Why Bear Markets Hurt So Much

[samclem]

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"....

Trombone Al found a way to get Subway Sandwiches on the cheap, but it caused such a rukus here that it is no longer mentionable (though it was one of the funniest threads I can recall).

http://www.early-retirement.org/forums/f27/seventy-cents-to-hold-the-roast-beef-30178-2.html

 

[bigla]

I retired 5 years ago at 55 with a small pension. My DW has been retired with a disability pension and SSD. We have needed to take out 2-3%/yr from our retirement portfolios to enjoy this time in our lives. Needless to say, we will curtail some of our activities now to cut future withdrawals during these bad times. Fortunately, about 2 years ago, I moved 5 years of withdrawals to a IRA MM. Nonetheless, this downturn has depressed my wife and I greatly even though I know in my head this will eventually end. We have lost 25+% of our portfolio and worry whether he will have enough to last a hopefully long life. These are very scary times.

 

[haha]

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.

Not only do not have a mark to market mentality, you wisely avoided a mark to market need.

But the typically promoted plan of total return asset liquidating funding of retirement is flawed. Without your pension and part time work it would be merely a question of how long until the cash runs out. But having confidence in these schemes depends on disregarding some of the relevant evidence. Big elephant in the room #1 is Japan's negative return now now persisting almost 25 years. Big elephant #2 is the the very poor performance by almost all asset classes, and the high correlation between them, in this current downturn. This wasn't supposed to be possible either.

What we have left to depend on is what we always had but allowed ourselves to be distracted from by gurus and scoundrels.

Safety comes from regular cash flows that can be expected to have a high degree of persistence, and are sufficient to fund our normal spending needs.

Without that it could be much harder to remain calm.

Ha

 

[chinaco]

We have a massive paper loss in equities. WE are holding some bonds... those have some losses also (but not much). They are holding their value.

Besides the loss in portfolio value, I am wondering if I will have to delay ER. I still have a few years before the planned time... But we are not in the financial shape we were.

It is a wait and see situation. The last bear was V shaped and drifted down over 3 years... took 4 years to move back up.

This is more of an L shape combined with a world-wide recession. It might recover in 5 years... could take 10. But where will we be? Where we were in 2000 before the tech bubble burst on the DOW and S&P. No growth for 15 years.

What has happened to us is that we have been herded into 401ks as companies have disbanded pensions. Now the government has let the greedy @$$holes on wallstreet (and other financial institutions) manipulate the markets to beat us out of our retirement savings.

We are the suckers that the hedge funds and other are feeding on!

 

[Alan]

What has happened to us is that we have been herded into 401ks as companies have disbanded pensions. Now the government has let the greedy @$$holes on wallstreet (and other financial institutions) manipulate the markets to beat us out of our retirement savings.

We are the suckers that the hedge funds and other are feeding on!

I believe you are quite right. Companies wanted to get out of providing pensions because they are expensive and even with trained professionals in charge the funds couldn't make enough money to maintain their obligations and needed regular injections of cash from the company when markets under performed. So they threw the burdon onto their employees

 

[donheff]

Big elephant in the room #1 is Japan's negative return now now persisting almost 25 years. Big elephant #2 is the the very poor performance by almost all asset classes, and the high correlation between them, in this current downturn. This wasn't supposed to be possible either.

I hadn't gotten the impression that the current downturn is deeper than any historical downturn yet. I assumed we would get several of these during the course of a 30+ year retirement. I can see that if a major downturn hits just after or prior to ER it may be cause for rethinking either your start date, your SWR or both. But is there reason to assume that we are starting an a-historical depression now that will exceed everything that has come before? If things return to normal (or slightly lower) in a couple of years does everyone plan on working forever anyway? What ever happened to Guyton approaches or other plans for dealing with a downturn?

 

[Alan]

I hadn't gotten the impression that the current downturn is deeper than any historical downturn yet. I assumed we would get several of these during the course of a 30+ year retirement. I can see that if a major downturn hits just after or prior to ER it may be cause for rethinking either your start date, your SWR or both. But is there reason to assume that we are starting an a-historical depression now that will exceed everything that has come before? If things return to normal (or slightly lower) in a couple of years does everyone plan on working forever anyway? What ever happened to Guyton approaches or other plans for dealing with a downturn?

I think that one of the reasons that bear markets hurt so much is that emotions take over and once markets are plummeting there is always the perception that this is the bear market that is the record breaker.

Of course that only applies to the "great unwashed", the members of this forum know better and are prepared for such markets.

 

[WilliamG]

W2R - I too wouldn't want to part with Wellesley! It is a nice middle ground between our pure bond/cash and pure stock. I also like that the managers will be rebalancing some, probably long before I get my own courage back!

Fyi, as diversification in the non-stock area we use Total Bond Market Index, IBonds and CDs to complement the dose of corporates in Wellesley. Will add some treasuries in taxable when rates get better. Total Bond has held up well as a fund, and although it has a third or less in corporates the rest is GNMA and treasury.

 

[haha]

I hadn't gotten the impression that the current downturn is deeper than any historical downturn yet.

It isn't. Let hope it doesn't become so. That is the relevence of Japan.

I don't think it will. But I didn't really expect this either. Martin Whitman is in his 80s, he says he has seen nothing like this, jean Eveillard is 60+, he says the same. They woujld have missed 1929 of course. They may be speaking about the combination of depth and violence which is different, although I cannot speak to Japan in that reagrd.

Ha

 

[dex]

Safety comes from regular cash flows that can be expected to have a high degree of persistence, and are sufficient to fund our normal spending needs.

Nice post.

I think that the idea of annually withdrawing your expense needs from your investments is wrong.

Two things not emphasized enough is:
1. Having several years of expense budget in cash equivalents.
2. Cash flow - including SS, pension and dividends in the expense budget cash needs.

Right now 100% of my expense budget is from my savings.
At 63 apx 7% will be from my savings.

Those that are thinking about delaying ER should run the numbers with this in mind. It might not be as dire as you thought.

 

[donheff]

Safety comes from regular cash flows that can be expected to have a high degree of persistence, and are sufficient to fund our normal spending needs.

I don't know if you are talking about dividends but I have seen this language in regard to dividend investing. I like the concept but I missed the boat on purchasing good dividend payers a long time ago. I have not felt confident that buying dividend oriented mutual funds (which I could switch to now) really equates to buying good dividend blue chips and holding them for decades. Just to understand what I missed, when people talk about dividends of say X% I have assumed that the X% is a function of the current value of the stocks. Thus, if the market goes down 50% one year your dividends may remain at X% but that is half of what they were last year. Am I correct or am I missing some important factor?

 

[W2R]

Donheff, usually it is more helpful to look at dividends per share, rather than per dollar invested.

For example, dividends per share of Wellesley have gone up this year, though not as much as dividends per dollar value of those shares since share price has declined. However, if one is living off dividends the dollar value is all on paper anyway.

 

[haha]

I don't know if you are talking about dividends but I have seen this language in regard to dividend investing. I like the concept but I missed the boat on purchasing good dividend payers a long time ago. I have not felt confident that buying dividend oriented mutual funds (which I could switch to now) really equates to buying good dividend blue chips and holding them for decades. Just to understand what I missed, when people talk about dividends of say X% I have assumed that the X% is a function of the current value of the stocks. Thus, if the market goes down 50% one year your dividends may remain at X% but that is half of what they were last year. Am I correct or am I missing some important factor?

Although dividends may be reduced or even eliminated, they tend to be very stable. So if you are getting 2.5% when your stock is at $50 (an annual dividend of $1.25), when that stock declines to $25 you will still get that annual $1.25. or it may even be increased. Your original yield stays with you unless the amount of the cash dividend is changed.

There are some securities such as royalty trusts and a few others classes where dividends float with the internal cash flows of the enterprise. In these cases the price of the security is likely to follow loosely the ups and downs of the payouts.

Ha

 

[donheff]

Donheff, usually it is more helpful to look at dividends per share, rather than per dollar invested.

Although dividends may be reduced or even eliminated, they tend to be very stable. So if you are getting 2.5% when your stock is at $50 (an annual dividend of $1.25), when that stock declines to $25 you will still get that annual $1.25. or it may even be increased. Your original yield stays with you unless the amount of the cash dividend is changed.

As I understand it, to get a good dividend return you need to buy the shares during your accumulation phase and hold long term. I missed that boat a long time back. If you buy "dividend oriented" mutual funds it seems like it would be hard to impossible to really match that "buy shares and hold" approach. What's up with the mutual funds?

Edit: forgot the thank you.

 

[W2R]

What's up with the mutual funds?

Wellesley Admiral (VWIAX) 5.03% SEC yield listed on Friday, 10/24/08. Wellesley share price keeps up with inflation in the long term.

You aren't going to get a 9% return with Wellesley but then these days 5% seems pretty reasonable to me. This would be a good time to buy Wellesley, since share prices are low. I'm already at my AA percentages so I am not going to buy - - but if I weren't, I would.

 

[haha]

As I understand it, to get a good dividend return you need to buy the shares during your accumulation phase and hold long term.

There are many good yields available right now. There may also be good funds, I don't know. A problem tends to be that funds are sold by performance, so it may be hard for an manager to stick steadfastly to a dividend approach, as it may mean lagging others in strong markets. Another problem is that even a relatively low expense ratio for a managed fund- say .75%- cuts into the income available for fundholders. If the fund yields 3.5% gross, a 0.75% expense ratio cuts that to a net yield of 2.75%. So I would imagine that most dividend investors go for individual stocks.

There is a CEF,(Adams Express) with a low expense ratio and a high current discount from NAV. Although it is not managed for dividends per se, it might work for a committment of some dollars toward this goal as the discount pretty well makes up for the drain from expenses. This fund has no risk of forced selling from redemptions, as a holder cannot redeem her shares, only sell them to someone else. Hence the discount.

Ha