Thoughts on investing in current market climate

[FIREd]

Excellent!! That was very smart. Have fun following them on their way back up. Sounds like you got some winners.

I guess only time will tell whether it was smart or not!

 

[W2R]

Not to be argumentative, but how do you they're going back up?

What goes down, must come up... (?) I dunno. It would be quite a bold statement to assert that the market would NEVER go back up, especially since the market went down sharply right before Firedreamer bought in. Notice I didn't give a timeframe. But if I was Firedreamer, I'd be looking forward to watching what happens (not dreading it).

The real answer: I'm a closet Dirty Market Timer, even though I don't let myself act on that except with the 1%-2% that I set aside for playing.

 

[FIREd]

Want2Retire,

I am indeed looking forward to watching what happens with my purchases. I managed to make a little bit of money on my January and February purchases and that alone makes me happy given the current market conditions.

But talking about the japanese market since 1989, it makes me wonder where do you invest your money if you are Japanese? Nineteen years later, the stock market is still way down (and by now I assume people must have lost faith in the stock market), housing prices are still way down and interest rates are still close to zero, so you know you're not earning a lot of interests on those savings accounts... So were would you put your money if the same happened here? Do you load up on long term bonds before interest rates take the big plunge (if you are lucky enough to see it coming)?

 

[innova]

Nineteen years later, the stock market is still way down (and by now I assume people must have lost faith in the stock market)

Please examine the following:
^N225: Basic Chart for NIKKEI 225 - Yahoo! Finance

What you are saying is an oft-repeated fallacy. Same thing about how the US stock returns have gone nowhere in 10 years.. or have they?

Suppose you were a long-term buy and hold investor who didn't alter their DCA plan despite the wildly bouncing charts. Then what? Surely at least the last 5 years weren't so bad:

^N225: Basic Chart for NIKKEI 225 - Yahoo! Finance

I realize I haven't accounted for dividend reinvestment here, you'll have to forgive me.

 

[FIREd]

innova,

I have looked at the charts, and what I am saying is look, the Nikkei was at 10,000 in 1984, even if it had never climbed to 40,000 by 1989, it has gone up barely 30% over a period of 24 years. Sure the past 5 years have been good, though I suspect that if you had DCAed into the market, as you suggest, throughout the 1990's and early 2000's the losses you incurred during these early years (when the Nikkei ranged from 15,000 to 40,000) probably more than offset the gains of the past 5 years. But at any rate, after 24 years of annual returns averaging 1.1% (even when neglecting the psychological impact of the market going from 40,000 to 7600 over 14 years), I might have decided that the stock market was not a good place to invest my money. I am patient but 24 years is a very long time. I would want to find another more lucrative investment.

Not counting dividends and assuming you DCAed into a Nikkei index fund from 1984 to 2008, today you would have (approximately):
made money on your 1984-1986 contributions
lost money on your 1986-2000 contributions (ouch!)
made money on your 2000-2005 contributions
lost money on your 2005-2008 contributions.

So it does not look good for the long-term buy and hold investor who DCAed through the all ordeal.

 

[yakers]

Want2Retire,



But talking about the japanese market since 1989, it makes me wonder where do you invest your money if you are Japanese?

I have asked myself that question many times; imagine you are some working stiff in Japan who just senses things are not good, how do you invest your workers income? I guess real estate was not the answer, probably buy foreign funds while the yen was still high enough.

An what should we do today? All I have done is increase my foreign stocks by 15%. Don't know what other bonds and things to buy. I came too late to buy into REITs and hold RE (other than my residence) only as part of my total market index. I would add commodities but it may be too late now to add that asset class.

 

[haha]

Please examine the following:
^N225: Basic Chart for NIKKEI 225 - Yahoo! Finance

What you are saying is an oft-repeated fallacy.

I guess I'm going to need you to explain the fallacy. I just looked at the chart; doesn't look too good to me compared to almost any other possible use of the money.

Ha

 

[haha]

I came too late to buy into REITs and hold RE (other than my residence) only as part of my total market index. I would add commodities but it may be too late now to add that asset class.

The beauty of asset allocation is that it is never too late. Any day is as good as any other day to invest your dollars, yen, or whatever.

Ha

 

[Gazingus]

Not to be argumentative, but how do you they're going back up?

 

[W2R]

I have asked myself that question many times; imagine you are some working stiff in Japan who just senses things are not good, how do you invest your workers income? I guess real estate was not the answer, probably buy foreign funds while the yen was still high enough.

An what should we do today? All I have done is increase my foreign stocks by 15%. Don't know what other bonds and things to buy. I came too late to buy into REITs and hold RE (other than my residence) only as part of my total market index. I would add commodities but it may be too late now to add that asset class.

A well diversified portfolio (including several asset classes that are not too closely correlated with one another) is supposed to be the best protection against an uncertain future. Lacking my crystal ball, the future definitely qualifies as uncertain. The fact that a well diversified portfolio is advisable doesn't mean that it wouldn't take a hit during tough times, though.

This is why I would urge all of us to build a little slack into our ER plans that will allow us to tighten the belt for a long time without excessive discomfort, should times get tough and stay that way for over a decade.

My conservative "sleep at night" asset allocation should hopefully damp market swings at least to some extent. But I expect that LBYM will be my closest friend should future long term market trends become grim.

 

[ziggy29]

This is why I would urge all of us to build a little slack into our ER plans that will allow us to tighten the belt for a long time without excessive discomfort, should times get tough and stay that way for over a decade.

I believe a "buckets of money" strategy which leaves 10-15 years of reliable, inflation-adjusted income in "safer" stuff while letting the rest ride in diversified equities would seem to be the trick here.

 

[brewer12345]

An what should we do today? All I have done is increase my foreign stocks by 15%. Don't know what other bonds and things to buy. I came too late to buy into REITs and hold RE (other than my residence) only as part of my total market index. I would add commodities but it may be too late now to add that asset class.

Personally, I think bonds of almost every stripe except treasuries and agencies are a remarkable bargain right now. You can buy AA rated notes issued by "too large to fail" banks that yield 150 to 200BP over treasuries. You can buy junk at ridiculous yields. You can buy bank loan funds at very attractive prices/yields. Heck, you can buy AAA munis at yields in excess of treasuries.

 

[WilliamG]

REITs

Regardless of current environment, how much REIT do you own if you have (hopefully) an asset allocation plan?

A Vanguard financial planner talked me into selling our REIT index back in June. Had had a pretty good run up over several years. First of this year we decided that REITs just make sense for diversification and especially for retirees due to healthy dividends. Took 7.5% out of our 30% US stock allocation to purchase almost the same dollar amount of the REIT index, but now have almost 25% more shares than when we sold!

 

[W2R]

I believe a "buckets of money" strategy which leaves 10-15 years of reliable, inflation-adjusted income in "safer" stuff while letting the rest ride in diversified equities would seem to be the trick here.

That would work.

I guess my plan partially resembles the "buckets of money" approach, since I plan to keep sufficient cash/MM/CD reserves (a bucket of money?)to maintain my income at the same level for 10 years if necessary.

Beyond that, my plan relies on reducing the expenditure side of the equation rather maintaining than the income side. I know that I can cut back on my SWR substantially without suffering severely should the bottom drop out for longer than 10 years, and that provides me with much peace of mind. Probably around year 7 I would cut back my SWR by about 0.5%, which would make the bucket last a few more years beyond 10. Once the bucket is empty, I know I can cut back further and still enjoy life. In the Japanese type of long term downturn, I believe a technique such as this one would be a more effective approach as it can be maintained indefinitely.

It would also give me time to get a nice, productive vegetable garden going!

Edited to add: In my case am talking about going from an SWR of 4%, to 3.5%, to 2%. Luckily I have enough slack in my plan to get by happily on 2% due to fortuitous circumstances, and I could get by grimly on 0% (pension, SS, and food stamps) if I really had to though short of the end of the Earth, I can't imagine having to. I would still urge others to at least think about having enough slack in your plan to reduce to at least 3% in a worst case situation.

 

[Eagle43]

I'll be 65 in a couple of months. The main reason any of my investments is in the market is to ameliorate inflation. Thanks to pensions and SS payments, we have never touched Vanguard. I am diversified enough, and have enough cash, to ride out the gyrations of this and, I believe, any future market. The mantra is allocation. Do it right, sleep at night. Do it wrong, cry all night long.

 

[Mysto]

I'm in the "bucket" camp. I built a CD ladder at a mean of 6% with a 3% COLA for the next 10 years. We have no pension so I need the security. My DW just ER'ed and we have moved her 401K to cash and I will be slowly DCAing into our AA at Vanguard. Equities may be high or low but as I still have a lot of cash I feel that a slow DCA is my best approach. When I reach my final AA we will "let it ride".

As want2 said, we can reduce our spending if required and extend our cash for up to about 4 additional years without great problems - if the market goes up then we will start to set up another CD "annuity" before the end of the 10 year "bucket".

Every approach has to be based on personal situation and risk tolerance. This one lets me sleep at night.

 

[Art G]

Just a tip, but watch the VIX. When volatility is high it's a traders market. When the VIX gets below 20 and especially in the lower teens, it will indicate the buy and hold people coming back into the market. JMO.

 

[RockOn]

Personally, I think bonds of almost every stripe except treasuries and agencies are a remarkable bargain right now. You can buy AA rated notes issued by "too large to fail" banks that yield 150 to 200BP over treasuries. You can buy junk at ridiculous yields. You can buy bank loan funds at very attractive prices/yields. Heck, you can buy AAA munis at yields in excess of treasuries.

I know it's just a guess, but I value your opinion. Over what period do you think I should be DCA'ing into these. I want to take a significant stake in some of the bonds you mention. Do you think there is only a month or so to get in before these are higher? Or a year or two?

I know there are several distressed securities funds being set up and when they get involved prices could jump.

 

[brewer12345]

I know it's just a guess, but I value your opinion. Over what period do you think I should be DCA'ing into these. I want to take a significant stake in some of the bonds you mention. Do you think there is only a month or so to get in before these are higher? Or a year or two?

I know there are several distressed securities funds being set up and when they get involved prices could jump.

Gawd only knows. I would hazard a guess that any significant improvement in spreads will take a while, several months to a year most likely. I would expect the muni market to heal first, then the agency MBS market, then the various flavors of corporate bonds and loans. I am selectively buying stuff now, though. If you stick to ~5 year and shorter maturities (and bank loans), you reduce the risk of getting whacked if spreads continue widening, at least compared to longer maturity stuff.

 

[RockOn]

Thanks

 

[freebird5825]

um...what is the "bucket approach"?

please point me to that...

 

[ziggy29]

um...what is the "bucket approach"?

please point me to that...

"Buckets of money" is a concept popularized by Ray Lucia. What that means (from 40,000 feet) is that you structure your asset allocation in retirement not as a typical "percentage of the portfolio", but into years of income. Each piece of the allocation is said to be a "bucket" and it's designed to provide years of income from "safe" investments so you can ride out stock market volatility and minimize the need to sell stocks while they are down.

http://www.early-retirement.org/for...is-buckets-30725.html?highlight=buckets+lucia

 

[Patrick]

"Past performance is no indication of future results." Or something like that . . .

 

[freebird5825]

"Buckets of money" is a concept popularized by Ray Lucia. What that means (from 40,000 feet) is that you structure your asset allocation in retirement not as a typical "percentage of the portfolio", but into years of income. Each piece of the allocation is said to be a "bucket" and it's designed to provide years of income from "safe" investments so you can ride out stock market volatility and minimize the need to sell stocks while they are down.

http://www.early-retirement.org/for...is-buckets-30725.html?highlight=buckets+lucia

thanks. i'll check it out.

is the "buckets" approach one of the sound ones or one of the "avoid like plague" ones?

hope i'm not opening a can of worms with that question

 

[ziggy29]

thanks. i'll check it out.

is the "buckets" approach one of the sound ones or one of the "avoid like plague" ones?

hope i'm not opening a can of worms with that question

No, it's perfectly legit and it makes sense, IMO. It's just really just a different way to look at asset allocation -- as a number of years of income rather than as a percentage. We usually talk about asset allocation in terms of a percent of assets -- for example, "60% in stocks and 40% in bonds." A "buckets" approach looks at allocation a different way -- several years of immediate income needs in cash, a few more in somewhat more volatile investments, and the rest in stocks that won't need to be "sold low" for at least 14 years. The thinking is that your "safe money" buckets will have a chance to be replenished during a time when stocks are higher -- pretty likely at some point in a 14-year period.