winners who quit after winning

[kcowan]

Still playing the game. We did stop reinvesting dividends in equities in 2008. So the AA has gradually declined. But in a discussion with my heirs, they strongly believe in keeping the majority in the market.

We have a good cash buffer that will get reinvested if a market correction happens.

 

[REWahoo]

Back in 2008/2009 many folks in/at/near retirement had their situations permanently changed for the worse because they had not been prudent in this regard.

The above is true for those who panicked, sold and failed at market timing. Those who rode it out (many on this forum did) had a temporary change for the worse on their brokerage statements, but are now much better off than they were pre-2008.

That's not to say those of us in/at/near retirement shouldn't give some serious thought to our risk tolerance and try to envision how we would react if the market had a 40-50% selloff. That's really tough to do unless you actually experience it, and if you discover when the market sells off that you don't have the tolerance for risk that you thought you did, bad behavior can ensue. That's when situations permanently change for the worse.

The best advice I can give after 50 years of investing is do your best to accurately determine your risk tolerance, then back off a notch or two from there. Have a few years expenses in cash or near-cash liquid assets, then steel yourself to hang on when the market takes you for a ride. Far easier to type than do, but history says it works.

 

[Mdlerth]

Recently, there are many more bullish posts here and on bogleheads, I guess that is the norm. People didn't have the 2000 and 2008 experience or they think this time is different.

Or perhaps they are thinking in terms of 30 years instead of something shorter.

 

[audreyh1]

Recently, there are many more bullish posts here and on bogleheads, I guess that is the norm. People didn't have the 2000 and 2008 experience or they think this time is different. Comments like "PE does not matter anymore" sounds very familiar to me.

Has anyone here said “PE doesn’t matter anymore”?* If so I completely missed it. I think folks here have fun with celebrating the run up but many of us lived through 2008 and some through 2000 as well and remember well how nasty it can be.

*Very 1999 statement.

 

[daylatedollarshort]

I have a name for people who completely quit investing in equities (or other growth investments). I call them gamblers. They are gambling that historically low inflation rates will prevail in the long term. That’s too risky a strategy for me. At least until I’m 90.

In the U.S. we have TIPS and I-bonds which are pegged to inflation - maybe not perfectly, but most articles I have read seem to rank them above equities for inflation hedges:

9 Top Assets for Inflation Protection
https://www.investopedia.com/articles/investing/081315/9-top-assets-protection-against-inflation.asp

I have run many spreadsheet models with high inflation scenarios. We have a low interest fixed rate mortgage, a house that has historically appreciated twice the rate of inflation, and various income streams with inflation adjustments. I think we would come out ahead with high inflation, even with a low allocation to stocks.

 

[flyingaway]

Honestly speaking, if I wanted to be greedy, I would move more to the bond part, in anticipation of a correction soon, and buy back after that.

If I maintain my 70/30 allocation, I have won the game.

 

[Sunset]

I like your thinking as well. Your comment on a 50% lose and still be able to live well is something everyone should ask themselves before retiring. If you can weather the storm I see no need to stop playing the game. I would of thought with the great savers and money minds on this site more would have a higher risk level and would never stop playing even if you won the game.

Currently we are approximately 93% equities, have brought it down from the 95% or so, but it went back up

Here is part of the problem, some stocks are in regular accounts, so that means large LTCG if we want to covert them en mass to bond(ish) things. But we are doing ROTH conversions too, so that does not work.

We could convert more in IRA without tax issues, and that is where most of the action has happened.
Still it's emotionally hard to do when bonds pay low interest , are projected to decline or at best stay flat while stock ETF's pay out 2% or more and will grow over the next 7 years.

So how do we avoid the problem of 50% drop in the market lasting a few years?
By having 4-5 years worth of spending (when you add in the stock dividends that will continue) available.
Plus lots of cushion in spending to chose between vacation in Europe or not eat Alpo.

 

[jkern]

Having read through all of the replies, as I see in many comments these days, both here and other on-line communities I participate in, there is currently a tremendous under-appreciation for risk and the markets.

I believe many folks are over-exposed to the markets and unfortunately it is going to come back and bite at some point. It's been long enough since the financial crisis that memories have faded and many folks are making the same mistakes as last time around.

I'm sorry to be the squeaky wheel on this thread, but with the markets continuing to head relentlessly higher, folks that are looking at large gains need to take a step back and have an extremely objective look at their situation. Revisit your risk tolerance and investment objective. I was particularly moved by the one comment earlier in the thread which stated "I could easily live with a 50% permanent “haircut”". If that's really true, it's wonderful that you have done extremely well and your personal situation allows for this. I personally find it difficult to believe that anyone could honestly/sincerely make the statement.

Back in 2008/2009 many folks in/at/near retirement had their situations permanently changed for the worse because they had not been prudent in this regard.

There is nothing wrong with taking money off the table or even pushing back and walking away from the table.

I'm far from some of the wealthy people here and I could easily make it with a 50% haircut. After I start SS in 2 years, I could live comfortably with less than 1% SWR.

 

[Meadbh]

In the U.S. we have TIPS and I-bonds which are pegged to inflation - maybe not perfectly, but most articles I have read seem to rank them above equities for inflation hedges:

9 Top Assets for Inflation Protection
https://www.investopedia.com/articles/investing/081315/9-top-assets-protection-against-inflation.asp

In Canada, the equivalent would be Real Return Bonds. However, they are more volatile than TIPS, which defeats the purpose.

The real problem with inflation-protected bonds

 

[Happyras]

Currently we are approximately 93% equities, have brought it down from the 95% or so, but it went back up

By having 4-5 years worth of spending (when you add in the stock dividends that will continue) available.
Plus lots of cushion in spending to chose between vacation in Europe or not eat Alpo.

This surprised me...that is a very high allocation to equities which was closer to where I was 3 or more years ago, prior to pulling the plug. We have a zero WR which we are struggling to increase for gifts to a few percent and do any Roth conversions we can. So this won the game scenario matches our situation. Life is now much shorter so we take less risk, but the old bond allocation to balance risk is likely not going to be as effective.

My more recent concern is our allocation is about 68% equities, with 28% bonds and 5% cash alt. (I leave real estate out of the equation). We remain in bonds with an average duration of 5.6 yrs which does not seem like a good place to be this year in particular. Last year we tracked 80% of the S&P, but this year we are close to 64% of the S&P performance, as the bonds are pulling us down. It would be a major move to pull our Wellington and Wellesey funds which hold our bond allocations, but we would do so to remain at same equity allocation and move to shorter duration investments. I know the math is OK if interest and inflation increase gradually, but I am seeing some higher risk in this area, with more aggressive changes in rates. The historical negative correlation of bond to equities is changing as even today rates are rising as stocks take a breather.

So quitting after winning the game (taking less risk) is difficult to do without clear options where to minimize risk. (cash is not the answer due to inflation) Maybe TIPS are finally becoming the preferred investment for this year? Any thoughts for those winners looking for reducing risk? I liked the link from the prior post for the 2015 article, it seems like the time to consider.

 

[street]

Currently we are approximately 93% equities, have brought it down from the 95% or so, but it went back up

Here is part of the problem, some stocks are in regular accounts, so that means large LTCG if we want to covert them en mass to bond(ish) things. But we are doing ROTH conversions too, so that does not work.

We could convert more in IRA without tax issues, and that is where most of the action has happened.
Still it's emotionally hard to do when bonds pay low interest , are projected to decline or at best stay flat while stock ETF's pay out 2% or more and will grow over the next 7 years.

So how do we avoid the problem of 50% drop in the market lasting a few years?
By having 4-5 years worth of spending (when you add in the stock dividends that will continue) available.
Plus lots of cushion in spending to chose between vacation in Europe or not eat Alpo.

Yep your last three sentence's are paramount.

 

[RAE]

But, if you think you have won then you can lower your equities to 20% to 30%.... that would not put you too much into the market and also have some insurance in case of higher inflation...

Yeah, that is basically what I have done. DW and I could live off of my pension and her part-time work if we had to (with just a few minor lifestyle adjustments), so I really see no need to invest a lot in equities at this point in my life.

I know that inflation is a concern when you are talking about a long retirement, but in the last decade or so it has really not been an issue. I think the likelihood of inflation in the 7-10% range coming back anytime soon is pretty slim, really. Of course, I could be wrong about that. If inflation does start to creep back up, we will make some portfolio adjustments. Until then, I sleep pretty well at night with a minimum equity exposure.

 

[JoeWras]

If inflation does start to creep back up, we will make some portfolio adjustments. Until then, I sleep pretty well at night with a minimum equity exposure.

Careful there! It can be a tough thing to do while in the midst of it all.

I think 1974 is the year that is frequently referenced. 12% inflation, -30+% drop in stocks. Brutal. This kind of thing can cause paralysis if not entered into before hand.

 

[RAE]

Careful there! It can be a tough thing to do while in the midst of it all.

I think 1974 is the year that is frequently referenced. 12% inflation, -30+% drop in stocks. Brutal. This kind of thing can cause paralysis if not entered into before hand.

I'm not too worried about it, given our situation. Since 1991, the CPI has been 4% or less. That's 26 consecutive years of relatively low inflation (and actually more that, as inflation was quite low all the way back to 1982, with the exception of 1990). Yes, we did have much higher inflation for a few years (mid 70s through 81). But do you really think it is likely that roaring inflation will come back without warning in the near future? I just don't think so. At least I am not willing to increase my equity exposure right now, just to protect against that kind of thing happening. I'm not saying my strategy is right for everyone, just that I am comfortable with it for DW and me.

 

[GravitySucks]

Careful there! It can be a tough thing to do while in the midst of it all.



I think 1974 is the year that is frequently referenced. 12% inflation, -30+% drop in stocks. Brutal. This kind of thing can cause paralysis if not entered into before hand.

Here's a word from the past:

Stagflation!

Interesting that a 4% rule worked for that year IIRC.

 

[Red Badger]

I remember! Wasn't that "I'm going to Whip His A..." wait, wait. Wrong President. It was the one before. "Whip Inflation Now". What's my prize?

Yes, I've won, but that simply means only being 50-55% in equities instead of 75%.

You win a free WIN badge. Jimmie Carter will deliver personally.

 

[Car-Guy]

I have a name for people who completely quit investing in equities (or other growth investments). I call them gamblers.

Funny, that is the way I think about folks who retire and "bet" heavy on equity gains to support their retirement.

 

[daylatedollarshort]

Funny, that is what I call folks who retire and "bet" heavy on equity gains to support their retirement.

One of the Boglehead posters had some thoughts on the subject that I found insightful:

"But the thing stock enthusiasts continually miss is that the lower end of that distribution is about the same as bonds. Not just the worst-case scenario, but the lower tenth percentile or something like that....
What this means is that you need to save about the same amount no matter what your asset allocation is. You cannot use the fact that you're investing in stocks to justify a lower savings rate. The amount you need to save is the same no matter what your asset allocation is. To say "it's very hard to save enough to retire just using Treasury bonds and TIPs" is just to say that it's very hard to save enough. If you aren't saving enough to retire just using Treasury bonds and TIPs, you aren't saving enough if you add stocks. You're counting on luck, and luck is not a strategy."

Sources: https://www.bogleheads.org/forum/viewtopic.php?t=93245

 

[Red Badger]

Having read through all of the replies, as I see in many comments these days, both here and other on-line communities I participate in, there is currently a tremendous under-appreciation for risk and the markets.

I believe many folks are over-exposed to the markets and unfortunately it is going to come back and bite at some point. It's been long enough since the financial crisis that memories have faded and many folks are making the same mistakes as last time around.

I'm sorry to be the squeaky wheel on this thread, but with the markets continuing to head relentlessly higher, folks that are looking at large gains need to take a step back and have an extremely objective look at their situation. Revisit your risk tolerance and investment objective. I was particularly moved by the one comment earlier in the thread which stated "I could easily live with a 50% permanent “haircut”". If that's really true, it's wonderful that you have done extremely well and your personal situation allows for this. I personally find it difficult to believe that anyone could honestly/sincerely make the statement.

Back in 2008/2009 many folks in/at/near retirement had their situations permanently changed for the worse because they had not been prudent in this regard.

There is nothing wrong with taking money off the table or even pushing back and walking away from the table.

I've made statements to that effect (50% haircut) on this forum - - - and mean every word of it. Most of our retirement is, or will be, funded by pensions and SS. Our "needed draw" from investments is 1-2%. Anything above that is "beer money." Furthermore, we could cut back on frivolous spending and live comfy w/o any portfolio $$.

Yeah, it was gut wrenching watching our 201K plummet ~40% during the great recession. But, we increased our contribution rate at the same time in the somewhat shaken belief that we were buying low. I guess we were after all. YMMV.

 

[RobLJ]

I don't see much of a problem with taking gains to cash or short-term bonds/TIPS. Last year I rebalanced 3 times instead of the usual one time in February, to take stock gains and keep the stock allocation to the low point of 58% (high is 64%). And I'm actually 50-35-15 in my 403b, which I'll start tapping in a few weeks (DW is 5 years younger, so her stock allocation is considerably higher).
I think a meltup this year and next is entirely possible and I want to scrape off much of the meltup if it occurs to fund/derisk the next 6 years before regular SS Retirement Age. The market PE also seems rather "rich" historically (or is that "fully valued"and frankly that scares me most, but that doesn't mean it can't continue to go up for a while.

 

[dunkelblau]

Maybe I should add that another reason for my extreme fear of inflation is that I lived in South America for a while, during the years of ultra-mega-hyperinflation. In some places, people were actually being paid almost hourly, so they could run out to the store with a bag full of money and buy something. In a largely cash economy, coins virtually disappeared and the smallest bill in my wallet was generally a 5,000.

Sounds similar to today:
Venezuela's cash crisis: You can't get $1 from a bank. I tried. - Jan. 17, 2018
You can't get $1 out of the bank in Venezuela. I tried. Four hours. Four banks. Six cents.

FWIW I'd agree that an all-cash portfolio is a very risky allocation over the long term pretty much anywhere in the world.

 

[kcowan]

Plus lots of cushion in spending to chose between vacation in Europe or not eat Alpo.

and spending down a bit of principal to tide us over.

 

[REWahoo]

Yeah, it was gut wrenching watching our 201K plummet ~40% during the great recession.

Sorry to hear your 401k took so much of a hit it became a 201k. Hopefully it's at least a 601k by now...

 

[Walt34]

This is hilarious!

https://en.wikipedia.org/wiki/Whip_inflation_now

It's like "voodoo" economics! Thanks for making me (in my 40s) look it up!

Oh, I remember that era very well. I worked for a county police department and the pay raises we received were paltry, on the order of one or two percent, so they didn't come close to covering the increased costs of living. This while folks in private industry were at times getting raises well north of 10% a year.

Despite how some folks feel about COLA'd public service pensions it's one reason I don't feel the slightest bit of guilt about mine. I did pay my dues.

 

[foxfirev5]

I read somewhere that you need to be between 30/70 and 70/30 with your AA. Meanwhile within that range and at 15 years cash/CD's I'll take my chances.