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Time to seriously consider getting defensive?
Old 03-13-2014, 11:05 AM   #1
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Time to seriously consider getting defensive?

Normally don't too gloomy reading bearish reports but this one from Fidelity had me thinking that now may be the time to get defensive.

https://www.fidelity.com/insights/in...ur-investments
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Old 03-13-2014, 11:13 AM   #2
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Well you're certainly consistent.

short or long correction going on

Anyone worried about the Ukrainian situation?

Like many here, I'll just revisit/tweak my AA every few years, and rebalance per my IP as needed. Same as I did in 87, 00, 08 thankfully...

I am sure you've seen all the studies on how unproductive market timing is for 99.9% of investors, but we all do as we see fit. No one is suggesting there won't be a correction, we all know there will be sooner or later, but we also know we can't time our way in and out successfully.

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Strip out these one-off gains and inflation, Rob Arnott recently suggested, and investors ought more realistically to expect about 1.5% a year plus dividends—meaning, in the current environment, an annual return of about 3.5% in real terms. That's a far cry from 10%.

If stock returns risk disappointing many optimists, prospects for bonds seem, if anything, even gloomier. It's highly unlikely that anyone will earn returns of 5% a year from the bond market when the Barclays Aggregate U.S. Bond Index offers a yield to maturity of about 2.2%.
They don't offer any suggestions as to what to do? And of course they won't tell you when to dig up the cash in your backyard (or mattress) and get back in.

No investor with any brains is planning on 10% and 5% real from stocks & bonds, most here seem to be planning on modest real returns. If we get 3.5% and 2.2% real returns from stocks and bonds respectively over our remaining lifetimes, we'll live well and leave a pile to charity.
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Old 03-13-2014, 12:26 PM   #3
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I am sure you've seen all the studies on how unproductive market timing is for 99.9% of investors, but we all do as we see fit.
Somehow we are hoping that for that 0.1%.
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Old 03-13-2014, 12:37 PM   #4
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Inflation is always a big variable in understanding long term performance, as the article indicates. The best thing you can do to prepare for this is to reduce your sensitivity to inflation as much as possible. Owning your home assures that you won't be subject to annual rent increases. If you live in a state where property tax increases are capped at a small amount (2% in California), that also offers protection against inflation.

There's not much we can do regarding the low bond yield environment other than be realistic in adjusting expected returns downward until rates begin to rise again. That is why many on the forum have lowered their SWR to 3%, even though historically 4% has never failed over a 30 year period, including the year 1966, which had the worst combination of high inflation and poor sequence of returns in history.
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Old 03-13-2014, 12:44 PM   #5
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As a defensive strategy, may I suggest that you don't read too many gloomy bearish reports? I understand that they are going to be right one day but relying on them for one's investment strategy is not going to be very profitable in the long run. Time has proven that.
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Old 03-13-2014, 12:57 PM   #6
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I find it a little hard to believe that anything in this Fidelity article is news to anyone who is even a casual observer of this forum. E-R.org has produced a steady stream of threads in the recent past about low bond yields and high stock valuations leading to future returns that will most likely be below the historical averages.

As far as what to do about it, I guess that's up to you. The Fidelity article doesn't suggest that long term stock market returns will be negative, just that they probably won't average 10% per year. If that has you concerned enough, maybe you should take J.P. Morgan's famous advice and "sell down to your sleeping point". Just don't be tempted to buy back again at higher prices if stocks continue to go up in the near term.
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Old 03-13-2014, 01:01 PM   #7
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Originally Posted by dtbach View Post
Normally don't too gloomy reading bearish reports but this one from Fidelity had me thinking that now may be the time to get defensive.

https://www.fidelity.com/insights/in...ur-investments
Don't let it get to you. I agree with others in the previous posts on this thread.

Sure, the market will go down at some time, but I seriously doubt that there will be a clear, unequivocal, prediction that we can rely upon with certainty for the timing of that event. But still, we know that what does up must come down! And that includes the market.

What I have been doing to protect myself, all along, is keeping my spending down like we all do. I am hoping that by spending less than my dividends, I will not have to sell low in the event of a crash. Also, I will be starting SS before long and that will help too.
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Old 03-13-2014, 01:27 PM   #8
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Apropos of nothing, except that when I turned on the TV, the DJIA was down $200, and I remembered my make believe portfolio from Feb 28 2011, when I read a recommendation for the top ten best stocks for the long haul.
I had created a test portfolio of approximately $1000 for each of those ten stocks...

As of right now, these are the results. Now I wonder if instead of $1,000 each it had been $100K each... would I be nervous?
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Old 03-13-2014, 01:43 PM   #9
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Don't let it get to you. I agree with others in the previous posts on this thread.

Sure, the market will go down at some time, but I seriously doubt that there will be a clear, unequivocal, prediction that we can rely upon with certainty for the timing of that event. But still, we know that what does up must come down! And that includes the market.

What I have been doing to protect myself, all along, is keeping my spending down like we all do. I am hoping that by spending less than my dividends, I will not have to sell low in the event of a crash. Also, I will be starting SS before long and that will help too.
I guess I don't get peoples fascination with this kind of "news" article. You think the author Brett Arends really spent a lot of time with this? Or just had to churn out another article to meet his deadline. IMO, just a list of obvious factoids that will not help anyone in any way other than Fidelity who can use it to drive people to their advisers.

Every day there will be another article like this. We don't often hear the Vanguard reports repeated in the media. They are always something like, we don't have any idea where the market is headed, just keep a balanced portfolio with an AA you are comfortable with. Hard to make up a newsy story everyday with this. So tomorrow, next week, next month, guess what, there will be more articles like this spouting off obvious factoids and "analysis".

I suspect they will be as helpful to people in the future as they have been in the past.
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Old 03-13-2014, 01:52 PM   #10
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.... If we get 3.5% and 2.2% real returns from stocks and bonds respectively over our remaining lifetimes, we'll live well and leave a pile to charity.
3.5% real? Yep, if we can count on that we will be in happy land. Imagine an (another?) opportunity for TIPs @ 3.5% real!

Even the worst 40 year periods in FIRECalc history have provided a small positive real return overall ( that is, a 40 year with zero real return would allow a 2.5% WR, but it shows something like 3.2% WR to still give 100%).

Here's an interesting exercise, but it does require you to kind of 'forget' history if you can (it works better with an individual, non-identified stock), or maybe the person creating the graph could stretch/shrink some time slots to change the shape of the curve a bit from what would be expected, and maybe they use the whole paper, maybe not (so 2013 may end half-way, which might trick you):

Have someone print out the 'market' from as far back as possible until today, preferably with re-invested divs and adjusted for inflation). Remove the scales on each axis (date and $). Cover it with a sheet of paper, and slide the paper slowly to the right, exposing the scale a little as you go. Mark where you would want to get out, and then when you would get back in again. See how you do. Did you miss a big peak? Did you ever get a chance to get back in again? Or did you give up in frustration, and jump in near the next peak (sell high, buy higher?)

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Old 03-13-2014, 01:52 PM   #11
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Snooze city and I cannot even be bothered to click the link. Come on, reading doom and gloom voluntarily? Go outside and play in the sunshine for a while if it is getting to you.
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Old 03-13-2014, 02:00 PM   #12
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Originally Posted by imoldernu View Post
... I remembered my make believe portfolio from Feb 28 2011, when I read a recommendation for the top ten best stocks for the long haul.
I had created a test portfolio of approximately $1000 for each of those ten stocks...

As of right now, these are the results. Now I wonder if instead of $1,000 each it had been $100K each... would I be nervous?
You meant that instead of a portfolio of $10K in value going up to $14K, would a portfolio of $1M going up to $1.4M make an investor nervous? Same as many people here, I have significantly more than $1.4M (won't tell exact number though ). Does this make me nervous? Yes, but I am not sure what to do. I myself have set aside 25% in cash (short-term interest accounts and I-bonds), so there's not a lot more that I can do.

So, I spent my time to repair and tweak my vintage speakers. I think we all need some hobbies or activities to take our mind off the market.
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Old 03-13-2014, 02:26 PM   #13
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Originally Posted by dtbach View Post
Normally don't too gloomy reading bearish reports but this one from Fidelity had me thinking that now may be the time to get defensive.
Nobody knows nothing. That's my story and I'm sticking to it.

Quote:
Wall Street strategists Rob Arnott...
Um. Reeeallly?
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Old 03-13-2014, 03:28 PM   #14
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Well, I just ran across a report contradictory to the one in the OP, so might as well link it here.

The analyst mentioned is Sam Eisenstadt, who was the research chairman at Value Line.

See: Top analyst sees S&P 500 at 2100 soon- MSN Money
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Old 03-13-2014, 03:34 PM   #15
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Nobody knows nothing.
Hmmm. Does this mean someone knows something?
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Old 03-13-2014, 03:41 PM   #16
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Has anyone else read the book Forecast: What Physics, Meterology, and the Natural Sciences Can Teach Us About Economics by Mark Buchanan? The premise is that a simple feedback loop from something like a hedge fund trading program can lead to major consequences, the kind predictable by mathematical models used to predict tornadoes, but pretty much not the way economists of today are generally trained to think. The author believes this faulty logic is why the last major recession seemed to take most economists by surprise.
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Old 03-13-2014, 10:02 PM   #17
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Well, I just ran across a report contradictory to the one in the OP, so might as well link it here.

The analyst mentioned is Sam Eisenstadt, who was the research chairman at Value Line.

See: Top analyst sees S&P 500 at 2100 soon- MSN Money
I like this one. Think I'll take that advice
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Old 03-13-2014, 10:11 PM   #18
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I'm going to listen to Cramer tonight to see what he has to say about all this market up/down stuff...
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Old 03-13-2014, 10:17 PM   #19
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Well you're certainly consistent.

short or long correction going on

Anyone worried about the Ukrainian situation?

Like many here, I'll just revisit/tweak my AA every few years, and rebalance per my IP as needed. Same as I did in 87, 00, 08 thankfully...

I am sure you've seen all the studies on how unproductive market timing is for 99.9% of investors, but we all do as we see fit. No one is suggesting there won't be a correction, we all know there will be sooner or later, but we also know we can't time our way in and out successfully.

They don't offer any suggestions as to what to do? And of course they won't tell you when to dig up the cash in your backyard (or mattress) and get back in.

No investor with any brains is planning on 10% and 5% real from stocks & bonds, most here seem to be planning on modest real returns. If we get 3.5% and 2.2% real returns from stocks and bonds respectively over our remaining lifetimes, we'll live well and leave a pile to charity.
I have actually done fairly well with a modified "timing". When the market was tanking in 2008 I sold approx. 35% of my stock portfolio. Not all, just a portion. Then did nothing until around Apr 2009 and deduced that the worst was probably past so threw just about everything back into stocks (including dumping pretty much all of my bond funds). Then riding the market up until last year when I began unwinding some of the stock funds and moving into Wellesley and Permanent Portfolio.

I don't think its unrealistic to do some partial timing. I didn't know when the exact bottom was and don't expect to know when the exact top is, but you don't have to ride the elevator completely up and down.
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Old 03-13-2014, 10:29 PM   #20
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...I don't think its unrealistic to do some partial timing. I didn't know when the exact bottom was and don't expect to know when the exact top is, but you don't have to ride the elevator completely up and down.
Partial market timing is what I have been doing since 2000, and have been doing OK. In contrast with rebalancers who do it on a fixed date and maintain a fixed AA, I rebalance based on market conditions and whenever I feel like it.

Thinking back, my timing was not perfect, but not that bad. If there is anything I regret, it is that I should have not been so timid, meaning I should have gone in harder at market bottoms.

But right now, I do not feel the urge to sell nor to buy, and see no compelling stories to do either, so am not doing anything.
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