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Old 07-06-2008, 09:16 PM   #41
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A list of excellent books for those who would like to or need to learn more about investing:

Investment Books

One of the books on the list providing an interesting discussion of financial history that some here might find beneficial is A Random Walk Down Wall Street by Burton Malkiel.

Required reading would include The Four Pillars of Investing by Bernstein and The Bogleheads' Guide to Investing by Larimore et al.
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Old 07-06-2008, 09:35 PM   #42
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Oh, please, you're trying to apply rational logic to a market that has neither. Spouse's ER'd uncle started shorting the overvalued NASDAQ in late 1998, when it couldn't possibly go higher by any rational logical analysis, and he shorted himself right back into the workforce until 2006.

We rebalanced in February because our asset allocation had gotten too far out of whack. That way we didn't have to be rational or technical or psychotic psychic. With the appropriate cushion of cash and a chosen asset allocation, the rebalancing should take care of the capital preservation.

Of course the ultimate in capital preservation would be an annuity.
You're making my point. There are times when the market is clearly overvalued - as in dot-com, and in US equities 2007. I could not believe that the market started to climb after the turmoil of last Aug, and in fact reached a new high. With all the revelations that were slowly being revealed?

But the "irrational exuberance" never lasts. Markets eventually come back to their rightful valuations - P/Es between 10 and 15. Lower range, a reasonable expectation for a good return. Higher range, t-bill returns or worse.

We were in the 20s last year - and those were based on "forward earnings expectations". Gotta give some credit to those on Wall St. - they always find a new way to let you know that stocks are a bargain.

I agree that rebalancing in and of itself reduces risk to a degree. I'll just say it again...when the market as a whole is trading at 20+ P/Es, based on "forward earnings expectations" - with all the cracks that became obvious in the system - that reducing your equity exposure makes sense.

I hope you're not trying to tell me that investing in the stock market with a "forward" P/E of 20 is likely to produce the same returns as investing in the same market with a backward looking P/E of 10?

Or, maybe phrased a different way, when would you ever consider reducing equity exposure? P/E=30? P/E=40?

P/E-100?

No, I guess not. Maybe it'll go to 200...
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Old 07-06-2008, 09:39 PM   #43
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Hey, if we all knew how to predict the market, we'd all be multi-zillionaires.

We wouldn't want to share our "knowledge" with anybody and we'd be hiding out on our private islands, surrounded by bodyguards and busily counting our money. 8)
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Old 07-06-2008, 09:41 PM   #44
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Come on...lets be honest. While I still believe that buy-and-hold is probably the best strategy to either gain wealth, or maintain buying power in retirement (mainly because it is essentially impossible to pick a top or bottom), there is something to be said for capital preservation.

How many of you **really** believed the market could streak further skyward last October? With the credit crunch that appeared in Aug, the meltdown in sub-prime mortgages, home prices plummeting and foreclosures going out the roof?

I'll bet virtually all of you - deep in the gut - knew that it couldn't continue. That a major sell-off wasn't only necessary, but inevitable. This at a time when virtually all of the world's stock markets weren't only at an all-time high, but growing exponentially. Nothing does that over time - exponential growth always ends with a collapse. Just look at China, or maybe closer to home a bacteria colony.

Now its going to take a 27% gain in the DOW to get back to the Oct high.

My only real point here is that while rebalancing, it makes sense to look at the market, try to get a feel for where it is historically valuation wise, consider the economic *knowns*, and if it is more likely than not that downside potential outweighs upside, to at least reduce exposure.

Remember the old adage - not losing money is every bit as important than making money.
The question is how do you reduce the risk of losing money. The buy and hold folks say pick an AA you can live with, climb on the roller coaster and hold on to your hat. What you are proposing is in essence market timing, no? Nothing wrong with it, but basically you have to be able to recognize a top in order to make the right move. In general I keep my asset allocation pretty conservative for someone my age (I am 34 and my AA is only 65-70% stocks), so I tend to ride the ups and downs. And so far that's exactly what I have been doing. My portfolio overall is down only about 8.6% from July 2007, much less than the overall stock market and I don't feel panicked about it. Nor am I kicking myself for missing the top.

But I have to admit that in mid 2007 I started feeling like we were heading into trouble, so I put my play money to work and I bought a bear market fund (when the DOW passed 13,000 on the way up). But by October of last year, when the DOW passed 14,000 I felt like I had made a big mistake and I almost got rid of it but for once my procrastination paid off. I am glad I didn't, but I think it showed me that it is difficult to make the right decision at the right time and not second guess yourself all the way. And now I have to decide when to sell this puppy...
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Old 07-06-2008, 09:41 PM   #45
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Cyclone, he said the money was lost shorting the market... as in he thought it would drop when it was clearly overvalued in 1998... only to see it climb to a point he couldn't keep up.
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Old 07-06-2008, 09:48 PM   #46
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A list of excellent books for those who would like to or need to learn more about investing:

Investment Books

One of the books on the list providing an interesting discussion of financial history that some here might find beneficial is A Random Walk Down Wall Street by Burton Malkiel.

Required reading would include The Four Pillars of Investing by Bernstein and The Bogleheads' Guide to Investing by Larimore et al.
Thanks, Want2retire. I've done a lot of reading in the last 1.5 years, trying to figure out how to invest my very fortunate inheritance. I have finally come up with a plan - that I intend to initiate come late Oct. I've been mostly cash, market-neutral (HSGFX) and foreign bonds (BEGBX) up to this point.

I simply can't understand why most just stick their head in the sand and say valuations don't matter. Nothing matters more...especially since the first couple of years in retirement can seal your bliss or doom.

When I finally get fully invested over the next couple of years, I will continue to keep my eyes on stock market valuations, and when they get out of line, reduce my exposure accordingly.

I think it was Buffet that said not losing money is as important than making money...
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Old 07-06-2008, 10:04 PM   #47
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The question is how do you reduce the risk of losing money. The buy and hold folks say pick an AA you can live with, climb on the roller coaster and hold on to your hat. What you are proposing is in essence market timing, no? Nothing wrong with it, but basically you have to be able to recognize a top in order to make the right move. In general I keep my asset allocation pretty conservative for someone my age (I am 34 and my AA is only 65-70% stocks), so I tend to ride the ups and downs. And so far that's exactly what I have been doing. My portfolio overall is down only about 8.6% from July 2007, much less than the overall stock market and I don't feel panicked about it. Nor am I kicking myself for missing the top.

But I have to admit that in mid 2007 I started feeling like we were heading into trouble, so I put my play money to work and I bought a bear market fund (when the DOW passed 13,000 on the way up). But by October of last year, when the DOW passed 14,000 I felt like I had made a big mistake and I almost got rid of it but for once my procrastination paid off. I am glad I didn't, but I think it showed me that it is difficult to make the right decision at the right time and not second guess yourself all the way. And now I have to decide when to sell this puppy...
You see, FIREdreamer - you actually have more guts than I do. I decided years ago never to short anything (although I posted here last year that I was considering shorting China (wish I had), and am very tempted to short USO right now!). Markets can and do move up irrationally, and if you're caught on the wrong side, can lose a fortune.

Yes, in a sense it is market timing. But when P/E ratios climb into the upper bounds of historical ranges, you'd better have a damn good reason to believe that they will be sustainable.

Typically they are not sustainable, and will eventually return to the mean.

Which means that if you bought in the 20s, you end up losing money. If you bought in the 10s, and rode it up to the 20s - and held - you give it back when it retreats.

Nothing wrong with taking some money off the table if you're lucky enough to have a gain. Theres also nothing wrong with not investing when the markets are excessively expensive.
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Old 07-06-2008, 10:18 PM   #48
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Sure, good advice to buy low, sell high--but does anyone here ever sell high?

OP is possibly more risk-adverse than he realized this close to his anticipated ER--should he just ride this market down (if that's where it's going) before he rebalances into a more conservative AA?
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Old 07-06-2008, 10:21 PM   #49
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You see, FIREdreamer - you actually have more guts than I do.
Well I don't know how much guts I really have. I picked BEARX, probably one of the "safest" bear market fund around (in case I was wrong). I didn't feel like I was taking as much risk with it as I would have with a Rydex inverse or double inverse for example.
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Old 07-06-2008, 10:27 PM   #50
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Yes, in a sense it is market timing. But when P/E ratios climb into the upper bounds of historical ranges, you'd better have a damn good reason to believe that they will be sustainable.

Nothing wrong with taking some money off the table if you're lucky enough to have a gain. Theres also nothing wrong with not investing when the markets are excessively expensive.
I read a lot of material over the weekend, much of it follows your view. I think the markets are very oversold as of last week and a rally is due. Selling into that rally and waiting it out for awhile makes some sense to me. Any rally from here might bring in investors selling out, bear markets tend to create that, the opposite of buying the dips. Of course, the real problem will be deciding when to put the chips back on the table. Waiting for the VIX to hit 35 or 40 is one idea, capitulation. :confused: Of course, the bottom could of been Friday, such is life, and market timing.
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Old 07-06-2008, 10:30 PM   #51
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Sure, good advice to buy low, sell high--but does anyone here ever sell high?

OP is possibly more risk-adverse than he realized this close to his anticipated ER--should he just ride this market down (if that's where it's going) before he rebalances into a more conservative AA?
I hopefully sell high when I rebalance my portfolio. That's really the only time I sell anything in my retirement portfolio. As for the OP, I think it is almost too late now to switch to a more conservative AA. The market has already lost 20% and it would lock in the losses. I think the best course of action is to ride it down, then back up and only then switch to a more conservative AA. Off course that's if you believe the market will ever go back up...In the end it might require postponing retirement to allow the market to recover. In the mean time stock up on Pepto-Bismol...
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Old 07-06-2008, 10:58 PM   #52
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The market is at a lower point than it was a few months ago, but I don't have to sell anything, so I won't.

If the market were at an all-time high I wouldn't sell anything either because of the same reason.

All I care about now is if I am properly allocated based on my financial plan. I've been DCAing into REITs because I need to boost up my REITs allocation, so I'll continue to do that on a monthly basis.

Having about 5 years of my annual budget in cash investments ( 8 years for a bare bones budget) plus still bringing in cash from my business in semi-retirement keeps me in the comfort zone.
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Old 07-06-2008, 10:59 PM   #53
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You're making my point.
I fear you're missing mine. It's along the lines of the market remaining irrational far longer than logical investors can remain solvent. That uncle was sure the P/E was way too high, and he was right, and he ran out of money.

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I agree that rebalancing in and of itself reduces risk to a degree.
Not only that, it keeps people from forecasting the market-- let alone being correct-- by deciding what the P/E is. If you pick an asset allocation and rebalance to it occasionally, you'll tend to buy low and sell high. If you're doing it with index funds then it's largely irrelevant to fret over P/Es.

You can invest as you suggest, and many do, but getting it right is a lot harder. I've spent the time doing that. I did better then than I'm doing now, but it was work and I'd rather have a life. If I can get 60-70% of my hypothetical max return with only about 20% of the effort, I'd have to be putting out max effort for love instead of for money.

When you're investing to get enough money for ER then you're quite happy to take volatilty and concentration risk. When you're ER, is there a reason to take volatility and concentration risk? How much more money do you need? More importantly, how much do you want to lose?

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I'll just say it again...when the market as a whole is trading at 20+ P/Es, based on "forward earnings expectations" - with all the cracks that became obvious in the system - that reducing your equity exposure makes sense.
I hope you're not trying to tell me that investing in the stock market with a "forward" P/E of 20 is likely to produce the same returns as investing in the same market with a backward looking P/E of 10?
Perhaps. I don't know. I'd be rebalancing without worrying about the P/E.

I should point out that I wouldn't be reducing equity exposure, either-- I'd be cashing in highly-valued stocks and buying lower-valued stocks with about the same total equity allocation (>90%). Again that'd have to be an asset allocation that was diversified enough to cover a pretty broad swath of the total stock market. Having both Worldcom & Enron wouldn't exactly count as "diversification".

Your concentration on P/E10 reminds me of a poster named JWR1945.

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Or, maybe phrased a different way, when would you ever consider reducing equity exposure? P/E=30? P/E=40?
P/E-100?
No, I guess not. Maybe it'll go to 200...
Don't know. (Don't care.) I'll point out that there's a high likelihood of the world's best forward P/E numbers being total crap, and we know how individual companies can manipulate their backward P/Es as well. The guys who get those forecasts right are the ones who take the time to get to know their businesses, and I'd rather do other things.

I suspect that in some markets, a high P/E stock (let's give it a name like, say, "growth") could outperform a low P/E stock (maybe we could call that "value"). I agree that value stock returns tend to produce a premium over the long term, but that's also because of the higher degree of risk that the company will go out of business. In other words a higher-returning value stock has priced in a higher degree of bankruptcy risk.

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I hopefully sell high when I rebalance my portfolio. That's really the only time I sell anything in my retirement portfolio.
See, people do get it. It doesn't require any ability to figure out when the P/E is "too high" or "too low" or "just right", either.
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Old 07-06-2008, 11:37 PM   #54
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With the recent downturn of the market, along with an uncertain future, what do you plan to do with your portfolio tomorrow
Nothing. Still essentially 100% SP500 index funds. If I had any available cash I'd be buying.

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Old 07-07-2008, 12:59 AM   #55
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I hopefully sell high when I rebalance my portfolio. That's really the only time I sell anything in my retirement portfolio. As for the OP, I think it is almost too late now to switch to a more conservative AA. The market has already lost 20% and it would lock in the losses. I think the best course of action is to ride it down, then back up and only then switch to a more conservative AA. Off course that's if you believe the market will ever go back up...In the end it might require postponing retirement to allow the market to recover. In the mean time stock up on Pepto-Bismol...
Firedreamer, your reply is most helpful. OP can also rebalance to his existing AA and feel like he is getting at least a little advantage from this market--that might help him psychologically stomach the ride. And he can look ahead and plan for a more conservative AA once things settle down.
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Old 07-07-2008, 03:17 AM   #56
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Gonna buy, spent much of the weekend looking for value and yield. I have too much cash/mm laying around not earning anything much, so decided to go for it. Will put 1/3 into munis and 2/3 into nice yield value stocks that have been beaten up and oversold. I'll still have 2-3 years of bare-bones living expenses in cash (and we're not FIREd yet) plus a pretty good divvie and muni yield on some AA changes (mostly from cash positions) I've made since early in the year. I'm just going to keep dca'ing, and I'm not going to worry much if we go down a few more percent. If it does, I'll just eat into the 2-3 years of barebones expense cash I have lying around and buy more.

I think though, that the fundamentals are not really so bad that companies like GE would be trading at under a p/e of 10, or that ED would be under 8. Granted, SOME of the high p/e's we saw last year were too high but a 15-16 for GE and a 12-13 for ED would be pretty normal I would think, so there is a lot of upside, once the gloom and doom media emotions calm down.

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Old 07-07-2008, 04:19 AM   #57
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You see, FIREdreamer - you actually have more guts than I do. I decided years ago never to short anything (although I posted here last year that I was considering shorting China (wish I had), and am very tempted to short USO right now!). Markets can and do move up irrationally, and if you're caught on the wrong side, can lose a fortune.

Yes, in a sense it is market timing. But when P/E ratios climb into the upper bounds of historical ranges, you'd better have a damn good reason to believe that they will be sustainable.
It seems to me that one of the toughest things is to figure out what is the real P/E of the S&P depending on what data you look at you get numbers anywhere from 14 to 23. It is worth noting that range in P/E estimates between sources exceeds the 20% market drop by a considerable margin.

I am not saying the P/E ratios are worthless but I think they are only one tool to evaluate the market, Price/Sales and Price to Book Value are also worth looking at.

Personally, I think the key comparison is the P/E of stocks vs bonds. Right now with 10 year treasury yielding 3.97% they Bonds have a P/E over 25. This seems expensive to me, and so while you maybe right stocks are still expensive they seem cheap in comparison to bonds. Finally if a person was rebalancing July 1 with a 50/50 portfolio you'd be selling about 10% of your bonds and buying stock...
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Old 07-07-2008, 08:07 AM   #58
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As someone who FIRE'd 5 years ago, I try to not look at the market news but it's like that car accident on the side of the road. You look and if its bad you get very queasy but you have to move on without stopping. I wish I had money to get into this buying opportunity. For now keep some of our more extravagant retirement plans are on hold and be thankful for the 3-5 years of cash I took out when the market was high.
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Old 07-07-2008, 09:04 AM   #59
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Plan on buying, always plan on buying. Maintain AA and keep moving forward, these bargains will look fantastic in a couple of years.
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Old 07-07-2008, 09:52 AM   #60
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The question is how do you reduce the risk of losing money. The buy and hold folks say pick an AA you can live with, climb on the roller coaster and hold on to your hat. What you are proposing is in essence market timing, no? Nothing wrong with it, but basically you have to be able to recognize a top in order to make the right move. In general I keep my asset allocation pretty conservative for someone my age (I am 34 and my AA is only 65-70% stocks), so I tend to ride the ups and downs. And so far that's exactly what I have been doing. My portfolio overall is down only about 8.6% from July 2007, much less than the overall stock market and I don't feel panicked about it. Nor am I kicking myself for missing the top.

But I have to admit that in mid 2007 I started feeling like we were heading into trouble, so I put my play money to work and I bought a bear market fund (when the DOW passed 13,000 on the way up). But by October of last year, when the DOW passed 14,000 I felt like I had made a big mistake and I almost got rid of it but for once my procrastination paid off. I am glad I didn't, but I think it showed me that it is difficult to make the right decision at the right time and not second guess yourself all the way. And now I have to decide when to sell this puppy...

FWIW, I've spent the past 25 years working for investment management firms that spend tens of millions of dollars/year on research trying to determine which stocks are under- and over-priced (you would not believe the inconsistent research that comes out of investment banks). There are thousands of other investment management companies doing the same thing.

My conclusion: nobody can consistently identify market tops and bottoms--period. My approach is to ignore the trailing and forward PE ratios, the VIX, the put/call ratio, the moving averages, the TED spread, the Baltic Dry Index, the head and shoulder chart patterns, and the other metrics everyone on Wall Street uses to predict the future and stick with my predetermined asset allocation.
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