Why Bear Markets Hurt So Much

[TromboneAl]

I find that I can no longer stand watching television shows that are all about violence and misery and gloom.

You mean CNBC, right?

 

[TromboneAl]

I guess that I don't feel too bad about the downturn, but I am expecting a fast recovery (in the market at least). If I felt that it would take 10 years to get to where we were a year ago, I'd feel much worse.

 

[Gearhead Jim]

:
...
We'd casually thought about a second home "up nort" or upscaling from our current very modest home to something larger in a swankier neighborhood. 2+ years into retirement, the numbers were looking good and making one of those moves would have only increased personal real estate from about 10% to about 20% of our total net worth.
...

Not a criticism, but more as a question for you and anyone else who wishes to respond:
I've never thought of our total net worth, or our house, as significant in calculating retirement. Some day we will probably move to a smaller place (condo?) and be able to clear maybe $150k on that deal, so I include that in FIRECALC. Beyond that; I only look at my pension, IRA's, and SS. All the other "stuff" in our net worth is either depreciating (cars, toys, etc) or will be needed until we die or go into a nursing home.

 

[Rustic23]

As stated in another thread, TAl's short about $10,000 this year using the 4% SWR.

However, look at the 4%, if I have my math right. If TAl started out with $700,000 in savings and the market returned 9% over the past 5 years he would have a little over 1M dollars before the crunch. Five years ago the 4% rule would say he could take out $28,000 from his savings and increase it each year for inflation, say 3.5%. That would mean he would need about $33,000 five years later. Now he takes his $250,000 hair cut. His portfolio is worth about $827,000 and to get his $33K would take just a little over 4%. So if he continues on the 4% rule, at least for now, he will be OK.

I know I have omitted the anual deductions for each of the 5 years, and that would make it a little worse, but i doubt if it would be equal to $10,000, and it also assumes only a 9% return on his investments over the past 5 years.

 

[samclem]

Our allocation is 85%+ in equities, so we've taken quite a hit. Still, I haven't sold any shares (been living on our pension and my income from PT work) so I really haven't felt like we have been hit hard. I just don't have a "mark-to-market" mentality: I really don't feel like I've lost anything until I have to sell shares i bought at $20 for $15. We've got enough cash to see us through a few years if I quit working. When I make my solo401K contribution this year it will all go into these bargain-priced equities. I think the market will come back relatively quickly, maybe back to its previous high in 4 years (and we'll be getting dividends until then as well).

Biggest personal impacts:
- We'll cut back on discretionary spending. Eat out less, maybe skip a pricey vacation. But we'll keep fixing up the house.
- I'll do more of the part-time work than I would otherwise. This will allow us to avoid selling equities, and maybe even buy some more while prices are down--speeding up the day that our balances recover to their previous level.

I'm not at all morose. We knew the road would have dips, and this is one of them. Let's get it over with and get the market back into the black.

 

[TromboneAl]

Something else to help put things in perspective:

Let's say your net worth is about $1 million. The worst happens and you need to sell some equities, say $20,000 worth, for expenses for this year.

You're only realizing a real loss (as opposed to a paper loss) on this small amount (2% of your net worth). If you're selling shares that are down 40%, then you are losing a total of $8,000. Plus, those shares probably appreciated over the years.

 

[youbet]

"This is worse than a divorce. I've lost 50% of my net worth and still have my wife."

 

[Alan]

So, how has this bear market affected you personally and your investment plans?

It has shaken my confidence. I was cruising towards RE'ing early 2010 with a pension, health insurance and $1.5m in savings. 1 year ago work got so sh***y that I almost quit even though I would lose health insurance and not be ale to collect pension until age 62 instead of 55 - I was very confident we'd be okay.

Thank goodness that when I talked to HR they offered me a totally different position in a different location.

I am back on track for RE'ing in 2010 with pension and health insurance, and I'll be pleased if I have $1m in savings (I'm down ~$250k this year).

With pension I have 5 years of needed expenses in cash. Without pension I'd have about 2 years in cash.

I plan to continue to hold about 40% in equities, but the main lesson I've learned is that 5 years cushion when you are retiring is essential. This may turn out to be a false assumption as well - the bear may yet run for a long time yet.

 

[youbet]

Not a criticism, but more as a question for you and anyone else who wishes to respond:
I've never thought of our total net worth, or our house, as significant in calculating retirement. Some day we will probably move to a smaller place (condo?) and be able to clear maybe $150k on that deal, so I include that in FIRECALC. Beyond that; I only look at my pension, IRA's, and SS. All the other "stuff" in our net worth is either depreciating (cars, toys, etc) or will be needed until we die or go into a nursing home.

House - you'll find a number of threads discussing whether to include the value of your home when determining if you can FIRE. Good arguments both ways. My rule of thumb is that if I include the value of my home on the asset side of the equation, then I include the cost of renting on the expense side.

My mention of our home in regard to retirement financing was only to clarify that the value of our home is a small percentage of our total net worth and we were, before this "downturn," actually looking to either add a second home or upgrade to a larger home in a nicer area. Not now though.

I calculate net worth as home + deferred (IRA, 401k) assets + non-deferred assets (investment portfolio). Like you, I don't include any depreciating assets like cars, etc.

 

[Gearhead Jim]

(deleted, unnecessary question)

 

[W2R]

W2R, Wellesley is already loaded with corporate bonds (up to 60% of the fund), so I don't know if you would want to add more to your portfolio.

Thanks, but I am not considering adding any? Today I have exactly the percentage (well, within less than half a percent) of Wellesley called for by my investment plan. Despite the big dividends it doesn't seem to be doing any worse than the rest of my portfolio up to now. While everything else has been plummeting, Wellesley is what has given me peace of mind as it slowly drifts downward at a more gentle and tolerable pace.

Do you expect it to experience some sort of delayed effect for some reason that I don't know about? The reason I am asking is that I am not the only one on the board with a substantial chunk in Wellesley, and OldBabe warned me about the exact same thing just a few hours ago.

If Wellesley is in trouble, then I think another thread should be started to warn all the others here who are in the same boat. (?) I do own it with a long time horizon in mind. It is mainly for dividends, and actually has paid out more this year than last, I believe. So, I am not sure what you and OldBabe are expecting to happen that hasn't already happened but would like to know.

 

[Bestwifeever]

W2R to me it seemed Firedreamer was saying you might not want to add more bonds to your portfolio (since Wellesley already has some in its mix, so you might already have a good allocation of them without realizing it)--didn't seem to be a caution about adding more Wellesley itself.

 

[Gotadimple]

W2R,

Wellesley is providing you with an income stream. If you sell it, you lose that stream of income. If I've read correctly, it fits within your asset allocation and that allocation hasn't drifted too far from what you intended.

Bonds can go down because the issuer can go bankrupt. With credit as tight as it is, even the best bond funds are losing principle, but the income stream continues. IIRC, the bond portfolio is most in AAA, so you have the safest bond investment available -- assuming Moody's did their job well.

I don't mean to throw any curves here -- once the credit uncertainty (including hedge fund redemptions) becomes less volatile, I think you'll see the value of Wellesley go up. I've seen my bond fund investments pretty much be the stable investment while my stock funds are all over the map.

All I'm saying is wait til the dust settles before making decisions. If you should decide you want to invest in other bond funds (or bonds themselves), I'm sure you'll be looking at your total asset allocation before doing so.

-- Rita

Full Disclosure: I don't own Wellesley but do own other bond funds (including TIPS) as part of my AA -- which is currently 43/57 -- I intend for it to be 55/45.

 

[bamsphd]

So, how has this bear market affected you personally and your investment plans?

We were so close. If our portfolio had gone up just another 5% last year around the high, we would have both retired. Our portfolio is pretty aggressive, targeting between 28% and 30% bonds, the rest in stocks.

This fall, just before the market fell, my wife did basically retire, giving up a secure middle management job to instead work part-time at a non-profit for roughly minimum-wage. She definitely had great timing, since I would be screaming NO if she asked to do that today.

Now as I watch our portfolio's value decline, I measure the decline in terms of years of salary. Through mid-summer, we had lost about 2 years of combined salary since the peak. Not wonderful, but not enough to really bother me. Now, with our greater losses and lower salary, we are down by almost 10 years of salary!

All of a sudden, my job is precious. Though I don't enjoy it any more that I did before. Three months ago I would have viewed being fired as an excuse to retire a bit early, and was seriously considering forcing my manager to let me work part-time. Now, part-time is out of the question, and losing my job would mean searching for a new job in the middle of a recession.

Investment wise, I've been harvesting tax losses and buying more equities to keep the allocation near 70% equities. I currently think I'll keep chasing the market down until either it bounces, I only have about 4 years of expenses left in bonds, or I lose my job, whichever comes first.

On my sad days, I figure I could easily end up working for another decade. On my happier days, I figure when I do ultimately retire, I'll probably have a wealthier retirement than I expected. In the mean time, I'm working to hang on to my job, and am starting to cut expenses at home. So far that mainly means no new toys. I'm not sure how frugal we will ultimately go. Thankfully the house is paid off, so if we really needed to we could get pretty frugal.

 

[W2R]

Thanks, Rita and BestWifeEver. I guess I misunderstood what FireDreamer was getting at. Whew!

I really don't want to get rid of my Wellesley (you'd have to kill me first, I think! ), and I am OK with how it has been behaving during this economic mess. And yes, it is in my plan and my asset allocation is about as it should be according to my plan, right now. I have been beefing up my stock index fund holdings to keep it that way.

Although Wellesley does have something like 62% bonds (and 38% stocks), I regard it as an actively managed balanced fund rather than a bond fund.

I was wanting to learn more about bonds before investing any more in (purely) bond funds, since some of them have dropped a lot more than I would have expected. Maybe those funds have lower quality bonds than I was aware that they had. I have another chunk of money in money market, which probably isn't the most ideal place for it to be. However, I am not ready to buy bond funds with it, yet.

Thanks again! And FireDreamer, sorry if I misunderstood what you were getting at!

 

[Frugality_of_Apathy]

Bear Markets only hurt me because they love me so much.

Or maybe I have battered investors syndrome?

 

[FIREd]

Thanks, but I am not considering adding any? Today I have exactly the percentage (well, within less than half a percent) of Wellesley called for by my investment plan. Despite the big dividends it doesn't seem to be doing any worse than the rest of my portfolio up to now. While everything else has been plummeting, Wellesley is what has given me peace of mind as it slowly drifts downward at a more gentle and tolerable pace.

Do you expect it to experience some sort of delayed effect for some reason that I don't know about? The reason I am asking is that I am not the only one on the board with a substantial chunk in Wellesley, and OldBabe warned me about the exact same thing just a few hours ago.

If Wellesley is in trouble, then I think another thread should be started to warn all the others here who are in the same boat. (?) I do own it with a long time horizon in mind. It is mainly for dividends, and actually has paid out more this year than last, I believe. So, I am not sure what you and OldBabe are expecting to happen that hasn't already happened but would like to know.

Bestwifeever has it right but after rereading my post I can see how it could have been misinterpreted. I am not saying anything negative about Wellesley. I own it, I love it, I am buying (lots) more of it right now. What I was saying is that Wellesley already represents 30% of your portfolio (I think). Corporate bonds represent up to 60% of Wellesley. So 20% of your overall portfolio is already invested in corporate bonds which is already pretty substantial. So my question was, do you really want to buy more [corporate bonds]? I just wanted to make sure you didn't inadvertently overweight them.

Gosh, I hope I didn't start a Wellesley panic!

 

[W2R]

Now, with our greater losses and lower salary, we are down by almost 10 years of salary!

I am so sorry to read this!!! How awful. Thank goodness you did not retire last year. All I can say is that this too shall pass (and I hope it passes sooner rather than later).

 

[W2R]

So my question was, do you really want to buy more? I just wanted to make sure you didn't inadvertently overweight them.

No!! I don't. Wellesley is now 30% and will always be 30%. My asset allocation has 55% bonds/cash/fixed, and the bond portion of Wellesley is only about 19% of my portfolio. So, I was talking about the rest of my bonds/cash/fixed.

Right now, I have another 18% in "G Fund" (TSP government treasuries fund) which I like as much as Wellesley. I have a tiny bit (3%) in VFSTX, Vanguard's Short Term Investment Grade Fund, and I am not impressed. But the rest of my bonds/cash/fixed is in money market. Eventually I should probably put more in bonds, because MM just isn't keeping up with inflation.

But, not now! Sorry that I misunderstood what you were saying, by the way. I love my Wellesley, too.

 

[Zoocat]

No!! I don't. Wellesley is now 30% and will always be 30%. My asset allocation has 55% bonds/cash/fixed, and the bond portion of Wellesley is only about 19% of my portfolio. So, I was talking about the rest of my bonds/cash/fixed.

W2R, I was only pointing out the % of financials in bonds and stock in Wellesley. I have no knowledge of whether these are good ones or not. I'm sorry if I alarmed you.

 

[W2R]

W2R, I was only pointing out the % of financials in bonds and stock in Wellesley. I have no knowledge of whether these are good ones or not. I'm sorry if I alarmed you.

No problem! I am just a little on edge about this market, I guess, plus I apparently read more into what you were saying than you probably said. I sure will be glad when we are out of the bear and back to a thriving economy. I guess we all will be.

I probably shouldn't even try posting when I'm doing other stuff! I just finished dismantling and cleaning a very icky 20 gallon fish tank, and moving a lot of heavy furniture around and dragging the rug to another room, all to make room for a treadmill that I might or might not buy tomorrow. I'm tired!

 

[audreyh1]

This one has been so brutal because there are so many forced sellers (financial companies raising cash to cover CDSs, leveraged hedge funds getting margin calls and redemptions, mutual fund redemptions).

The buyers - the BIG buyers, are simply waiting on the sidelines for the sellers to be done. When will they be done?

I heard a couple of dates today:
October 31 - end of year for 75% of mutual funds. I guess by then they have some
Nov 15 - last day for redemptions notice for some hedge funds (although I thought that was Sept 30).

But then again, the same commentator mentioned that he expected hedge fund selling to continue into the new year, so who knows.

But, in the meantime, the big buyers are all aware of these deadlines and sitting back and waiting for the sellers to be done. They have no motivation to step in before that.

Audrey

 

[Florida]

What I have found really hurtful in this bear market is that the stuff that you would never expect to fall like stocks or stock mutual funds is doing a very good impression of that.

Take Tips which are US Government bonds. They are down quite a bit over the last month. And the bond funds that hold Tips such as Vanguards and Pimcos are really in a freefall. (Market is anticipating deflation).

And foreign currency another 20% to 40% decliner.

Gold, silver and commodities down.
Oil especially. (Well at least we pay less at the pump). Not a very big consoliation for all this deflation that is being anticipated.

The only survivors seem to be cash (in the bank or the mattress) and Treasuries bills, bonds and notes.

Who would have ever figured.

 

[ziggy29]

Gold, silver and commodities down.

Actually, it's not clear gold and silver are *truly* down.

Yes, the paper securities representing silver and gold are down. But try to get someone to sell your physical gold and silver bullion at anywhere near the "spot" prices. In reality, the prices of the physical metal have, if anything, gone *up* a bit in the last month.

That tells you what the market thinks of paper securities right now. If it really hit the fan, you want the gold itself, not a piece of paper that promises to represent the same amount of gold. That's what we're seeing here.

 

[Delawaredave5]

I think there's a lot of people "selling stocks to a level where they can sleep at night". I can't sell now, so I'm not sleeping.

I've talked with several 2 worker couples in seemingly stable jobs with 10+ years of working that are "hunkering down" on current expenses - two people I talked to canceled planned vacations.

BTW, I always get the tap water at Subway. Many Subways I am in raised their soda prices a lot - I think to make up for the "$5 footlong"....