Tomorrows market?

[FIREd]

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...

 

[retire@40]

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.

 

[Nords]

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.

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?

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.

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.

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.

 

[SecondCor521]

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.

2Cor521

 

[Bestwifeever]

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.

 

[Rambler]

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.

R

 

[clifp]

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...

 

[bigla]

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.

 

[CitricAcid]

Plan on buying, always plan on buying. Maintain AA and keep moving forward, these bargains will look fantastic in a couple of years.

 

[newporttony]

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.

 

[Jessica08]

With the recent downturn of the market, along with an uncertain future, what do you plan to do with your portfolio tomorrow? Futures call for another significant down day on Monday, July 7.

At 55, and desperatly wanting to ER, I'm considering pulling out of the market and going to cd's for a while.

your thoughts?

There will always be uncertainty in the market, unfortunately that is just a fact of life. I tend to think that there is always a trend within the marketplace; whenever there is a trough there will be a peak at some point. Unfortunately the time to get from one to the next can vary considerably. Being a risk-averse person myself, I generally would just wait it out until my peak comes again, but that depends on a couple of things. While the market is at a downturn right now, if I put my money in say... 30 years ago, I might still be ahead. That is, after I take into account the time-value of money and everything else that truly affects the value of my assets. So if I turn out to be ahead, that is a good thing, I could sell, buy low sell high right? And using the same time frame and using the Dow as a reference point in all of this, I can see that the market has been steadily increasing overall, and appears to have leveled out over the past approx. 10 years, I might say it looks as if the time has come for a downturn. So maybe I would pull out of the market because of this.

But I think it just depends on your situation and your attitude toward risk. I wouldn't want everyone to fell the same as me and pull out of the market; we certainly don't need to have another stock market crash.

 

[Zoocat]

Is anyone planning any sales to harvest losses? I've got this mutual fund that's down almost $4K.

Here's an article in case anyone else (besides me) is new to this and wants to learn more.

"After using capital losses to offset gains, you can use up to $3,000 a year of losses to offset wages or other income. Losses exceeding capital gains and $3,000 of other income can be carried over for use in future years." Time to Harvest Your Capital Gains? - US News and World Report

 

[RockOn]

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.

So the technicals don't turn you on I see. How about valuation measures, they don't mean anything either? You would continue to hold stocks even if the current, trailing, and forward PE's were all 100?

If your favorite pair of shoes went from $100 to $1000 in a year, you'd still buy the same shoes?

 

[newporttony]

So the technicals don't turn you on I see. How about valuation measures, they don't mean anything either? You would continue to hold stocks even if the current, trailing, and forward PE's were all 100?

If your favorite pair of shoes went from $100 to $1000 in a year, you'd still buy the same shoes?

I think there is some validity to technical analysis, but there are many, many firms spending many millions of dollars to obtain an edge. I won't try to compete with them.

On valuation, you could spend a lifetime waiting for trailing PEs to come back to the historic long-term average. Here are many people who argue that PE ratios need to be considered in the context of lower taxes, greater liquidity, lower trading commissions, and lower inflation. I don't know the right answer, so I hold a diversified portfolio of equities and bonds and rebalance (ie, sell appreciated assets and buy depreciated assets) periodically.

 

[Midpack]

if you think your smart enough to know when to dump your equities, why didn't you do it last fall?

This great answer got lost in the shuffle...and it applies to several subsequent posts just as well.

 

[Dawg52]

Some dude on CNBC(yes I turned it on) with UBS just said he projects the S&P 500 will rally 25-30% by the end of the year. I'll send him a case of his favorite wine if he is correct. Just noticed where the DOW has dropped about 50 while he puked out his forecast.

 

[Lsbcal]

...I don't know the right answer, so I hold a diversified portfolio of equities and bonds and rebalance (ie, sell appreciated assets and buy depreciated assets) periodically.

After many years of tinkering I've basically come to this point also. In setting up that diversified portfolio, it helps a lot to run FIRECalc simulations and look at those portfolio temporary lows during bad times to make sure you can live with the results. Those 100% safe withdrawal results can mask some wild rides, look at the spreadsheet!

 

[retire@40]

Some dude on CNBC(yes I turned it on) with UBS just said he projects the S&P 500 will rally 25-30% by the end of the year. I'll send him a case of his favorite wine if he is correct. Just noticed where the DOW has dropped about 50 while he puked out his forecast.

He didn't predict that rally because he really believes it might happen.

He just did it for a chance on a free case of wine.

 

[statsman]

In setting up that diversified portfolio, it helps a lot to run FIRECalc simulations and look at those portfolio temporary lows during bad times to make sure you can live with the results. Those 100% safe withdrawal results can mask some wild rides, look at the spreadsheet!

I don't see how the FIRECalc results could be of much use. It uses historical data, and by most accounts we shouldn't expect to be anywhere near historical returns in the coming decades. I am not talking about a pessimistic view or being extra conservative.

There are many who believe that the bull runs of the past will not be replicated in the future. I even look at this year, and I see stocks are down and bonds are either flat or down. I don't see years like that in the historical data. At least with a bad or flat stock market the bonds would produce some gains. Nope, at least not for us.

 

[RockOn]

I think there is some validity to technical analysis, but there are many, many firms spending many millions of dollars to obtain an edge. I won't try to compete with them.

On valuation, you could spend a lifetime waiting for trailing PEs to come back to the historic long-term average. Here are many people who argue that PE ratios need to be considered in the context of lower taxes, greater liquidity, lower trading commissions, and lower inflation. I don't know the right answer, so I hold a diversified portfolio of equities and bonds and rebalance (ie, sell appreciated assets and buy depreciated assets) periodically.

All good points, thanks

 

[Lsbcal]

There are many who believe that the bull runs of the past will not be replicated in the future. I even look at this year, and I see stocks are down and bonds are either flat or down. I don't see years like that in the historical data. At least with a bad or flat stock market the bonds would produce some gains. Nope, at least not for us.

I added the red above. Statsman, have you really looked closely at the spreadsheet put out by FIRECalc? One of the worst periods was 1966 to 1982. Both bonds and stocks did poorly in some years in the 1970s.

What I did was to take the spreadsheet (from version 2) and for each data set (retirement year simulated) calculate the worst value using the MIN function. Then using the MEDIAN function find the median low for the portfolio. Then select all the cells and using the conditional formatting to color all those cells below that median low. This will illustrate some of the tough times these portfolios can go through.

A sense of this is given by the year-by-year portfolio balance chart in Version 3. I'm not referring to the portfolio failures but just to those lines that dip down and then drift up again.

 

[statsman]

I added the red above. Statsman, have you really looked closely at the spreadsheet put out by FIRECalc? One of the worst periods was 1966 to 1982. Both bonds and stocks did poorly in some years in the 1970s.

From 1970-2007, I have yet to find a year where both the S&P 500 lost and so did bonds. 1994 was close (bonds negative, S&P500 positive), and so was 1973 (bonds positive, S&P500 really negative). The current economic environment is far closer to 1973-74 than 1994. A repeat of 1973-74 would be brutal.

 

[clifp]

I don't see how the FIRECalc results could be of much use. It uses historical data, and by most accounts we shouldn't expect to be anywhere near historical returns in the coming decades. I am not talking about a pessimistic view or being extra conservative.

I am curious why do you think the next 30 or so year will be significantly worse than the last 130 years of stock market performance.?

From 1970-2007, I have yet to find a year where both the S&P 500 lost and so did bonds. 1994 was close (bonds negative, S&P500 positive), and so was 1973 (bonds positive, S&P500 really negative). The current economic environment is far closer to 1973-74 than 1994. A repeat of 1973-74 would be brutal.

Year to Date Vanguard Total Bond fund +1.11% (Admiral)
From 6/30/07 to 6/30/08 up 7.33%
A very good proxy for a balanced portfolio psst Wellesley -5.00% YTD 1 year -1.86% (My Unclemick is looking smarter every day.)

Now it is possible that this year may end with both bonds and stocks down, but if that happens, I'd willing to bet that it is because the market rallies a bit but doesn't end up positive.

 

[statsman]

I am curious why do you think the next 30 or so year will be significantly worse than the last 130 years of stock market performance.?

Historical and Expected Returns - Bogleheads

 

[Razor]

I am curious why do you think the next 30 or so year will be significantly worse than the last 130 years of stock market performance.?

.

I think it will be worse because the US spent 1850 to 1990 building this country into the manufacturing superpower of the world and the last twenty years frittering it all away.