, er, more or less.
__________________

__________________
unclemick 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
Scott Burns: The Risk of Delaying SS REWahoo FIRE and Money 47 10-27-2007 08:29 PM
High-carb, low-glycemic-index diet best for weight loss and CVD risk reduction wabmester Other topics 37 09-03-2006 05:20 PM
What's Your Risk of Death in the Next 4 Years? REWahoo Other topics 18 02-16-2006 02:52 PM
Choosing cash/short term bond/bank/cd for low risk money lazyday FIRE and Money 3 10-23-2005 01:49 PM
Interesting Article - Risk vs. Reward grumpy FIRE and Money 2 05-06-2005 12:29 PM

 

 
All times are GMT -6. The time now is 01:10 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.