Market Volatility

[LOL!]

I UNDERSTOOD already everything you wrote. You are missing my point/question.
Moving on......

I forgot to mention that selling depressed equities in a taxable account is beneficial because if one sells at a loss, one can get other taxpayers to help pay for the losses. This is called tax-loss harvesting.

One would buy similar, but not substantially identical, equities in a tax-deferred account in an act of rebalancing without creating a wash sale.

 

[Montecfo]

In my taxable account I tend to own high quality, lower beta stocks. Also no position over 5% of total. So I do not experience large downdrafts except when it is marketwide.

 

[Ronnieboy]

In addition to the 5% limit, wouldn't it probably be prudent to have some industry limit exposure?
I don't have individual stocks either, but it is an interesting topic to me.

Definitely this ^
If I have a $1m portfolio I would have 30 different stocks spread over 11 different sectors of the stock market (roughly 3%). Or 33 stocks w/30k each over 11 sectors to have 3 stocks in each sector if I was OCD

I am building a retirement portfolio based of companies with ever increasing dividends, for several decades (Dividend Growth Investing), e.g. JNJ, MMM, KO, T, O, etc. Market volatility does not affect the dividend income stream.

Market crashes can certainly impact dividend income streams as many found out in 2008!

As Audrey says it can impact dividend streams either with a freeze or a cut. Mostly in 2008 it was financial services (banks) but if you were limited to only 3 bank stocks (and there are sub sectors of finance that were not banks i.e. insurance, investment managers that did fine). Then your other dividend steams would have made up for the laggard.

So in 2008 if you had Citibank, Chubb and T Rowe Price as your 3 financial sectors then you would have only seen citi take a dividend beating where chubb dropped 0.03 for one quarter then continued to increase and T. Rowe Price not drop at all and continue to increase its dividend.

Yes, unless you invest into companies that have increased their dividends every single year in the past 25+ years - these are called Dividend Aristocrats. These companies have not only sustained but even increased their dividend payouts during the Great Recession (2008-9) and before and after, each and every year. Therefore, investing into DAs you minimise the probability of market volatility effects to the dividend income from your portfolio. See more about Dividend Growth Investing on here.

The problem is picking the right ones. Even if you have a systematic approach to only having 3% in each stock of 3 in each sector, what if your 3 financial stocks were all banks? Citi, B of A, and Wachovia? The dividend income stream would've taken a hit.

But as a reader of this board for many years, I noticed that no matter what investing style people followed, almost everyone on this board shat in their pants during that time and started belt tightening and cutting the budget to weather the 'this time its different' storm. Even when FireCalc said it would be ok historically.
I would do the same if multiple dividend stream(s) were cut.

Keep a year's worth of cash on the side to use while the market recovers

My plan is a combination of the above. Have a bucket approach where I have a year or two of expense in cash equivalents and constantly refill that bucket with the growing dividends of dividend growth challengers, contenders, champions and kings. Trim stocks that grow more than the aforementioned 3%. Don't sell in a bear market by using the cash bucket.

Why not do an ETF? Maybe when I get to the point where I don't find the above plan 'fun' - but why pay someone else to do what I can do myself? Plus the payout of ETF's fluctuate a bit much and you don't have the choice of when you get capital gains as the fund manager does that for you.

 

[copyright1997reloaded]

When the overwhelming data says investors will underperform index funds when they buy individual stocks, I'm completely baffled when someone chooses to do so. What is it? it can't be the increased work involved, angst, complexity and tracking leading to that underperformance - could it?

I like investing. I've been doing it with real money since I was 20, and on paper since my mid teens.

I'm pretty happy with my investments over the years. For many years, I compared my returns with Vanguard's Moderate Life Fun - using the thesis that if I couldn't outperform it (over time) that I should shift funds to it.

That doesn't mean exclusively individual stocks - most of my mega-corp contributions (401K) were in index funds, but the leftover money I invested outside the 401K is mostly in individual stocks (and some specific country or sector funds I couldn't buy in mega-corp 401K).

One thing nice about individual stocks is that *I* get to pick when I take a capital gain/capital loss (for the most part). Of the individual stocks, my profit on those holdings makes up over 2/3 of the overall value. It would be even higher had my LLTC not got bought for mostly cash last year by ADI.

Of my top 5 holdings:
I have APPL (Apple) with a cost basis of $1.40. Around $190 now.
I had LLTC (Linear Technology) with a cost basis of $0.57 (bought out $60 cash plus ADI stock, total around $80). This was my largest holding.
I have ADI with a cot basis of $0.66. Stock is at $96.98.
I have MAR with a cost basis of $2.62. Stock is at $128.55, plus they have spun off a bunch of things (Host Marriott, Suduxo(.sp?), Marriott Vacation Club).
I have EW (Edward Life Sciences) with a cost basis of $53. Stock is at $141.87. My original cost basis was much lower (spin off from Baxter), but I have added to my position.
I have HON (Honeywell) with a cost basis of $29.94. Stock is at $159.34.

Do I have losers? Sure. Have I made mistakes. Definitely.

But an individual buying securities has one major advantage over a mutual fund: I don't have to worry about what companies are on my list at the end of a quarter, and I don't have to sell stuff just because it has gone down in price (as a passive index fund must do) or because of outflows. For example, EW just came out with earnings. They were fine and dandy but the stock got knocked from $155 to $140. But has something fundamentally changed at Edwards? Nope. Do I think their business will continue to grow? Yep. Could I be wrong with my analysis? Sure. Will I have trouble sleeping tonight because EW went from $155 to $140? Not a bit.

 

[Chuckanut]

<snip>
If one isn't buying equities after substantial drops, then one ain't doing it right.
<snip>

Also consider that a retiree with a 60/40 asset allocation and withdrawing 4% a year, sort of has 10 years of assets in fixed income.

This is not rocket science, brain surgery, nor rocket surgery.

The one exception to not buying equities after drops is if one has such a huge pile of cash and so little debt that one never has to worry about the cash pile getting to low. Granted that a nit. For the vast majority of us, LOL! is correct.

Great point about the 60/40 AA. In an equity decline one rebalances by selling bonds first, then maybe buying stocks as necessary.

Like my old grand pappy used to say, "We can predict the future, so it's buy lower and sell higher, and hope the economy doesn't hornswaggle you".

 

[audreyh1]

Probably not important, but when 10yr treasury went to 3.0% the market dropped today.
Chartists may cheer.

It’s crossed 3.0% many times already this year.

 

[copyright1997reloaded]

It’s crossed 3.0% many times already this year.

Indeed. I want the 10 year to go north of 3.0%. The economy is strong, and should result in (somewhat) higher rates. Also I would like to see the yield curve not flatten or go inverted quite yet.

 

[Dtail]

Indeed. I want the 10 year to go north of 3.0%. The economy is strong, and should result in (somewhat) higher rates. Also I would like to see the yield curve not flatten or go inverted quite yet.

+1

 

[audreyh1]

Indeed. I want the 10 year to go north of 3.0%. The economy is strong, and should result in (somewhat) higher rates. Also I would like to see the yield curve not flatten or go inverted quite yet.

Same here.

Gosh, the 5 year made it to 2.92% earlier this year. That could also cross 3%!

 

[CyclingInvestor]

Retired almost 12 years, age 60, still 98% individual stocks (since 1993). I generally own 15-40 stocks at any one time out of the 50 or so I consider of high enough quality to track, all dividend growth types.

Current stock prices only interest me as opportunities to trade stocks I consider over-valued for those I consider under-valued. Some years this means no trades, some years multiple trades.

 

[joel2125]

Warren Buffet recommends 90% Total market index/10% total bond market index in retirement. When the market is down, live off the bonds. Market rises, rebalance into bonds by selling some stock. You can fiddle with the allocation, but the general concept is sound.

I have made all my money over the years in individual stocks. I have also had my hind quarters handed to me in individual stocks! But overall I have beat the market by 1.5% or so for 26 years. If I was in the accumulation mode, which was almost always, I welcomed some volatility. I held Netflix through every horrible new cycle. I bought more Apple when people were on the ipads an iphone selling it because it had no growth potential. And I am an active buyer of FB and bought it not long after its IPO. My gestalt is that if the reasons for having bought it and held onto have not changed, I don't sell. Most of the money I have not made is because I got smoked out of a good company. Lose the news.

Put your efforts into being a student of the market. read books, read blogs (Irrelevant Investor, Reformed Broker, Barry Rhitholz Big picture, etc) and over a period of years you will gain some knowledge. You can't be a stock market investor and not be a student of the market IMHO.

Having said all that its time for me to reduce my risk. I am actively giving my individual holdings a haircut and dollar cost averaging into a total market index and total bod index for an 80/20 goal. I am doing this for the simple reason that everything goes to hell eventually meaning there is no company that will stand the test of time. Look at how the S&P 500 has changed over the years. If I had it to do over again (im 59 y/o) I would be 100% total market index, and head for 80/20 by my age. Less stress, less work, and you will beat 90% or more of active money. Stay in that allocation during retirement.

 

[audreyh1]

Warren Buffet recommends 90% Total market index/10% total bond market index in retirement. When the market is down, live off the bonds. Market rises, rebalance into bonds by selling some stock. You can fiddle with the allocation, but the general concept is sound.

Hah - won't catch me doing that. 10% covers 2.5 years of expenses? That's a little lean for me. Buffet can afford to be aggressive.

2000-2002 and 2008-2009 are still fairly recent memories for me - and I was retired!!!

 

[LOL!]

Warren Buffet recommends 90% Total market index/10% total bond market index in retirement.

Right. But that's for a billionaire widow who is age 72 or older and not for people like me.

 

[joel2125]

The Buffet plan does require that you have enough in bonds to last five years. At ten percent thats a portfolio of % mil in my book. But the concept does hold water, has been studied etc. The allocation depends on the individual. Seems like most folks are 50/50. Jack Bogle says the % bonds should be equal to your age.

 

[joel2125]

Portfolio of 5 mil

 

[flintnational]

Hah - won't catch me doing that. 10% covers 2.5 years of expenses? That's a little lean for me. Buffet can afford to be aggressive.

10% of Buffet's stash would be $8B. It might not last but 2.5 years, but hey they would be a couple of really fun years!

 

[audreyh1]

10% of Buffet's stash would be $8B. It might not last but 2.5 years, but hey they would be a couple of really fun years!

I think Buffett was trying to give advice to the average retiree, and I was using the 25x expenses scenario.

 

[flintnational]

I think Buffett was trying to give advice to the average retiree, and I was using the 25x expenses scenario.

I agree with you. 10% is a little thin. I hold 30%. I was going for the humor in Buffet's 10% compared to the rest of us.

 

[audreyh1]

Sorry - I get a little peeved at Buffet when he give advice like this. It seem cavalier. It's really easy to suggest such an allocation when you are a multi-billionaire.

 

[pdxgal]

As others have noted, best way to handle volatility is asset allocation + diversification. My investment advisor (who uses a Value approach to stock investing) bought FB after its 20% drop. She feels the market overreacted, and that FB's longer term prospects are OK and stock will rise. My parents came of age pre-mutual funds and only held CDs and a handful of stocks my grandfather bought in the 1920s(!): AT&T, Chevron, PG&E. Our investment advisor had us sell off shares so any one stock was no more than 5% of the portfolio.


Another strategy is real estate. If you have some rental property the rents can keep the cash flow going. Of course rents can go down, but they tend to be 'sticky'.

 

[Oakster]

Thanks for the reply all. I have no intention of selling and it's not necessarily bothering me, I wonder from a retired person point of view. Even if you are in index funds, how would you feel if it was 2008 - 2009 again? Your net worth gets a shave of 40%. How to account for that especially when the income from a job is no longer there.

I am not FIRE yet but my plan is to wait until I have enough to keep my retirement funds mostly in mutual funds for the earnings. It would drive me crazy to have large amounts of money earning 2-3 percent... I plan to have enough in mutual funds that I can live well off the interest and cut back during market crashes, but still live off the interest. I am also considering the idea of a 3 year bond ladder to cover living expenses over that period if I need to wait for the market to recover.

 

[Quantum_Computer]

Embrace Market Volatility

• Pullbacks (5% to 10%) average once per year
• Corrections (10% to 20%) average every 3 years
• Bear markets (over 20%) average every 5 years

On average, 6 months separate one decline of 5% or more to the next. That doesn't include the time it took to get back to break even. In 85% of all declines of 5% or more, the market got back to break even in an average of only four months or fewer. Most Bear markets recover in about 14 months.

Have cash on hand to cover 2 to 4 years of a downturn. Then there is no need to time the market, no need to guess which pundit guessed correctly, and no need to panic when the commonplace downturn occurs. Replenish the cash portion during the good times.

 

[Dtail]

• Pullbacks (5% to 10%) average once per year
• Corrections (10% to 20%) average every 3 years
• Bear markets (over 20%) average every 5 years

On average, 6 months separate one decline of 5% or more to the next. That doesn't include the time it took to get back to break even. In 85% of all declines of 5% or more, the market got back to break even in an average of only four months or fewer. Most Bear markets recover in about 14 months.

Have cash on hand to cover 2 to 4 years of a downturn. Then there is no need to time the market, no need to guess which pundit guessed correctly, and no need to panic when the commonplace downturn occurs. Replenish the cash portion during the good times.

Nice first post.
I have raised this question before in various ways, but looking for a response.
If one has most of their assets in a TIRA and their cash allocation is part of their AA, then does it matter the same as having the stocks in a Taxable account, i.e. is selling stocks from a TIRA in a down cycle effectively "bad"?

 

[RunningBum]

Nice first post.
I have raised this question before in various ways, but looking for a response.
If one has most of their assets in a TIRA and their cash allocation is part of their AA, then does it matter the same as having the stocks in a Taxable account, i.e. is selling stocks from a TIRA in a down cycle effectively "bad"?

Any time you sell stocks at a low it's "bad". It would seem worse to sell stocks in a bear market out of a tIRA, rather than taxable, because you get no tax benefit from the lower sales price. In your taxable account at least you can do some tax loss harvesting or at least reduce LTCGs in your taxable account.

As a side note, a bear market is a good time to convert to a Roth, so that (hopefully) when the recovery happens, you will never be taxed on those recovery gains.

 

[Dtail]

Any time you sell stocks at a low it's "bad". It would seem worse to sell stocks in a bear market out of a tIRA, rather than taxable, because you get no tax benefit from the lower sales price. In your taxable account at least you can do some tax loss harvesting or at least reduce LTCGs in your taxable account.

As a side note, a bear market is a good time to convert to a Roth, so that (hopefully) when the recovery happens, you will never be taxed on those recovery gains.

Thanks, see that aspect now.
I guess I was thinking that if one has cash and stocks in a TIRA, then if one uses their cash only or instead sells the stocks and then replaces the stocks due to rebalancing with the cash, one might end up conceptually in the same place (mathematically probably not).