big galloot
Dryer sheet wannabe
- Joined
- Nov 14, 2008
- Messages
- 11
Thanks a bunch for doing this. I'm impressed and grateful! Your advisor's response is basically irrefutable.
And therein lies the problem...
Unfortunately, he suffers from a chronic case of "silver-lining-itis," otherwise known as incurable "cup-half-full" syndrome. It's very common with financial advisors, which is why I avoid them like the plague. It's highly contagious!
If he were a "tough love" advisor, he would show you the attached chart, which is the log of SP500 "real prices" since the late 19th century, and tell you, in no uncertain terms that after partying heartily for a decade-and-a-half above the trend line, we have abruptly and violently regressed to the mean, and that historically, such abrupt regressions tend to grossly undershoot and stay down below for periods ranging from six years to 2.5 decades. Then, if he were really useful, he would advise you to adjust your equity targets according to your age, portfolio headroom, and other factors, and to generate enough cash and "safe" assets to keep you and yours fed, clothed and housed for quite some time, even if it means returning to work (while/if you still can).
All this is is a historical analysis (just like Firecalc). My observations are my observations, but they are based on irrefutable data and events that really truly happened. I make no claims regarding the future, or of calling bottoms or tops. I just stare at data and tell people what I see. I actually prefer that you take it with a grain of salt. I hate being taken seriously.
Your advisor is right though: the glass is indeed half full. What he's not telling you is that is was nearly full just a few short months ago, and the water level is dropping fast even as I write this. I can lie, your advisor can lie, but the data don't lie.
Yes, you can do what your advisor suggested and massage the data and the trend line until you get answers you wanted to hear. Unfortunately, just stare at the chart for a while and you can see that no matter how you massage it, it won't change the historical realities all that much, maybe just make them slightly less terrifying.
You don't have to be a statistician to make the following factual historical observations from this chart. (Even my most non-mathematical wife got it!):
- We just came down from a historically high deviation from the mean (by "mean" I am referring to the trend line), which occured in August of 2000. We have very recently (today again believe it or not!) finally regressed to the mean.
- The last time we were at the mean was about mid-1994. We've been above the trend line for nearly a decade-and-a-half! Yay!?
- The other often-cited recent crises (Asian meltdown, post 9/11) did NOT regress us back to the mean. As bad as they were, they didn't even come all that close.
- The last stage of this recent regression to the mean, starting last November, was extremely abrupt. In fact, the slope looks historically unprecedented to me - like skiing down a black diamond run.
- Nearly every abrupt regression to the mean that originated from historical peaks has resulted in severe undershooting relative to the mean. It's called gravity, momentum, inertia, etc. The only exception was in 1907 when we bounced right off the trend line like a Superball (remember those?) (If the market recovers after forming a bottom here, it would be historically unlikely..., possible, but unlikely. We humans rarely do things in moderation.)
- The worst-case undershoot happened in June of 1932. If we fall by the same magnitude of negative deviation today, it would result in another approximately 65% drop from today's SP500 price. WARNING: this is not my opinion or forecast; it is simply a historical fact. It happened. Infer what you will from it.
- To get to the 90th percentile of all historical negative deviations from the trend line, would require another 49% drop from today's price.
- To get to the median would require another 33% drop from today's price.
- Historically, the amount of time spent below the trend line, after precipitous falls to the mean, ranged from about 6 years to nearly two decades. If you exclude one brief respite to the mean during the Great Depression, it took a worst-case of 25 years to regress to the mean and stay above it.
My own personal answer - and everyone has to answer this in light of their own personal factors - is I DON'T FRIKIN' KNOW, only I don't mean "frikin'", I mean the real f-word, and I'm not a cusser!
So, what to do, what to do??
Read my post above for what I'm doing in response to this same question posed by REWahoo. It's basically a "don't-frikin'-know-but-the-trend-is-your-friend" system which exploits the relative distance from the trend line and the established direction of the trend to retarget equity exposure in relatively small, graded steps. I feel that such an approach is prudent (again, for my situation, maybe not yours). I'm well beyond the greedy stage, just wanting to generally increase my odds of preserving capital in the event of more water being drained from the glass, while increasing equity exposure in the more unlikely event of the glass getting fuller from here.
This is not market-top/bottom-timing, nor is it an all-in/all-out "switching" system, both of which I absolutely abhor. Backtesting it, it would have reduced my equity exposures by at least half while the SP was still above 1300. Of course, it didn't call the absolute top, but that's not what I'm aiming for.
I'm not looking for converts here. Writing this down is therapy for me, and if someone reads it and it helps if they're in the same boat, then it's a nice bonus. In my experience, when it comes to investing, religion and politics, most folks have their heels dug in pretty deep and quickly become immovable objects. One of the tenets of the FIRE faith is steadfast buy-hold-rebalance, so anyone interrupting the conversation with a different approach is a heretic, who is probably going to get stoned (in the Judeo-Christian tradition that is, not the Bob Dylanesqe way!)
