If you lost half what action would you take

[NW-Bound]

Believe me, if inflation jumped to 25% for two years the stock market would drop big time!

If inflation jumped that much, there would be people jumping out the windows, and it would not be windows on the ground floor either.

 

[ExFlyBoy5]

Interesting. I see many more "lost all their savings due to a scam/mental issues" stories than "lost all their savings due to a market downturn" stories. Gullibility and/or mental deterioration may be more of a danger than market downturns.

And as I understand many of these "lost everything" stories were folks that weren't diversified AT ALL...eg...single holdings like Enron.

 

[Out-to-Lunch]

it would not be windows on the ground floor either.

That is right -- because of inflation, even the ground-floor windows would be very high!

 

[GravitySucks]

Believe me, if inflation jumped to 25% for two years the stock market would drop big time!

Agreed. The market would not be happy.
How about 3 years at over 10% inflation, like 79-81? Market dropped but started recovering before 82.

 

[Dtail]

Agreed. The market would not be happy.
How about 3 years at over 10% inflation, like 79-81? Market dropped but started recovering before 82.

And thus 1982 was probably the best year to begin a 30 year retirement.

 

[BigNick]

Interesting. I see many more "lost all their savings due to a scam/mental issues" stories than "lost all their savings due to a market downturn" stories. Gullibility and/or mental deterioration may be more of a danger than market downturns.

Also, reporters seek out the worst cases. After 2008 I saw a story about a couple who had piled into stocks in mid-2007, *and* one of them was sick, *and* they had sold a house in a hurry because of some not very good reason, *and* whatever line of business they were in had tanked, *and*... it just went on and on. And so they "had" to sell all their stocks at the absolute bottom of the market, and had lost a million or so simply by being unlucky and incompetent in a long series of events. Part of successful financial management is realising when you should just stay in cash.

 

[Huston55]

Your original question is a bit vague. Is it "lost half of total portfolio" or "the market (S&P500) lost half its valuation"?

My current AA is 50/50 with lots of dry powder and a WR of ~2.2% (although that varies a lot year to year based on discretionary spending). Also, for context, the three largest Bears since 2000 ranged from 34% -56% loss, averaging 49% loss. https://www.investopedia.com/a-history-of-bear-markets-4582652. So, you're essentially describing a situation that most of us have lived through three times in the past two decades.

If it's 50% loss of total portfolio, I'd do the following:
- Maintain spending as is for the short term
- Use fixed income for expenses
- Maintain AA via rebalancing
- Look for equity index buying opportunities (using leverage) with dry powder
- Consider taking SS on the early end of my "optimum" age spectrum (68-70)
- Continue to watch my success rate in FIRECalc & FIDO RIP, adjusting discretionary spending only if success rates dip below 85%

If it's 50% loss of S&P500, I'd do the following:
- Continue business as usual
- Look for equity index buying opportunities (using leverage) with dry powder
- Book my next big travel adventure

 

[Markola]

I’ve built systems to rebalance regularly, taking any emotional action on my part out of the equation.

 

[brett]

Our first reaction has always been to consider selling and get out of the market.

Our second reaction has always been to stay the course and to consider this an opportunity to take advantage of low prices and buy more. This has worked well for us so far.

 

[Sniggle]

My personal stop loss is 8%...anything approaching that and I would flee to safety in a 0% interest account. So unless it all happened in one day, I would not let it happen.

 

[Markola]

Our first reaction has always been to consider selling and get out of the market.

Our second reaction has always been to stay the course and to consider this an opportunity to take advantage of low prices and buy more. This has worked well for us so far.

I always scratch my head about how stay-the-course investors, like me, think they will realistically take advantage of future low prices. To do so, an investor must be either:

1). Still working, saving and, therefore, dollar cost averaging new money into the markets. Fine, I get it. I did this too.

2) Inefficiently sitting on a pile of unused cash. However, are there really such conservative market timers who stock up on do-nothing cash in amounts large enough to make much of a difference when deployed in a dip? Maybe so. Emotionally, in reality, a lot of people are going to appreciate their cash stash at such insecure times and won’t want to let go of it. In bull markets, conversely, such investors will miss out on growth due to a cash lag, thus evening out their returns long term.

3) Willing to rebalance from a more conservative allocation in bonds into a more aggressive position in stocks during the frightening teeth of what one hopes is the bear market trough. Such a person must be changing up their asset allocation, because if they keep their original AA, the rebalance at the trough would have made virtually zero difference later on in their net worth vs. just doing what they always do. Adopting a more aggressive AA is also a form of market timing vs. “stay the course.”

4) Something else, in which case, please teach me.

 

[ownyourfuture]

I've been taking most of the dividends (large taxable brokerage account) in cash for the last couple years. If those investments matched the market & were down by 1/2, I'd probably start reinvesting them.

 

[SecondCor521]

I always scratch my head about how stay-the-course investors, like me, think they will realistically take advantage of future low prices. To do so, an investor must be either:

1). Still working, saving and, therefore, dollar cost averaging new money into the markets. Fine, I get it. I did this too.

2) Inefficiently sitting on a pile of unused cash. However, are there really such conservative market timers who stock up on do-nothing cash in amounts large enough to make much of a difference when deployed in a dip? Maybe so. Emotionally, in reality, a lot of people are going to appreciate their cash stash at such insecure times and won’t want to let go of it. In bull markets, conversely, such investors will miss out on growth due to a cash lag, thus evening out their returns long term.

3) Willing to rebalance from a more conservative allocation in bonds into a more aggressive position in stocks during the frightening teeth of what one hopes is the bear market trough. Such a person must be changing up their asset allocation, because if they keep their original AA, the rebalance at the trough would have made virtually zero difference later on in their net worth vs. just doing what they always do. Adopting a more aggressive AA is also a form of market timing vs. “stay the course.”

4) Something else, in which case, please teach me.

I am also a stay the course investor. I did a variant of #3 - I had an asset allocation at the beginning of last year that was approximately 95/5. As the market dropped throughout the spring, I rebalanced back to 95/5 by selling bonds and buying stocks. As stocks recovered I let my AA drift a little bit higher so now I am at 97/3. The mild AA shift was a bit of greed rationalized as an increased capacity for risk.

But the practical difference between 95/5 and 97/3 is really close to irrelevant. Practically speaking it's just a way for me to amuse myself.

...

There are a fair number of people here who say they are sort of stay the course investors, but they allow themselves the freedom to vary their AA in order to adapt to and take advantage of current conditions. I assume they tend to guess wrong frequently enough to where they don't beat a LTBH indexer on a risk-adjusted after-tax basis, but I think that's how they're wired and how they prefer it. These people would perhaps claim to be stay the course but also taking advantage of the dips.

 

[aaronc879]

If I was in the accumulation phase I would change nothing. If I was in the withdrawl phase I would change nothing as far as how I invest but I may decrease spending if I felt it were needed.

 

[street]

In 40 years of stock market investing I have never once sold or rebalanced through those 40 years. I'm right at 80% equities now and don't plan to do anything till RMD time which is 10 years out. I'm sure most would not manage their portfolio like that but it seems I have done just fine.

 

[PointBreeze]

Put my dry powder in the market and reduce some discretionary expenses. Returning to employment is not gonna happen.

+1

I decided, being a chronic worrier, that we had to have at least 3-4 years' in cash so that we can weather a big drop. We have that, plus more cash waiting in the wings to plow into the market when it drops. And one of us gets SocSec and if things were really dire, I just turned 62 and could start SocSec if absolutely necessary, but I'd much rather wait on that.

 

[foxfirev5]

While I can rationalize and believe I'm a rebalancer I understand the difference. Rebalancing is nothing more than market timing with a made up schedule. If you can't take a 50% decline in equities you're in the wrong game. I can take it can you?

 

[Lsbcal]

I cannot see being 100% married to any fixed plan. People seem to believe that because the very worst has never happened it won't happen. I stayed the course in 2008 but I would now revise that methodology. I am too old to participate in a 1930's like situation ... or an even worse situation.

There are declines that I can find no real defense against like, for instance, March 2020. But most equity declines had rather easy warning signals like a slow business decline. There was time to reduce equities (not necessarily to zero). Fairly recent examples were 2001 and 2008.

Even the earthquake like 1987 decline saw bonds having really great real returns and so for the retiree was a good safety valve and should have resulted in a reduced equity allocation beforehand. Not so today. Probably cash is the alternative, I guess.

 

[Out-to-Lunch]

While I can rationalize and believe I'm a rebalancer I understand the difference. Rebalancing is nothing more than market timing with a made up schedule. If you can't take a 50% decline in equities you're in the wrong game. I can take it can you?

Color me confused: What do you mean by "take it"? Not only can I (as a rebalancer) "take" a 50% decline, I am willing to throw more money (via rebalancing) into the market after such a decline. Am I in the wrong game?

 

[Markola]

While I can rationalize and believe I'm a rebalancer I understand the difference. Rebalancing is nothing more than market timing with a made up schedule. If you can't take a 50% decline in equities you're in the wrong game. I can take it can you?

I think I mostly agree, though if rebalancing is market timing, it’s benign. I have played with scenarios enough on Portfolio Visualizer to believe it doesn’t make any notable difference when or how frequently one rebalances to a fixed asset allocation, as long as one does it. If you rebalance regularly or periodically to a fixed AA, you come out in the same place over the long run.

For example, this chart compares the Vanguard Balanced Index Fund (60% Total Market Index/40% Total Bond Index), which rebalances constantly vs. those same underlying two funds rebalanced when, just to use the OP’s example, 50% deviation rebalancing bands dictate. Regardless, it makes virtually no difference to the outcome what bands one uses (5%, 30%, whatever) or whether one rebalances annually or quarterly or occasionally. The portfolio ends up in essentially the same place, assuming a fixed asset allocation (60/40 in this example) and equal or no distributions.

I can’t prove it, but I suspect the small disadvantage of the Balanced Fund in my example is both temporary, if the long history displayed is a guide, and also due to its cash drag from having to allow for investor withdrawals.

 

[daylatedollarshort]

If we lost half our savings now that we are retired, I'd freak out, which is why we don't have a high allocation in stocks. We had enough to retire comfortably with what we had in savings but not so comfortable if we lost half, so we have invested more for capital preservation than growth.

 

[marko]

I'd buy the dip...drop in that case. Last year about 13 months ago, I bought a fund that I wish I had had more of. Put $100k more into it. That $100k is up 65% as of this morning.

 

[Closet_Gamer]

I'm closing in on ER...2 years out or so.

A 50% drop in broad stock market?

Nothing changes. I might get a little weak in the knees on buying a beach house. Or I might take that conservatively invested, short term, buy-the-beach-house pile I'm accumulating and shove it into the market. Dunno.

Of course, for me, the un-asked question is "What if megacorp imploded and your non-qualified deferred comp plan got nuked to zero?"

That how I'm funding the first 10-12 years of my ER.

If megacorp completely imploded, I will cry in my beer for a month, shake my hand at God, and rend my garments. I will also have to do grief counseling with colleagues, some of whom are far more exposed to the plan than I am.

Then DW & I would have to have a long talk about whether we change our lifestyle plans or I go back into mines and dig for another few years...more likely both!

 

[street]

I think I mostly agree, though if rebalancing is market timing, it’s benign. I have played with scenarios enough on Portfolio Visualizer to believe it doesn’t make any notable difference when or how frequently one rebalances to a fixed asset allocation, as long as one does it. If you rebalance regularly or periodically to a fixed AA, you come out in the same place over the long run.

For example, this chart compares the Vanguard Balanced Index Fund (60% Total Market Index/40% Total Bond Index), which rebalances constantly vs. those same underlying two funds rebalanced when, just to use the OP’s example, 50% deviation rebalancing bands dictate. Regardless, it makes virtually no difference to the outcome what bands one uses (5%, 30%, whatever) or whether one rebalances annually or quarterly or occasionally. The portfolio ends up in essentially the same place, assuming a fixed asset allocation (60/40 in this example) and equal or no distributions.

I can’t prove it, but I suspect the small disadvantage of the Balanced Fund in my example is both temporary, if the long history displayed is a guide, and also due to its cash drag from having to allow for investor withdrawals.

 

[foxfirev5]

Color me confused: What do you mean by "take it"? Not only can I (as a rebalancer) "take" a 50% decline, I am willing to throw more money (via rebalancing) into the market after such a decline. Am I in the wrong game?

Regional slang. Can you handle it. Are you tough enough etc. If not your in the wrong game. I don't think your in the wrong game if your going to keep on playing in the face of a huge sucker punch.