Interesting discussion with an FA yesterday.....

[FIREmenow]

It was quite refreshing - I wasn't looking for an FA, and he wasn't looking for new business. We just talked (imagine that?)

Anyway, he said he has been toying with a strategy that has to do with market volatility and asset allocation. He didn't share every last detail (I wouldn't have remembered it anyway), but it generally went like this (all his thoughts):

If one starts with a 50/50 AA and the market goes down some threshold (big) percentage in a year, say 15 or 20%, then the plan is to change the AA to 60/40. If it goes down big a second year in a row, then 70/30. He said he would never go past 70/30. He said the market has never had more than two "big" down years in a row (depends on what your definition of 'big' is, I am sure - I haven't looked). He said he had run the scenario over the last 42 years and showed that it always recovered, and worked out for the better.

Likewise, if one was at a non-preferred AA in one, or two consecutive really good years, move the AA back in the direction of the "norm".

I hadn't heard of this kind of strategy, but maybe it is common practice. In any case, I thought it interesting to think about.

 

[LOL!]

Isn't this just another kind of Over rebalancing or Tactical asset allocation?

 

[FIREmenow]

Isn't this just another kind of Over rebalancing or Tactical asset allocation?

Probably. But I don't have seven stars on my profile to the left.....
This is how I am hoping to get there.

 

[samclem]

It was quite refreshing - I wasn't looking for an FA, and he wasn't looking for new business. We just talked (imagine that?)

My Ouji board says you'll hear from this FA again . . .

If you like the idea of buying more stocks when their prices are depressed, you might check out some of the tactical asset allocation schemes. Google "Valuation", "PE10", "allocation" and "Schiller" . Here's an article that examines the idea, as it relates to retirees.

Just know that a lot of people claim to have ways to beat the market--and that that market would pay them very handsomely if they could really do it. But most of those people find it more profitable to sell books and newsletters about their system (or to use the proposed system to gain clients for their FA business).

 

[audreyh1]

2000 thru 2002 the market went down three years in a row, -9%, -12%, -22% - that seems big enough. I think your FA doesn't know his market history.

S&P 500 index - Bogleheads

That tactical allocation scheme isn't new. It probably works great in the long run if you can stomach the volatility. Not sure I'd want to retire on it.

 

[JPatrick]

Dollar Cost Averaging on steroids...

 

[urn2bfree]

Value Cost Averaging. Google it.


Sent from my iPad using Early Retirement Forum

 

[braumeister]

He said he had run the scenario over the last 42 years and showed that it always recovered, and worked out for the better.

And I'm sure there are many other strategies that look even better when backtested.

For me, the most important thing to keep in mind is that no matter how good a strategy "would have been" in the past, it really doesn't tell you anything about how it will work in the future.

 

[MichaelB]

I suspect someone with the fortitude to increase their equity allocation after two straight years of decline, then again after another, does not need an FA.

 

[davismills]

That sounds much like the old blackjack betting scheme. Set a base bet of say $10.00. If you lose, double the bet and add one dollar ($21.00). Lose again ($43.00). Win...go back to $10.00. I guess the market is like Vegas

 

[Which Roger]

After a down year for stocks, it's scary enough just rebalancing to one's original allocation. If you start with 50 dollars in stocks and 50 dollars in bonds, and stocks drop 20% (and bonds stay flat), you're at 40$/50$. Then you rebalance to 45/45. But with the strategy you're discussing, you'd rebalance to 54/36. Then if stocks drop 20% the second year, you're at 43/36, and following the strategy, you'd rebalance to 55/24. You now have less than half the amount in bonds that you had two years earlier. And that's with just a 20% drop in stocks each year. Scares me.

 

[jIMOh]

The concept would work for accumulating. I would not want this when retired for myself.

The biggest issue is FA need automation- because touching 200 customer accounts the day of the correction is time consuming. It takes 20-40 hours to find one client, so not much time can be spent doing actual planning work or allocation work- it needs to be automated. Or you waste more time trying to call clients to get permission to trade accounts, it is easier to create accounts and investment profiles and investment policy statements saying this will be done ahead of time.

 

[audreyh1]

I suspect someone with the fortitude to increase their equity allocation after two straight years of decline, then again after another, does not need an FA.

good one!

 

[audreyh1]

The concept would work for accumulating. I would not want this when retired for myself.

The biggest issue is FA need automation- because touching 200 customer accounts the day of the correction is time consuming. It takes 20-40 hours to find one client, so not much time can be spent doing actual planning work or allocation work- it needs to be automated. Or you waste more time trying to call clients to get permission to trade accounts, it is easier to create accounts and investment profiles and investment policy statements saying this will be done ahead of time.

The funny thing is that when I was accumulating, I was pretty much 100% stocks!

 

[Andre1969]

2000 thru 2002 the market went down three years in a row, -9%, -12%, -22% - that seems big enough. I think your FA doesn't know his market history.

S&P 500 index - Bogleheads

That tactical allocation scheme isn't new. It probably works great in the long run if you can stomach the volatility. Not sure I'd want to retire on it.

Yeah, 2000-2002 was the first period that popped into my mind. I saw a loss every single year, although it was masked by the fact that I had a small portfolio at the time, and was able to easily add to it. IIRC, my net worth was actually up in 2000 and 2001, because I added more than what I lost. I wasn't able to do that in 2002 though.

I'm actually surprised that we didn't have three straight years of declines in the late 70's/early 80's period. I've always been into cars, and know a bit of auto industry history, and remember that sales in 1980 were down seriously from 1979, and they slipped even more in 1981, 82, and 83. Chrysler nearly went bankrupt. It's not common knowledge, but Ford wasn't far behind. The only reason GM made money in 1983 was because of their financing arm, GMAC. Usually, the auto industry tends to track the economy, but I guess it's not always the case.

But, that S&P historical chart makes that 1979-83 period look like a romp in the park. But, car sales go by model year rather than calendar year, so that can make a difference. And, since unemployment figures often lag the stock market returns, I guess it would stand to reason that auto sales would, as well. After all, most people aren't going to buy a new car while they're unemployed!

 

[2B]

I'm actually surprised that we didn't have three straight years of declines in the late 70's/early 80's period. I've always been into cars, and know a bit of auto industry history, and remember that sales in 1980 were down seriously from 1979, and they slipped even more in 1981, 82, and 83. Chrysler nearly went bankrupt. It's not common knowledge, but Ford wasn't far behind. The only reason GM made money in 1983 was because of their financing arm, GMAC. Usually, the auto industry tends to track the economy, but I guess it's not always the case.

The early 1980's were the "bad quality" years for the US auto makers. People discovered that some island we had bombed the crap out of 35 years earlier had learned how to make a pretty good automobile for a better price.

 

[audreyh1]

Yeah, 2000-2002 was the first period that popped into my mind. I saw a loss every single year, although it was masked by the fact that I had a small portfolio at the time, and was able to easily add to it. IIRC, my net worth was actually up in 2000 and 2001, because I added more than what I lost. I wasn't able to do that in 2002 though.

In "fairness" it sounds like the FA doesn't count it as a "big" down year unless it's down at least 15%. So 2000 wouldn't have counted. But maybe at the end of 2001, the two years combined were well over 20% so perhaps the first allocation shift would have happened at the end of 2001, and the second at the end of 2002.

But I think most investors would feel a pinch from a down 9% year like 2000. I remember at the end of 2002 it seemed to most investors as if the world was coming to an end!!!

Especially us 1999 retirees!!!

 

[haha]

That sounds much like the old blackjack betting scheme. Set a base bet of say $10.00. If you lose, double the bet and add one dollar ($21.00). Lose again ($43.00). Win...go back to $10.00. I guess the market is like Vegas

You are describing a technique called Martingale. Cards are random. It is different with US stock market averages, or at least it has been different. Stock averages are thought to be mean reverting. Although something could always change.



Ha

 

[Texas Proud]

2000 thru 2002 the market went down three years in a row, -9%, -12%, -22% - that seems big enough. I think your FA doesn't know his market history.

S&P 500 index - Bogleheads

That tactical allocation scheme isn't new. It probably works great in the long run if you can stomach the volatility. Not sure I'd want to retire on it.

Usually it takes more than a 10% move to be considered 'big'.... so the first year does not count....

Not saying there isn't one out there.... but I would say this is not the one....


Edit.... I see someone else already said this....

 

[Travelwanted]

That sounds much like the old blackjack betting scheme. Set a base bet of say $10.00. If you lose, double the bet and add one dollar ($21.00). Lose again ($43.00). Win...go back to $10.00. I guess the market is like Vegas

It's called reverse progressive. When used in reverse of what you mentioned it is called progressive betting.

I have heard other people mention this strategy with investing. But past performance. . .

 

[Delawaredave5]

These "doubling down" strategies seem like you "can't lose", but there's a famous quote from John Maynard Keynes:

"The market can stay irrational longer than you can stay solvent"

John Maynard Keynes :: Keynes The Speculator

 

[ejman]

In "fairness" it sounds like the FA doesn't count it as a "big" down year unless it's down at least 15%. So 2000 wouldn't have counted. But maybe at the end of 2001, the two years combined were well over 20% so perhaps the first allocation shift would have happened at the end of 2001, and the second at the end of 2002.

But I think most investors would feel a pinch from a down 9% year like 2000. I remember at the end of 2002 it seemed to most investors as if the world was coming to an end!!!

Especially us 1999 retirees!!!

Amen to that!. I ER'd at the end of 2002 and quite frankly at first I thought maybe I'd leaked all my antifreeze. As it turned out it was a great time to ER as the market pretty much went straight up for the next 5 years - up a bit too much as it turned out...but that's another story.