20% stock market plunge

[ferco]

Just curious to know how you'd deal with a 20% stock market drop that lasted 12 months. Would your lifestyle/spending change? Would you change your asset allocation or wait it out? Assuming you're ER/FI, would you go back to work PT/FT. Would you freak out and sell at the bottom and buy all MM and CD's.

My take is , if I'd set my SWR based on FIREcalc with a 90-95% confidence level I wouldn't change anything. What are the other posters thoughts.

 

[mathjak107]

i would be completely uneffected even if it lasted a decade the way i structured everything. if you plan in advance for worst case at the very worst you may have tooooo much money

 

[LOL!]

I have been through a few of those 20+% drops. Generally, I simply reduced my cash allocation and bought more equities during those times. In essence, I sold MMs and CDs and bought stocks.

I would also do tax loss harvesting which means sell losers and immediately buy something similar.

 

[unclemick]

Well - Let's put it this way - who on this forum was retired and viewed the tiny dip of the 2000 - 2003 period as anything more than an insignificant nit on the highway of life?

A 50% is more like it - does happen and I sure everyone here has run the what if's on their portfolio and has a backup plan.

Right?

heh heh - 8)

 

[Alan]

the worst period I've had was the 2000 - 2003 dip when my portfolio lost for 3 years running, worst year being 10.1% (I was allocated 70/30 at the time).

I stuck with my re-balancing twice a year and bought more stocks (just like I had been buyin bonds during 90's re-balancing).

However, I was still 8 - 10 years from RE and had a good job so a good cushion. I would hope to be have the courage to do the same when actually RE'd.

 

[Spanky]

.. how you'd deal with a 20% stock market drop that lasted 12 months

There is no way to know the duration in advance. If for sure it will last 12 months, sell and buy back by the 11th month. .

 

[chinaco]

Duh statement here... Downturns are the opposite of the upturns... Buy when it appears to be creeping up from the bottom. You won't get it at the cheapest, but won't ride it down further either. A 20% downturn is not as bad as say a 40% or 50%.

Either way, I would hang in there and rebalance. The only way I would exit the market is if I had knowledge of some fundamental situation that would not self correct. It is unlikely that I would have that knowledge.

To avoid scenarios like Japan in the 90's be well diversified.

Once people get past thinking that they are going to make 25% per year and get realistic, they follow a reasonable and realistic strategy.

Buy low sell high... its the only way to win. Rebalancing does that for you. target a reasonable % and you will compound your way into FI and RE.

 

[2B]

Part of the question needs to be "why?"

Right now, if the market dove while earnings stayed strong and interest rates remained low, I'd ride my asset allocation through it. Should the US put massive protective barriers against trade in place or do a strong fiscal shift, I'd have to ask myself if I wanted to change my asset allocation away from equities.

I hate to admit it but under certain circumstances I would become a market timer.

I started switching to indexing in the late 90's and rode through most of the 2000 downturn. I did go to 50% cash when I was out of work for awhile but I went fully back in when I got anoter j*b.

 

[dmpi]

There is no way to know the duration in advance. If for sure it will last 12 months, sell and buy back by the 11th month. .

Yes. The question should be rephrased as: "If the maket has fallen 20% over the past year, what would you do at this point?"

For me, I think I would try to stick out. Maybe I'll use new money to buy into bonds. However I really don't know what I would do until I get there. I did manage to get thru the 1987 crash and the 2000 dot com bust. All I can say is Ouch!

 

[kat]

I haven't been through a 20% drop. Actually, got to correct that. My 20% drop was during a period I wasn't paying attention. Oh, correct that. I had to buy a new car in 2001 after a car accident.

What I'd do now is probably fret and change nothing. The distributions from my taxable account cover what I need. If I was smart when there was a 20% drop, I'd be grateful for that.

 

[kjpliny]

I would continue to dollar cost average in. As markets seem to be frothy (like right now), I skim some of the stock gains and move it to cash. I'm in mostly cash right now (preservation mode), but continue to buy stocks each week up to the maximum contribution amount in 401k and 403b accounts.

Dirty market timer? Maybe.

Able to deal with another 2000 bubble burst? No.

I'd rather gain 6% than lose 50% at this point.

 

[haha]

I hate to admit it but under certain circumstances I would become a market timer.

I started switching to indexing in the late 90's and rode through most of the 2000 downturn. I did go to 50% cash when I was out of work for awhile but I went fully back in when I got anoter j*b.

And of course many of us are permanently out of a job. But I think some don't fully comprehend what that means.

My whole idea about risk changed when I realized that I had been away too long, and getting back as a wage earner woud be a very long shot.

Ha

 

[2B]

And of course many of us are permanently out of a job. But I think some don't fully comprehend what that means.

My whole idea about risk changed when I realized that I had been away too long, and getting back as a wage earner woud be a very long shot.

That's the reason a retiree portfolio should be heavier in fixed income. The risk factor shifts when the steady check goes away. Of course, pension benefits are another factor. People with serious COLA'd or non-COLA'd pensions have a greater cushion than those of us hoping for our SS check someday if we're lucky.

I am currently around 20% fixed income/cash. I'll make it 30% when I rebalance this August and go to 40% the following year. Tentative FIRE is January 2009. By then, I'm assuming my in laws medical conditions will have become more "stable."

I could go earlier but I can't see doing anything while DW is tied to parental care. If I FIRE'd now, I'd be sucked into it more than I am now. I'd rather calculate line pressure drops and size heat exchangers. I'm also hoping for a short international assignment to test out foreign living on the company's money.

 

[cute fuzzy bunny]

I'd defer any unnecessary major expenditures, simplify the budget a little bit ("do we really need directv platinum and how about we go from filet mignon to chuck eye steak for a few months?"), and try to shift overpriced asset classes into the underpriced ones.

Then hang in there.

 

[kcowan]

I would continue to rebalance each quarter and watch the budget. I might also play some index futures to generate some potential added cash.

 

[unclemick]

Pssst - Bear Bryant the budget and Norwegian widow the portfolio.

1966 - 1982 was a chewy little flat - but I was working in those days and doing 'strange stuff' untill 1977(Index fund 401k) - gold coins, timberland with Spotted Owls, Vanguard PM and International, Putnam closed end foriegn bonds, etc. etc.

Pssst - Wellesley and chasing wild wild women in Seattle, Denver and New Orleans seemed to work well - until I settled down/she made me an offer I couldn't refuse/ran out of gas/got older/what was the subject again?

Yep - scrub the budget and check the current yield of your portfolio if it looks like 'hard times' may last a while. Party when the sun comes out again.

heh heh heh

 

[mathjak107]

i have my buckets structured for different time frames, bucket 1 hold cd and money market money for 1-7 years bucket 2 holds 8-14 years of conservative laddered treasursay bonds, un-listed reits, strategic income bond funds, international bond funds,real return funds

bucket 3 holds 15 years plus of growth, growth and income, and commodity funds .

theres no chance ill probley ever have to liquidate stocks in a down market.

the mix gives me my long term goal of 7-8% overall.

 

[CyclingInvestor]

I would make no changes at all. I have stayed at 100% equities since
1993, and retired last year at 48 on the dividends. I consider market downturns
to be irrelevant (to me). If several of my stocks started slashing dividends then
I would get concerned, but I think the odds of GE / JNJ / PG / KIM / GGP / WRE
etc. cutting dividends as a group is small. Even so, I could live on 1/2 the
current dividend flow if I had to.

 

[bssc]

I remember October 1987. That happened in a day. I was buying stocks the next day.

 

[samclem]

We are approx 95% equities with a COLA'd pension. We would:
-- Kick ourselves in the butt for awhile--would have been nice to have more fixed income so we could rebalance and buy stocks, or ride out a long downturn without selling equities at low prices.
-- Cut some expenditures. Nothing major, but enough to live largely within the monthly pension and avoid/reduce the need to sell stocks while they are down.
-- Tax loss harvesting--take a look at it, but probably not do it. Over the years I think we've sold shares from almost all of our taxable accounts using the "average cost basis" method, so I can't use the "specific shares" method at this point for those acconts.
-- Not get too worried about it. The market will go back up.

 

[W2R]

What CAN we do? In such a case I'd like to stamp my foot and insist that the market must immediately stop falling, but that wouldn't help. It makes no sense to sell when the market is low, so I couldn't sell. I suppose I could invest my emergency fund, but that is not in my plans so I wouldn't.

I'd probably come to this message board and write a bunch of freaked out posts, and do nothing, other than an occasional re-balance... doing nothing might be the best move of all.

I do plan to re-evaluate my retirement date just before giving notice. If the market has gone you-know-where in a handbasket, I would consider at that time whether or not to delay retiring. (sigh)

 

[Sam]

We have potential for a 20% drop now, in the REIT world. Change of -12% so far from Feb 7, 2007. A real test for "buy and hold".

 

[Moemg]

I would up my cash portion so I had enough for two years and just hold tight .

 

[SecondCor521]

No to all your questions, both now and in the future. I am aiming for 100% Firecalc safety and expect to be at an 80/20 allocation when I retire.

2Cor521

 

[Spanky]

I remember October 1987. That happened in a day. I was buying stocks the next day.

Way to go!