What is your Bull/Bear strategy

[Gunny]

I am currently invested aggressively to very aggressively using stock index funds in my TSP and Vanguard accounts. I have done pretty well in this four year bull market but am clueless as to how to allocate some assets to take advantage of/protect my earnings from a bear market. I keep reading that bonds should help with this, but I also read that with the impending rise in interest rates bonds will do poorly. If a bear market hits along with rising interest rates, what would be the best position to be in?

 

[golfnut]

Bonds will most likely go down due to impending rising interest rates. Their decline will probably pale compared to possible declines in the stock market. A rule of thumb is having your age in bonds (ie. 40 yrs. old - 60% stock, 40% bonds).

Might be called cutting your losses if we see both a declines in stocks and bonds.

 

[jebmke]

I keep my bond portion in high quality bond funds and I keep the average duration on the short side (3-4). I don't need to take a lot of risk so my equity target is 40%.

 

[Meadbh]

Add some real estate. No, seriously! If chosen carefully and managed well (by you or others) it can be a steady source of cash flow even when equities and bonds tank. I was very glad to have some income producing real estate in my portfolio in 2008-2009. Diversification is about more than equities, bonds and cash.

 

[FIREd]

Personally I am using cash, short term bonds, i-bonds, and either short term CDs or longer term CDs with low early withdrawal penalties in order to protect my market gains from the next bear.

 

[eta2020]

I have same allocation/investments all the time. Once you buy good index fund there is no reason to sell it.

It worked well over the years.

 

[golfnut]

I keep my bond portion in high quality bond funds and I keep the average duration on the short side (3-4). I don't need to take a lot of risk so my equity target is 40%.

Sorry, I got the impression from your original post that you were not in bonds.

 

[Options]

I have same allocation/investments all the time. Once you buy good index fund there is no reason to sell it.

It worked well over the years.

+1
Something like my 27% of my FIRE budget is discretionary. Only strategy change in bear markets is possibly reduce spending, depending on factors. Nothing else changes. I do not time or pay attention to short term market movements, particularly since all studies demonstrate long term (10+, 20+, 30+) is where the action is.

 

[easysurfer]

Bonds will most likely go down due to impending rising interest rates. Their decline will probably pale compared to possible declines in the stock market. A rule of thumb is having your age in bonds (ie. 40 yrs. old - 60% stock, 40% bonds).

Might be called cutting your losses if we see both a declines in stocks and bonds.

I use the rule of thumb to keep myself honest. In the example of the 40 yr old, I then break down the 60% stock to what percentage in domestic vs international. For the 40% (fixed income), I then break that down into what percentage bonds and what percent cash. Then just rebalance as appropriate.

 

[Meadbh]

+1
Something like my 27% of my FIRE budget is discretionary. Only strategy change in bear markets is possibly reduce spending, depending on factors. Nothing else changes. I do not time or pay attention to short term market movements, particularly since all studies demonstrate long term (10+, 20+, 30+) is where the action is.

That is certainly true during the accumulation phase. During decumulation, however, the sequence of returns in the first few years has a huge impact on the life of the portfolio. Extra vigilance is required at that time. Later on, if running out if money, a bear market may lead to ruin because there is no ability to ride it out.

 

[Gatordoc50]

I have some in individual bonds and quite a bit in cash since I sold some equities a few months ago. I'm about to sell some more to get to my new retirement AA.

 

[nun]

I use cash, intermediate bond index, Wellesley (bond part), Stable Value fund and a deferred fixed annuity as my fixed income.

My strategy to deal with bull or bear markets is to rebalance and when I retire I'll also vary the source of my income; cash and stable value in bear markets, more capital gains and dividends in bull markets.

 

[Options]

That is certainly true during the accumulation phase. During decumulation, however, the sequence of returns in the first few years has a huge impact on the life of the portfolio. Extra vigilance is required at that time. Later on, if running out if money, a bear market may lead to ruin because there is no ability to ride it out.

Well, not exactly in my case. My discretionary budget will be much higher in the decumulation phase than it is now, in the accumulation phase. This is because virtually all income has been diverted to accumulation up until December of this year. I have several strategies to overcome the early sequence of returns issue, including reducing discretionary spending for up to 5 years (or even longer depending), large lump sum addition to portfolio 5 years after FIRE, even w*orking (very) part time should length/severity of bear market warrant. Latter strategy highly unlikely, however, as reducing spending by up to 27% will significantly reduce overall portfolio drain.

 

[Meadbh]

Well, not exactly in my case. My discretionary budget will be much higher in the decumulation phase than it is now, in the accumulation phase. This is because virtually all income has been diverted to accumulation up until December of this year. I have several strategies to overcome the early sequence of returns issue, including reducing discretionary spending for up to 5 years (or even longer depending), large lump sum addition to portfolio 5 years after FIRE, even w*orking (very) part time should length/severity of bear market warrant. Latter strategy highly unlikely, however, as reducing spending by up to 27% will significantly reduce overall portfolio drain.

Perhaps I should have expanded on "extra vigilance" by adding "and a change in strategy". Your contingency plans make sense and are described by Otar in his book on Unveiling the Retirement Myth.

 

[eta2020]

That is certainly true during the accumulation phase. During decumulation, however, the sequence of returns in the first few years has a huge impact on the life of the portfolio. Extra vigilance is required at that time. Later on, if running out if money, a bear market may lead to ruin because there is no ability to ride it out.

In "decumulation" time I will spend dividends and not touch index funds. Hence again I plan no change to my investments.

 

[brewer12345]

I was very aggressive in the pit of the crash (borrowed money to invest for the only time in my life), but have been intentionally easing out of such an aggressive posture. I am now down to 65% equity and that is my long term target. To offset equity volatility I use high quality domestic and foreig bond funds, CDs, I bonds, and merger arbitragge funds.

 

[clifp]

I am currently invested aggressively to very aggressively using stock index funds in my TSP and Vanguard accounts. I have done pretty well in this four year bull market but am clueless as to how to allocate some assets to take advantage of/protect my earnings from a bear market. I keep reading that bonds should help with this, but I also read that with the impending rise in interest rates bonds will do poorly. If a bear market hits along with rising interest rates, what would be the best position to be in?

You have nicely summarize the dilemma for many of us. The Bull Market has been very good for us who grimly held during 2008 and 2009. Many of us have lighten our bond exposure and/or move the money into shorter maturities despite the very poor interest rates.

The answer to your question is you want to short the market and also short bonds, to prepare for a bear market with rising interest rates. This is both highly risky advice and also pretty impractical to execute.

Realistically the only thing you can do is start allocating more of your money to the G fund. Or determine that you simply want to ride out this next bear market. Unless you are retiring in the next couple of years, I'd vote for riding it out.

 

[Options]

Perhaps I should have expanded on "extra vigilance" by adding "and a change in strategy". Your contingency plans make sense and are described by Otar in his book on Unveiling the Retirement Myth.

That's interesting, because I"ve not read Otar. A VG FP told me last week in her experience frugal people like me don't change after retirement. Reminds me of when I was laid off previously: I immediately cut all spending by about a third. I guess this is why a bear market/temporary portfolio reduction wouldn't bother me. To your point, flexibility is paramount.

In "decumulation" time I will spend dividends and not touch index funds. Hence again I plan no change to my investments.

I plan to do the same, although am unsure what % of required withdrawals dividends will cover at this point. Will continue reinvesting all dividends/CG's (for tax reduction strategy) until 2015 when I'll start sweeping them into a MM account.

 

[brewer12345]

The answer to your question is you want to short the market and also short bonds, to prepare for a bear market with rising interest rates. This is both highly risky advice and also pretty impractical to execute.

I've chosen to put on a rate/inflation hedge via a 30 year fixed rate mortgage.

 

[donheff]

You have nicely summarize the dilemma for many of us. The Bull Market has been very good for us who grimly held during 2008 and 2009. Many of us have lighten our bond exposure and/or move the money into shorter maturities despite the very poor interest rates.

The answer to your question is you want to short the market and also short bonds, to prepare for a bear market with rising interest rates. This is both highly risky advice and also pretty impractical to execute.

Realistically the only thing you can do is start allocating more of your money to the G fund. Or determine that you simply want to ride out this next bear market. Unless you are retiring in the next couple of years, I'd vote for riding it out.

+1. I have the G Fund maxed out. Outside of that I plan to ride it out at about where I am.

 

[Fermion]

I-bonds are now paying 0.2% fixed after years of 0% fixed. Of course you can only put $20,000 in there a year as a couple.

I wouldn't try to short the market with something like puts right now. If I wanted to profit from a market decline, I would just go heavy cash. Inflation is so low you can do this for a year or two and not lose much purchasing power.

I am at 10% bonds, 70% stocks, 20% cash right now. Market still has legs...for awhile.

 

[HFWR]

I've chosen to put on a rate/inflation hedge via a 30 year fixed rate mortgage.

This...

Current rate is 3.75%, which makes my "house payment" less than the rent on a 1BR apartment. If I can't make that, the poo has really hit the fan...

 

[Lsbcal]

I view the bond market right now as just giving some hope of capital preservation (compared with stocks). Over the next 5 years any real return would be gravy as 5 year TIPS are now about -0.5% which implies maybe 0% for nominal intermediate term bonds. Still will look very good should we get a bloody bear equity market.

FWIW, have 65% equities that might be reduced towards 50% should we run up a lot in the next few months. I'm worried about a repeat like October 1987, a crash coming out of nowhere (seemingly) but not necessarily followed by a business recession. That came 5 years into a bull market and we will be at the 5 year point in March 2014. Could be just a speculative "correction" event. May be just free floating anxiety on my part, but at least I'm not complacent.

 

[eta2020]

I'm worried about a repeat like October 1987, a crash coming out of nowhere (seemingly) but not necessarily followed by a business recession. That came 5 years into a bull market and we will be at the 5 year point in March 2014. Could be just a speculative "correction" event. May be just free floating anxiety on my part, but at least I'm not complacent.

I pray for repeat of October 1987. It was followed by wicked Bull market.

 

[Lsbcal]

I pray for repeat of October 1987. It was followed by wicked Bull market.

Did you go through that one? I did and don't want a repeat for our portfolio.

No guarantee of a followup to the 1990's. But it could happen that way too.