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Two years after the bottom: lessons learned
Old 03-09-2011, 07:38 AM   #1
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Two years after the bottom: lessons learned

With a couple of threads going about memories of the '09 bottom and the great current market performance, I thought this was an interesting article. Once again, history appears to be a great teacher.

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Back on March 9 two years ago, gloom was overwhelming in the markets. Buy-and-hold investing had been declared dead. With stocks down 50% or 60% in the previous 18 months, and having fallen six months in a row, many investors were convinced the markets wouldn’t come back in their lifetimes.
Quote:
And then, on a spring Monday of no real significance at the time, stocks bottomed out. Over the next few weeks the market would rise 20% as investors watched and argued about whether it was just another in a long line of false bottoms. It wasn’t.
Quote:
The lessons for investors should not be forgotten. Buy-and-hold investment strategies did not survive for decades because they were fads. Investors who didn’t sell and held on — indeed, continued to dollar-cost average — did quite well over the last few years.

....And, most important, that the daily noise of news, opinion and protest we all live with, and which grows louder as we increasingly connect ourselves, often needs to be blocked out when making long-term or even short-term financial decisions.
Investor lessons as bull market turns two David Callaway - MarketWatch
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Old 03-09-2011, 10:42 AM   #2
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My lesson's learned over the last two years....or the last 30 years for that matter.

1. Buy and hold still works.
2. Rebalance yearly.
3. Buy only good quality stocks, bonds, mfunds and etf's.
4. Be diversified.
5. Always have cash on hand so when others panic you can buy.
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Old 03-09-2011, 11:01 AM   #3
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I've changed my methodology to almost buy and hold. Didn't sell any stock in 2008-09 crash and bought more in July 2009. But I do not think a pure buy-hold is right for me anymore in retirement. So I've developed my own methodology which shamelessly borrows from several others and adds my own data driven studies i.e. no "gut feelings".

That's just me, like to be a bit different.
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Old 03-09-2011, 12:02 PM   #4
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I'm a mindless buy-and-hold indexer, an approach that has seemed to work for me during my accumulation phase. I'm about to enter a period of ESR, so perhaps I'll be qualified in 5-10 years to report back as to whether it still seems to be working. The only changes I plan to make are to my AA from time to time when it gets too out of whack.

More active investors may have trouble watching a portfolio lose something like 30% of it's value (which I did with my port during the recent bottom) but I would suffer more stress from the second-guessing of active investing were I to attempt it.

When the market is going up I check my port almost daily. When it's going down I go out and play and don't think about it.

So buy and hold works for me because it's easy. I take my hat off to those who play a more active role in managing their portfolios but I know my abilities and their limits and don't want to test them with my life savings.
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Old 03-09-2011, 12:27 PM   #5
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"When the market is going up I check my port almost daily. When it's going down I go out and play and don't think about it." That's my investment approach as well, and it's seemngly foolproof - whenever I check my portfolio, it's always up!
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Old 03-09-2011, 12:55 PM   #6
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I agree with the general thrust of that article.

For me, some lessons learned were:

(1) Being paralyzed with fear isn't necessarily a BAD thing. Use any fear you may experience during a catastrophic market crash, to your own best advantage.

(2) the Bogleheads are right. They are also pretty good at hand-holding.

And,

(3) stick with your financial plan come h*ll H-E-double-hockeysticks (2008-2009) or high water.
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Old 03-09-2011, 01:14 PM   #7
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Quote:
Originally Posted by W2R View Post
(1) Being paralyzed with fear isn't necessarily a BAD thing. Use any fear you may experience during a catastrophic market crash, to your own best advantage.
That's a useful perspective. I like it!
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Old 03-10-2011, 05:27 AM   #8
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I have a buy and hold strategy, but I took lessons I learned during the downturn 1999-2002. While everyone was spouting doom and gloom in 2008, I was throwing as much money as I could find into the market. ...like a kid in a candy store.

Now I'm getting ready to ER.....

I've recently moved some money out of the stock market and into some really good deals on real estate.

Quote:
Be fearful when others are greedy. Be greedy when others are fearful.
- Warren Buffett

A couple other things I took out of this last down turn:
  • When you are invested heavily in the market (or real estate) - it is essential that you keep CASH/low risk investments on hand to be able to ride out a down turn
  • It's nice to have additional CASH sitting on the sidelines waiting for opportunities (stock market, real estate, business opportunities...)
In other words - CASH isn't just sitting there doing nothing - it acts as an an insurance policy and represents opportunity.
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Old 03-10-2011, 06:45 AM   #9
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The crash and recovery reinforced my belief that valuations matter and adjusting my portfolio by cutting equity exposure when valuations are high and increasing it when valuations are low - recognising that "high" and "low" are debatable terms and do not necessarily indicate where the market is going in the short term.

As much as I dislike the negative real returns that cash and many bonds provide, I think I have developed a better appreciation for its value as a war chest for taking advantage of opportunites as they arise.

Both these issues will be important once I FIRE and lose the comfort of job related income.
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Old 03-10-2011, 09:49 AM   #10
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Originally Posted by RockyMtn View Post
My lesson's learned over the last two years....or the last 30 years for that matter.

1. Buy and hold still works.
2. Rebalance yearly.
3. Buy only good quality stocks, bonds, mfunds and etf's.
4. Be diversified.
5. Always have cash on hand so when others panic you can buy.
Agree with 4out of 5. The crash didn't do much to reinforce the diversification point. Everything tanked at the same time.
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Old 03-10-2011, 09:54 AM   #11
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Agree about liquidity. It does have a cost but it is certainly worth something as well. The trick is getting the right balance of liquidity. Has anyone worked out a quantitative system for determining the amount of liquidity that is optimal that could be applied in general?
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Old 03-10-2011, 11:23 AM   #12
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We pretty much did what the article said, but have some friends who lost a ton by doing the following

One had 100% company stock in his 401K, it is now about 30% of what it was at it's height.
One was trying to get everyone in on some speculative leases which to him were a no brainer way to get wealthy. He is currently working with no end in sight by ignoring the rules that if you don't really understand what you are buying don't do it and if it sounds too good to be true it probably is.
and lastly my good friend panicked and took everything out of stocks at the bottom and put it in money market. They still haven't recovered.
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Old 03-10-2011, 11:32 AM   #13
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Originally Posted by 52andout View Post
We pretty much did what the article said, but have some friends who lost a ton by doing the following

One had 100% company stock in his 401K, it is now about 30% of what it was at it's height.
One was trying to get everyone in on some speculative leases which to him were a no brainer way to get wealthy. He is currently working with no end in sight by ignoring the rules that if you don't really understand what you are buying don't do it and if it sounds too good to be true it probably is.
and lastly my good friend panicked and took everything out of stocks at the bottom and put it in money market. They still haven't recovered.
Wow. I had a friend who at the bottom panicked and sold all his Cdn bank stock as he thought they would cut their dividends. This wa his primary source of income. Instead he bought bonds. The banks are now more than double from that point are are now raising their dividends. He will never recover.
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Old 03-10-2011, 03:18 PM   #14
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Quote:
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(1) Being paralyzed with fear isn't necessarily a BAD thing.
Don't just do something, stand there!

Quote:
Originally Posted by Danmar View Post
Agree about liquidity. It does have a cost but it is certainly worth something as well. The trick is getting the right balance of liquidity. Has anyone worked out a quantitative system for determining the amount of liquidity that is optimal that could be applied in general?
For me, liquidity i.e. cash serves two purposes: cash buffer for hopefully approaching retirement, and cash reserve for rebalancing when the poo hits the fan. My allocation bands are 25%.
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Old 03-10-2011, 03:52 PM   #15
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I have learned a few lessons from the crisis. However, I am still unsure whether I learned the right lessons and whether what I've learned is not going to backfire on me down the road.

For example:
1) I have learned that valuations matter. However, equities can remain overvalued for years and I could be missing on the next bull market.
2) Cash is important for peace of mind and to take advantage of investment opportunities of a lifetime when they present themselves. But, right now, I am earning a negative real rate of return on all that cash.
3) My risk tolerance was not as high as I thought. I took advantage of the recovery to gradually reduce my exposure to equities, but I may be shooting myself in the foot by increasing my exposure to fixed income instruments at a time when interest rates are near historical lows.
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Old 03-10-2011, 06:40 PM   #16
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Old 03-10-2011, 07:36 PM   #17
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The market sucks! Maybe that will kick start it again.
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Old 03-10-2011, 08:13 PM   #18
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Quote:
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The market sucks! Maybe that will kick start it again.
Dawg52, you and I would make a great team. As the market proceeds on its inevitable rollercoaster, we could damp the volatility:


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Originally Posted by W2R
Wheeee!!!
Quote:
Originally Posted by Dawg52
The market sucks!
Quote:
Originally Posted by W2R
Wheeee!!!
Quote:
Originally Posted by Dawg52
The market sucks!
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Old 03-10-2011, 08:15 PM   #19
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I'm with Dawg today, suckee market!

P.S. But I'm rooting for W2R's response.
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Old 03-10-2011, 08:24 PM   #20
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I think buy and hold works best when you are in accumulation phase and can recover by adding more money.

I'm less than enamored with the phase I'm currently in where there is no "BUY", simply a "HOLD". Watching equities lose half their values from the late 2007 peak to the March 2009 trough really made me question the "HOLD AT ALL COSTS" philosophy.
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