Thinking about Market Timing

[growing_older]

I've been a pretty staunch supporter of "stay the course" style investing, but I now see I am nearing FI on my 70-80% equities portfolio. I've weathered pullbacks before and not flinched, but I wonder now being so close to FI if I should consider dialing back my equity exposure some. Particularly since markets are near all time highs. It feels like market timing to me, which makes me reluctant to give in to the impulse, but it also feels like reducing risk might be a prudent thing to do right about now.

Anyone had similar decisions to make? How did you know when it was time to shift to a lower risk portfolio?

[jerome len]

I don't think you would be considered a market timer if you dial back your portforlio.
You don't mention your age but most consider a 50/50 portfolio well diversified for anyone close to retirement.

At my work, I saw a number of individuals invested agresively in 2009 that had to put off retirement ......and, since they scaled back after the drop they are still working, today. So, I've scaled back .....below 50/50 because I can and it's safe.

The real truth is you should do what you're comfortable doing. And, once you reach FI, you have to decide if YOU think it is worth risking it if we experience another 2009 drop in the market. Good Luck, isn't it really nice to be FI after spending years accomplishing that goal.

[heeyy_joe]

Do it, do it now. You'll sleep better when the market takes a hit.

[RunningBum]

Your profile says you are 54. 70-80% seems high for someone that age, and possibly nearing retirement. I shifted my AA down a bit when I neared retirement. I can't recall the exact decision making process, but I lost my FI status once when the tech bubble burst. I realized I didn't want that to happen again, though I didn't want to lose out on market gains when I realized I wouldn't be able to predict when downturns would happen, so I set an AA by age.

If you feel you should pull even more out than what you'd like to adjust your AA down to, I say do whatever you feel is best for you. Some may call you a dirty rotten market timer, but even if any of them happen to be serious, they don't have to live with the consequences of a drop, nor will they lose any sleep of your action or inaction.

[Htown Harry]

Not to draw too fine a line, but to me the OP is contemplating "AA rebalance timing" rather than market timing. When I think of the latter, I picture options trading or selling off stocks for cash while waiting for a drop that will put stocks "on sale".

[growing_older]

Yes, just to be clear, I am NOT suggesting I pull completely out of equities or try to time the market with a strategic sell out now and buy in later. I am just suggesting I am contemplating a shift to a less aggressive AA, but acknowledging at least in part this may be because equity markets are near all time highs. I am concerned about how do I tease out is this really because I think it's time to make an AA shift, or is it at least in part because these valuations are making me nervous. Or maybe those are the same thing.

[easysurfer]

If you cut back because you are very near retiring, I wouldn't consider that market timing but more portfolio preservation. Like that retirement red zone commercial. When close to retirement, you don't want any surprises that set you back.

From personal experience, when I FIRED, that was in Jan 2008. When the market meltdown had already started. I didn't pull back as much as I wished and my decision to FIRE came more suddenly than I planned. But luckily that was only in Jan 2008 and not several months afterwards during the peak of the meltdown.

[audreyh1]

Quote:

Originally Posted by growing_older I've been a pretty staunch supporter of "stay the course" style investing, but I now see I am nearing FI on my 70-80% equities portfolio. I've weathered pullbacks before and not flinched, but I wonder now being so close to FI if I should consider dialing back my equity exposure some. Particularly since markets are near all time highs. It feels like market timing to me, which makes me reluctant to give in to the impulse, but it also feels like reducing risk might be a prudent thing to do right about now. Anyone had similar decisions to make? How did you know when it was time to shift to a lower risk portfolio?

I don't see anything wrong with changing allocation as one approaches retirement. The personal situation has changed, so changing the investment strategy with a planned transition is perfectly logical. Most people do this as they change from accumulation phase to withdrawal phase.

I was 100% equities until I finally "had enough to retire" and then after I designed my retirement portfolio, I gradually transitioned to the new AA.

[clifp]

I think it is perfectly fine to adjust your AA as you approach retirement.

I am your age, retired, and my AA is about just over 70% equities. But if you are worried that market has reached near record levels (and remember that is only the S&P, the NASDAQ is still far below its 2000 peak), I'd be even more concerned about bond prices being at all time record highs and and yields are almost 4% below historical averages. As Warren Buffett said last year bonds offer return free risk.

So if you have other uses for the money, pay off a mortgage, buy some rental real estate, purchase gold, oil, timberland, do a bath/kitchen remodel prepay your kids college tuition etc., then it makes some sense to cut your exposure to equities. However if you want to sell stocks to buy intermediate or long term bonds,or keep the money in cash where you are losing 2-3% per year due to inflation, I have to ask why?

[UserRequested]

Quote:

Originally Posted by growing_older Anyone had similar decisions to make? How did you know when it was time to shift to a lower risk portfolio?

Depends - if you definitely have a target retirement date and don't want to compromise, then perhaps its time to take some risk off the table.
On the other hand, if timing of your RE is flexible, then taking some risks for better rewards is fine IMO.

I have a few more years till RE (2016), have 40% of my assets in equities out of which 50% are in what I would call high growth (volatile) stocks.

The other 60% of my assets are property which give me a nice cash flow in addition to my salary. I invest the cash flow from property into equity at the moment. No pain no gain I reckon.

[sfsob]

Quote:

Originally Posted by growing_older I am concerned about how do I tease out is this really because I think it's time to make an AA shift, or is it at least in part because these valuations are making me nervous. Or maybe those are the same thing.

I think they really are the same thing. Admit you don't know what the market will do first, then decide. Asset allocation is a gut thing - once you have it right you won't think about it much. I think your gut is trying to tell you something. That adage age in bonds thing is a rule of thumb for a reason!

[enjoyinglife102]

I was in the same situation a few years back and it was a simple as looking at the potential upside versus the potential downside. For me, when the potential downside included extending w**k for a few/many more years, it was a pretty easy choice.

[LOL!]

I changed my asset allocation a few months ago after reaching a big round number milestone:
http://www.early-retirement.org/foru...ths-63244.html

Since then the market has gone up 5% to 10%.

[Midpack]

Like others have said, if you're reducing your equity exposure (changing AA) because you're at or near FI without the intent of increasing your equity exposure again 'when the market drops,' that's not unusual and it's not market timing per se. If you plan from the outset to increase your equity exposure later, you're in the realm of market timing. Or if you're planning on exiting equities altogether, you're market timing.

But it's your money - your future.

As for 'when to shift to a lower risk portfolio' there can be many reasons aside from market timing. It's not a stepwise, all or nothing proposition IMO. It's always made sense to me to optimize the risk I take, from another recent thread.

Quote:

"Play around with FIRECALC" using the default 75:25 (or whatever you like) and "find the lowest portfolio amount that yields" whatever % you're comfortable with (ie, 95% works for me). If your portfolio is larger than that (hopefully), put the balance of your portfolio "someplace safe." 'You've won the game, why keep playing (with all your money)?' That's basically how I arrived at my AA and I will review where I stand every year or so, but not often.

For example, if you're comfortable with 75:25 and your portfolio is 1.5 times the amount for FI (just to make the example math easy) call it $1.5M, you've won the game you might consider putting the excess in safer investments. For the first $1MM that provides your SWR, you'd put $750K in equity & $250K in fixed income (75:25). The additional $500K isn't needed to support your SWR, so if you're really conservative you could put that all in fixed income. So you're overall AA would be 50:50 - $750 in equity, and $750K in fixed income.

My target AA is in my signature, and that won't change just because the market is reaching new highs (BTW, hopefully there will always be new highs, inevitably laced with periodic corrections). Had I sold off every time my portfolio hit a high in the past 30 years, I probably wouldn't be FIRE today. I may never exit equities altogether, keeping a 20-30% exposure in my 80's or thereabouts may be the best bet. My Dad is all cash, but he's 91 years old. YMMV

FWIW, here is how my asset allocation has progressed, you can see I've become more conservative as the nest egg has grown. Best of luck...

[ChiliPepr]

Be careful doing anything because a market is at a "record high". You always need to remember that at some point in time, every point below that "record high" was a "record high".

[Lsbcal]

Quote:

Originally Posted by ChiliPepr Be careful doing anything because a market is at a "record high". You always need to remember that at some point in time, every point below that "record high" was a "record high".

This is a good point and got me to do some homework.

We are not currently at a new high in the SP500 when one includes dividends and inflation. The last high was in August 2000 and we would have to be about 7% higher to reach this.

Since 1951 based on monthly data, we have had an average of 22% of those months being monthly highs. So monthly highs are not really very rare, but note they do tend to cluster.

[Animorph]

I retired in November 2007. I didn't change my long-term AA (nominally 100% equities), but I did take out about 3 years of cash with the intent of spending the cash down to zero before selling any equities. The cost of that is a temporary reduction in gains for a few years, much less of an impact than a permanent AA shift. The benefit is some insurance against a big market downturn just as you retire. As a side benefit, DW decided not to retire (she liked what she was doing) and we were able to reinvest during the 2008 downturn and hit new portfolio highs in 2011, even though we take some income from the portfolio. With the portfolio running a little ahead of itself lately, I'm currently about 13% cash and once again ready for any market gyrations.

[Lsbcal]

Here is a chart showing the positions of monthly highs since 1970. It looks a little like a bar code. When a month is a monthly high I entered a "1". Clustering of monthly high months gives a band of blue in this column chart format.

[ChiliPepr]

nice chart... You never know if the monthly high is a "Jan 1995" or a "June 2000" market high.

Going back to the OP, I do agree with the people who said you are "timing your AA" and not market timing. If you were thinking of getting out of a part of the marke with plans to re-enter at a later point, that is market timing.

[Lsbcal]

What would stop me from reducing my AA here are the alternatives. Cash gives an assured loss to inflation and bonds are at relative highs.

Not a pretty picture.