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Old 03-17-2012, 08:31 PM   #21
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Sometimes a good way to look at this is trying to avoid maximim regret. If you move to cash, and the market takes off (unlikely in my opinion, but I am no trader), will you feel bad or will you think that you didn't like what you saw so you left. If you go to a party and people are doing various things that could get you all arrested, and you leave, and later a friend tells you it turned into a maximum bacchanal- do you feel regret, or do you think that you can only play probabilities as you see them?

Contrariwise, if you stay in and the market does go down hard, are you more upset than condition A above?

(snippage)

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Ha, I assume that you are familiar with the basics of behavioral finance. If so, surely you must recognize that the outcome to what you pose is a foregone conclusion for pretty much everyone. All the research has shown that people feel the pain of loss far more keenly than the pleasure of gains. So I think this is not a great way to frame the dilemma. But then again, I am immediately suspicious of what I am contemplating the moment I recognize one of the classic behavioral finance traps presenting itself.

I think OP may simply be coming to the realization that his AA is no longer suitable for where he is in life and his risk tolerance. Assuming that is true, he should do some navel gazing to figure out what would be more appropriate. Personally, what I struggle with is that investment grade bonds, treasuries, agencies and agency MBS all appear to be vastly overpriced. That being the case, diversification is hard to come by without essentially locking in inflation-adjusted losses at the time of purchase. That probably explains my zeal for merger arbitrage funds and individual junk bonds these days.
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Old 03-17-2012, 08:32 PM   #22
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If you go to cash, what is your signal or plan to buy back into the market?
Given the following scenarios, what will you do?

DJIA goes to 10,000 in the next year.
DJIA goes to 12,000 in the next year.
DJIA goes to 15,000 in the next year.
DJIA goes to 14,000 in the next year.

Will you just sit and wing it? Or do you have a plan on when to reinvest?

Or do you have an asset allocation plan of say 20% equities and 80% cash? Or is it really 100% cash?
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Old 03-17-2012, 08:33 PM   #23
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Your stock funds never made it back? Mine did - and many by the end of 2009, all in 2010. It was pretty darn quick! (unlike in 2002 - that took longer).

Why do you think the pundits predicting a pullback are any more correct than the pundits predicting new highs?

I'm always amazed how absolutely certain people feel about an imminent correction. As if it's guaranteed!

Audrey
I have nothing to be gained from changing anyone's mind, and I know I would have no success anyway. While I agree that much forecasting is just noise, there are people who are uncannily good at producing useful noise. Jeremy Grantham at GMO is one. He is one of the originators of asset allocation instead of stock picking, and an extremely wealthy man. His firm makes hard predicitons, and goes back and reviews their history and outomes regularly. Here is GMO's webpage, and Jeremy's most recent quarterly letter.

http://www.gmo.com/America/MyHome/default
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Old 03-17-2012, 09:07 PM   #24
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To LOL

The prediction is 20-30% correction, so I guess, getting in slowly at about 10,000. Obviously if it goes up to 14,000, I'll just wait. It went up.

Is there any study on cashing in completely when the market is at the top, then dollar cost averaging into stocks again, when the market hits the bottom.(I know it is relative).?

Most of the prediction I read calls for market "volatility" in the next decade, suggesting that the old buy and hold may not be feasible.
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Old 03-17-2012, 09:23 PM   #25
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That's wishful thinking. What if the DJIA does not ever reach 10,000 in the next few years?

Your answer if the market goes up is interesting: You will just wait. Wait for what? What if DJIA goes to 11,000 and then goes to 17,000? What's your plan?

Nobody does "buy and hold"; they do "buy, hold and rebalance". Select a percentage for equities, for fixed income, for cash and just go with the flow and keep rebalancing along the way.
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Old 03-17-2012, 09:31 PM   #26
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A quote from Peter Lynch:

Quote:
Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
While a certain degree of concern is understandable as the market "climbs a wall of worry" and revisiting asset allocation from time to time as we progress through life is sensible, going all cash may simply be an exercise in trading off one group of risks for a different group of risks.
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Old 03-17-2012, 09:34 PM   #27
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To elaborate on Brewer's point: There are no risk-free investments today which pay better than inflation. I suppose very long term Treasuries might be close, but they are only "riskless" if held to term.

That's not to say folks shouldn't have any assets in cash. But people shouldn't think they can pull out of the market and preserve 100% of the purchasing power of their portfolio.
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Old 03-17-2012, 09:42 PM   #28
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Quote:
Originally Posted by Birchwood View Post
To LOL

The prediction is 20-30% correction, so I guess, getting in slowly at about 10,000. Obviously if it goes up to 14,000, I'll just wait. It went up.

Is there any study on cashing in completely when the market is at the top, then dollar cost averaging into stocks again, when the market hits the bottom.(I know it is relative).?

Most of the prediction I read calls for market "volatility" in the next decade, suggesting that the old buy and hold may not be feasible.
Yes, I have a study on just that subject. It's called "The Personal Experience" study.

I took a large amount of money (app. 50% of my net worth) out of the market at a very good time, just before the 2008/2009 crash. I watched in great satisfaction and possibly even smugness as the market went down and down. I kept saying "the economy is in the crapper, and things will get even worse". When it started to go back up I figured it was temporary and so I waited for the double dip. It went up more and I just knew it couldn't last. It went up even more and I started thinking maybe I better do some buying on the dips. I did do a little last August, after the market had regained 70% of it's losses, but I figured since it might crash again I better go slow.

So for the past 3 years I've been sitting with a huge amount of cash, probably 15 years expenses worth. I've been raking in the interest, making anywhere from 3.5% to 1.1% recently. I did put a good chunk into VBIRX (Short Term Bonds) a while ago, to try to get over 2% return although with some capital risk. I've missed the entire 100% run up of the S&P, and am in a position now where I'm stuck in a money losing position (cash vs. inflation), or having to dollar cost average into a market I still think is overvalued while having missed most of the profits.

My point is, it's often relatively easy to pick the high end of a stock run up, but getting it right twice in a row is pretty darned hard. I'm with Ha, do whatever makes you feel best. But going to extremes is seldom what will work out best in the long run. Many have suggested readjusting your asset allocation to a more comfortable level. That's good advice. If you decide to go for it, I wish you better luck and wisdom than I've had. It felt good when I was right, but not so great now. Whenever I do get back to my desired AA, I'm going to breath a sigh of relief and sleep much better at night.
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Old 03-17-2012, 09:50 PM   #29
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Ha, I assume that you are familiar with the basics of behavioral finance. If so, surely you must recognize that the outcome to what you pose is a foregone conclusion for pretty much everyone. All the research has shown that people feel the pain of loss far more keenly than the pleasure of gains. So I think this is not a great way to frame the dilemma. But then again, I am immediately suspicious of what I am contemplating the moment I recognize one of the classic behavioral finance traps presenting itself.

I think OP may simply be coming to the realization that his AA is no longer suitable for where he is in life and his risk tolerance. Assuming that is true, he should do some navel gazing to figure out what would be more appropriate. Personally, what I struggle with is that investment grade bonds, treasuries, agencies and agency MBS all appear to be vastly overpriced. That being the case, diversification is hard to come by without essentially locking in inflation-adjusted losses at the time of purchase. That probably explains my zeal for merger arbitrage funds and individual junk bonds these days.
I do understand what you are saying. But OP is clearly not extremely sophisticated in investing, or he wouldn't be asking this question. The only reason I responded to the original post was that he was getting only one side of a complex argument. He must already know the "AA and stay the course" argument. Who does not?

I think with the average AA around here for retirees or soon to be retirees is less than half stocks. Not too much hurt lurking there, but think back to the posts on this forum during the last crunch. Some were very close to jumping ship. To me, the time to take precautions is when it will not too expensive.

I am reasonably good at taking risk when the payoffs for success are clear, and avoiding what I can when they are not.

I may soon go to all cash in all non-taxable accounts. This thread is scarier than the infamous whee.

Taxes make it look different, but your suggestions on options on volatility is probably a very good one for one who feels as I do. I'll soon PM you, as I am ignorant of this area.

Ha
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Old 03-17-2012, 09:51 PM   #30
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On the verge of retirement is not a bad time to get conservative. I went about 30% cash in 2007 when I retired because that's when your portfolio is most vulnerable and I felt the negative personal savings rate was going to cause big problems for the near-term economy. Pretty good call. But the market went up 10% after I had the cash. When it finally lost 20%, an "official" bear, I started buying equities with the cash. Each 5%-10% drop in the market I added about 20% of my excess cash back into equities. I was planning for about a 40% total drop, but you never know what's going to happen. If the market hadn't gone down enough, then I would simply have used the cash for retirement expenses. That's one advantage you have over those still accumulating.

When the market was 50% down I bought equities with a HELOC loan I was out of cash except for a few months of expenses. Then, conveniently, things turned up before I had to sell anything at a loss. Though with recent investments, it wouldn't have been a big loss.

The converse of sorts is that when the market exceeded my retirement projections, I sold equities and raised cash again so that I'm about 12% cash now. Even after getting to reinvest a little during last year's dip. So you can do the whole raise cash and reinvest on the dips thing completely mechanically, no timing calls involved. Just buy low and sell high. Although if you spreadsheet the benefit of going 30% cash and reinvesting during a bear market the results are not all that impressive.

So everything worked out pretty well, and I would have been OK if the market had never gone down. But it's a pretty big stab in the dark trying to figure out when the market will peak, when it will trough, and how fast it will recover.

So go ahead and take a reasonable amount in cash, something that won't wreck your retirement if the market goes up and you're not fully invested. If the market goes up, you have your retirement spending money ready to go. If it goes down, reinvest in pre-determined increments so you are ready if the market goes back up, but also have more to reinvest if it goes down. Hang on to enough cash so that you feel comfortable the market will be headed up before you run out. You don't need to make it through to a full recovery before selling equities again. You'll have done a little better than buy and hold if the dip was deep enough. If not, you've only lost equity gains on the cash amount for as long as it takes to spend it (per your budget!)

Good luck!
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Old 03-17-2012, 09:54 PM   #31
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He must already know the "AA and stay the course" argument. Who does not?

Ha
I feel quite safe in telling you that a distressingly significant fraction of retail investors do not have a working knowledge of even the basic framework of "AA and stay the course."

I would be happy to chat about options.
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Old 03-17-2012, 11:08 PM   #32
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Just wait to sell just before you see a post titled "Wheee......."
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Old 03-18-2012, 05:14 AM   #33
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I agree with what Ha writes below. This is one of the reasons why nearly 100% of my savings are in CDs, munis, and bonds. I could not stand losing a lot of money in another financial downturn.
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Sometimes a good way to look at this is trying to avoid maximim regret. If you move to cash, and the market takes off (unlikely in my opinion, but I am no trader), will you feel bad or will you think that you didn't like what you saw so you left. (...) Contrariwise, if you stay in and the market does go down hard, are you more upset than condition A above?
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Old 03-18-2012, 08:15 AM   #34
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I sympathize with the urge to go toward cash as markets rise but the "time to sell all" impulse seems futile to me. As others pointed out the markets tend to swing pretty far before they correct and the timing and degree are impossible to predict. Visualize this possible scenario - good recovery news continues and exuberance leads the Dow to 16500 over a couple of years and then it drops to 14000, goes up to 14500, then drops to 13500 (still above today). Is it time to buy back in? Gotta wait some more? There are just too many scenarios that leave you standing on the sidelines forever burning up your cash.

If I was going to try to "time to a degree" I think I would set a range of equities (say a high of 70% and a low of 40% and then dollar cost average up and down based on market PE averages or something, always stopping with equities at some predetermined minimum to allow some long term growth.
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Old 03-18-2012, 08:22 AM   #35
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I think LOL summed it up best: Buy, hold, rebalance. Sounds to me you could use Vanguard's help with your financial planning as there is not a solid understanding of what you hold or your strategy. Each of us must decide what we works best and is appropriate for us on the AA. That may change given life's circumstances but shouldn't change due to market fluctuations; let the rebalancing capture lower prices. If you think you can time the market, historical data says you are almost definitely wrong. Sure, there are always instances of someone who made "the right call" (including on this thread) but remember, even a broken clock is right twice a day.
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Old 03-18-2012, 08:39 AM   #36
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Well, you might not get the pullback until we are much higher.

Look at a chart of the DOW from 1980 to 2000.

It was at about a 1000 (a record high) in 1980. It kept making record highs for 20 years, until it was well over 10000.

I'm not saying that the market is going to do anything like that. It might tank tomorrow. You need to own an amount of stocks that leaves you comfortable in either scenario.

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Now that the DOW, NAsdaq and S&P are on a record high, and there is a prediction of a 20-30% pull back, why not run into safety of cash, wait for this train to crash, then slowly move back?
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Old 03-18-2012, 08:52 AM   #37
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I agree with what Ha writes below. This is one of the reasons why nearly 100% of my savings are in CDs, munis, and bonds. I could not stand losing a lot of money in another financial downturn.
CDs are barely keeping up with inflation while bonds are due for a correction according to the experts.
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Old 03-18-2012, 09:02 AM   #38
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CDs are barely not keeping up with inflation while bonds are due for a correction according to the experts.
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Old 03-18-2012, 09:27 AM   #39
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I know a guy who has been buying puts on Apple (for people who dont know options, thats a bet that the stock will drop) for weeks. Week after week he makes another bearish bet because "it has to drop sharply from here". He may be right eventually....if he has any money left when it happens.

Never bet against momentum. Going to cash isn't exactly betting against the momentum but it is definitely being afraid of it. The market will pull back at some point, probably pretty soon, but I seriously doubt it will be a dramatic drop like 2008. We are in totally different economic scenarios.
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Old 03-18-2012, 09:30 AM   #40
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I sold the last of my $10 basis AAPL in December at $390, taking advantage of the 0% cap gains (15% bracket). I intended to buy it right back to readjust the cost basis, but it went up $3 the next day. So I waited for it to drop back. Waiting, waiting, waiting...
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